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How much do you really know about your suppliers? How could your supply chain be impacted by a natural disaster, another recession, or limited inventories? Global supply chains have been brought to their knees in recent years as the result of host of massively disruptive events including devastating natural disasters, economic crisis, turbulent commodity prices, product recalls, and other unforeseen disruptions. These catastrophic events including Hurricane Irene, the eruption of the Eyjafjallajokull volcano in Iceland, the Japan earthquake and tsunami, and the most recent Thailand flooding have put many suppliers out of business, leaving manufacturers stranded and production lines halted. Executives are becoming increasingly aware of the risks of doing business on a global scale and are experiencing first-hand the havoc these supply chain disruptions pose to their bottom lines, brand reputation, and stock value. Join Supply & Demand Chain Executive and IHS as they share expertise, tools, and best practices in supply chain risk mitigation, and supplier risk scoring. Speakers will discuss why managing risk in the supply chain needs to be a multidimensional approach taking into account: Materials risk, knowing where volatile raw material prices are headed Electronic Parts risk, ensuring the sustainability and authenticity of the components within your supply chain Supplier risk, understanding what potential obstacles your suppliers might face Global supply chains need this critical information now more than ever. Don't miss this chance to hear industry experts share actionable advice on leading tools and best practices for supplier risk management.
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Welcome to Today’s Webcast
Supply Chain Risk Mitigation:Minimizing Exposure to Supplier Failure, Volatile Commodity Prices, andManufacturing Disruptions
March 15, 2012
Copyright © 2012 IHS Inc. All Rights Reserved.
Today’s Speakers
Katie Lewis
Director, Procurement & Sourcing Solutions, IHS Inc.
Eric Pratt
Senior Director, Pricing & Competitive Analysis, IHS Inc.
Copyright © 2012 IHS Inc. All Rights Reserved. 2
John Mothersole
Principal, Industry Practices Group, IHS Inc.
Barry HochfelderEditor, Supply & Demand Chain Executive
Join the Conversation
Follow IHS on Twitter…Get the latest supply chain news,updates and trending topics from
@IHS_SupplyChain
Copyright © 2012 IHS Inc. All Rights Reserved.
Live Tweet today’swebcast:
#IHSWebcast
3
Supply Chain Risk Mitigation:Parts, Materials, & Suppliers
Katie Lewis - Director, Procurement & Sourcing Solutions, IHS Inc.
Eric Pratt - Senior Director, Pricing & Competitive Analysis, IHS Inc.
John Mothersole - Principal, Industry Practices Group, IHS Inc.
Early Survey Findings Reveal Priorities
Material Risk Management/Hedging
Gaining Greater Visibility into the Supplier Network
Managing Inventory Levels
Negotiating Contracts/Individual Supplier Relationships
Greatest Supply Chain Focus Areas
Copyright © 2012 IHS Inc. All Rights Reserved. 5
0% 10% 20% 30% 40% 50% 60% 70%
Parts Management
Geographic Mapping of Supplier Mfg
Benchmarking
Low Cost Country Sourcing
Material Risk Management/Hedging
IHS Inc and Supply & Demand Chain Executive magazine 2012 preliminary Supplier Risk Survey results (data collection is ongoing)
Segmenting Supply Chain Risk
• Resting Risk• Supplier Segmentation – Partner, Critical, Bottleneck, Transactional
• Fragmentation of Supply
• Conflict Metals or soon-to-be Non-Compliant substances in Supply Chain
• EOL and PCN alerts
• Counterfeit Parts
Copyright © 2012 IHS Inc. All Rights Reserved. 6
• Counterfeit Parts
• Reactive Risk• Natural Disaster Disruptions
• Political Disruptions
• Supply Disruption Alerts/Notices specific to supplier
• Cost – rising & volatile prices for key material inputs
Parts & Components: Resting RiskManaging Scheduled Variations
Eric PrattEric PrattSenior Director, Pricing & Competitive Analysis, IHS Inc.
Product Life Cycles & Technical Documents
Growth
MaturityDecline
Copyright © 2012 IHS Inc. All Rights Reserved. 8
Introduction
GrowthPhase-Out
Obsolete
Product Change Notification (PCN)
Product Change Notification (PCN)
End of Life (EOL) orDiscontinuance (PDN)
New Product Introduction(NPI)
End of Life (EOL) orDiscontinuance
New Product Introduction(NPI)
Insight: IHS Analyzes NPI, PCN, EOL Data
Business Driver Stated by Manufacturers
DemandDemand-Side Economics
LOW DEMAND, LOW SALES
LOW INVENTORY
LOW FORECAST
…
EnvironmentCompliance and Sustainability
PB-Free Conversion
REACH CONVERSION
ROHS CONVERSION
…
Copyright © 2012 IHS Inc. All Rights Reserved. 9
…
TechnologyInnovation, Technology,
and Manufacturing
DIE CHANGE, MANUFACTURING PROCESS CHANGE
NEW VERSION, TECHNOLOGY INNOVATION
QUALITY ISSUES
OBSOLETE MFG PROCESS, OBSOLETE TECHNOLOGY
…
OrganizationConsolidation / Rationalization of
Company and its Products
COMPANY ACQUISITION
FAB/FACILITY CLOSURE
PRODUCT RATIONALIZATION/CONSOLIDATION
…
SupplySupply-Side Economics
SHORTAGE OF MATERIAL
SUPPLIER OBSOLESCENSE
…
Insight: PCN/EOL Correlate with Market Trends,Business Drivers, and Volatility
End of Life (EOL)Specific to RoHS/Pb-free Environmental Compliance
Component PCN 40% CAGR from 1997-2010 Lead-free creates 20% new EOL 2006-2007
Copyright © 2012 IHS Inc. All Rights Reserved. 10
2003 2004 2005 2006 2007 2008 2009
.00
.05
.10
.15
.20
.25
.30
.35
.40
.45
.50
.55
.60
.65
.70
.75
.80
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
2,400
2,500
2,600
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Semiconductor MSI (Right Scale)End of Life Parts % of Total Parts
IHS EOL insight found “demand side” primary reason for 90% of EOLactions in 2009, vs. more typical 15-20% citations during 2004-2008
Millions Square Inches Silicon Processed - SemiParts: IHS Electronics Database
Component EOL 40% CAGR from ‘97 to ‘10 Demand weakness 90% of EOL in 2009
Charts Courtesy of IHS Inc., 2011
Today, Counterfeits Are A Big DealRisks to Company, Brand, and Performance
55%
42%
37%
44%
Expose product safety / legal liability
Expose contractual liability
Compromise device/product security
Undermine compliance claims
CO
MP
AN
Y&
BR
AN
D
What is the Impact of Counterfeit Electronics?(% Respondents)
Copyright © 2012 IHS Inc. All Rights Reserved. 11
65%
64%
62%
51%
38%
84%
67%
57%
36%
71%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Increase warranty/maint. costs
Reduce expected product life
Inhibit sales / customer sat
Add to unit costs
Increase product dev’pt time/costs
Product quality/reliability failures
Customer returns/recalls
Production line stoppages
Product launch delays
Damage brand / reputation
FIN
AN
CIA
L&
PE
RF
OR
MA
NC
E
PR
OD
UC
T&
OP
ER
AT
ION
S
Source: Benchmarking Counterfeit & Inferior Grade Components,Supply & Demand Chain Executive & IHS Inc., April 2009
Insight:Counterfeit Incidents vs. Revenues 2001 – 2011
Copyright © 2012 IHS Inc. All Rights Reserved. 12
ERAI Accounted for Over 90% of High Risk and Suspect Counterfeit Parts Verifiedand Reported from 2001-2011
Reactive RiskManaging Supply Chain Disruption: Thailand & JapanManaging Supply Chain Disruption: Thailand & Japan
Thailand Flood -Update
• Over 800 fatalities
• More than one-third ofThailand flooded
• 7 million people affected
• 14,000 factories flooded
Copyright © 2012 IHS Inc. All Rights Reserved. 14
An aerial view of the Chaophraya River on Oct. 12, 2011 in Ayutthaya province, central Thailand.(AP Photo)
The disaster in Thailand disrupted the supply chains of many industries.• Direct Impact: Automotive production, Analog IC & Discrete Semiconductor
manufacturing, HDD manufacturing and assembly, Electronics Assembly –PCs, digital cameras
• Indirect Impact: PC, DRAM, Set Top Boxes, Servers
Supply and Demand Analysis
Toshiba plant before flood
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12E
Pe
rce
nta
ge
Supply/Demand AnalysisSHIPMENTS CHANGE % ASP'S CHANGE % DAYS OF INVENTORY CHANGE %
Copyright © 2012 IHS Inc. All Rights Reserved. 15
Source: IHS
Supply and Demand Analysis:
Q4-11: Total Q4 HDD shipment dropped 29% QoQ. Price has increased ~28% QoQ in Q4-11.
Q1-12: IHS expects Q1-12 shipment and inventory to improve due to increased production fromnon-flooded HDD makers and component manufacturers. Price may start to decline for certaindrives.
2012: Situation will continue to improve. Inventory will increase and prices will gradually decline 3-10% QoQ. Overall supply/demand equilibrium in Q312. Almost 12 months!
Toshiba plant during flood
-40.00%
-30.00%
To what extent has your company’s increasednormal purchasing for commodities, materials,or components believed to be impacted?
How have prices changed for impactedcommodities, materials, or components?
Disaster Effect: Japan Crisis
Not at all 9.2%Somewhat 21.7%Moderately 34.2%Significantly 6.7%Very significantly 2.5%
Significant decrease in prices 0.0%Slight decrease in prices 1.7%No change to prices 24.2%Slight increase in prices 40.8%Significant increase in prices 4.2%
60%+45%
Copyright © 2012 IHS Inc. All Rights Reserved. 16
How have you or your suppliers increased theuse of open market or other independentsupply chains to source critical parts?
Which of the following do you believe are true?
Very significantly 2.5%Not applicable 25.8%
Significant increase in prices 4.2%Not applicable 29.2%
Not at all 18.3%Somewhat 24.2%Moderately 10.8%Significantly 8.3%Very significantly 1.7%Not applicable 36.7%
Prices are/or will increase for commodities,materials, components or services we need
69.2%
Material shortages or obsolescence willincrease
49.2%
Counterfeiting of electronics will increase 55.0%
We will use new suppliers or open marketsources to satisfy demands
27.5%
Other 7.5%
Source: IHS Online Poll
40%+
45%
PCNalert: Actual PCN Show Disaster Impact
Copyright © 2012 IHS Inc. All Rights Reserved. 17
PCNalert: Illustrate Material/Price Volatility
Copyright © 2012 IHS Inc. All Rights Reserved. 18
Material RiskWhat Was Reactive Becomes Routine:Rising Commodity Volatility
John MothersolePrincipal, Industry Practices Group, IHS Inc.
What Has Changed?
• Commodity prices exploded from 2002 to 2011• Average annual growth rate of 15%
• Why should we care about commodity prices?• This surge in prices has impacted profitability and complicated budget
planning - elevating purchasing’s role
• Higher prices joined by higher volatility in recent years
Copyright © 2012 IHS Inc. All Rights Reserved. 20
• Higher prices joined by higher volatility in recent years• Upside risk and downside risk combine to create wild gyrations in prices on a
month to month basis
• Emerging markets have exploded onto the global economy• Influence will continue to grow over the next decade
• Resource nationalism is becoming a factor
• Investors are now firmly entrenched
Copper Versus Gold Prices
1200
1600
2000
6000
8000
10000
Which to Choose?
Copyright © 2012 IHS Inc. All Rights Reserved. 21
0
400
800
0
2000
4000
2000 2002 2004 2006 2008 2010 2012
Copper, $/metric ton, left Gold, $/troy ounce, right
6.0
7.0
8.0
9.0
10.0
Standard Deviation in Monthly Price Changes*
Price Volatility Has Increased
Copyright © 2012 IHS Inc. All Rights Reserved. 22
3.0
4.0
5.0
6.0
1982-85 1986-89 1990-93 1994-97 1998-
2001
2002-05 2006-09 2010-
2011*Gold, silver, oil, aluminum, copper, coffee, sugar, rubber, cotton, corn, w heat, lumber, steel
scrap, steel plate, HR carbon steel sheet
NorthEmerging
Japan8.7%
Other Asia,Pacific20.5%
Mideast,Africa5.8%
2010
The ‘West’s’ Influence is Waning
Share of world GDP, measured in US dollars
2020
NorthAmerica
Other Asia,Pacific33.8%
Mideast,Africa6.1%
Copyright © 2012 IHS Inc. All Rights Reserved. 23
NorthAmerica27.1%
OtherAmericas
6.3%
WesternEurope25.2%
EmergingEurope6.4%
US 22.9%China 9.4%India 2.7%
America20.1%
OtherAmericas
7.1%WesternEurope19.6%
EmergingEurope7.5%
Japan5.7%
US 16.9%China 19.6%India 5.5%
Is the Investment Climate Worsening?
48
52
Fraser Institute Global [Mining] Policy Potential Indexle
ss
att
ractive
en
viro
nm
en
t
Copyright © 2012 IHS Inc. All Rights Reserved. 24
36
40
44
Lo
we
rsco
resig
na
lsle
ss
att
ractive
min
ing
en
viro
nm
en
t
Country Risk Analysis
Copyright © 2012 IHS Inc. All Rights Reserved. 25
Quantified Risk Correlates With Volatility
Copyright © 2012 IHS Inc. All Rights Reserved. 26
The Role of Investors
65
75
85
2.5
3.0
3.5
4.0
4.5
Copyright © 2012 IHS Inc. All Rights Reserved. 27
95
105
1150.5
1.0
1.5
2.0
2.5
1996 1998 2000 2002 2004 2006 2008 2010 2012
IHS Global Insight Industrial Materials Price Index, 2002=1.0, left scale
Trade Weighted Value of U.S. Dollar, 1973:3=100,inverted, right scale
Takeaways
• Commodity prices exploded since 2005• Global economy continues to struggle from the Great Recession; however
prices have almost regained previous peaks
• A new higher cost profile has been placed under many commodities
• Volatility has increased significantly – and is likely a permanentfeature of supply chains
• This raises the need to not just track commodity prices but also
Copyright © 2012 IHS Inc. All Rights Reserved. 28
• This raises the need to not just track commodity prices but alsothe corresponding factors that drive prices
• Build a cost profile of your key materials
• Identify key production centers and raw material exporters
• Be aware of changes and potential changes in policy – these do influenceinvestor flows
• Be prepared for volatility• Formal hedging strategies should be considered if not already in place
Supplier RiskManaging Risk in the Supplier Network
Katie LewisDirector Procurement & Sourcing Solutions, IHS Inc.
Risk Survey (Preliminary) Results
Moderately Significant
Very Significant
Extremely Significant
Significance of Managing Supplier Risk toOperational Plan
Environmental Compliance
Reliability
Cost
Quality
Supply Delay/Disruption
Most Pressing Supplier Risks
Copyright © 2012 IHS Inc. All Rights Reserved. 30
• Survey results confirm supplier risk management is integral to 2012operational plans
• Delays and disruption are the biggest concern, with quality and costfollowing closely behind
0% 10% 20% 30% 40%
Not At All Significant
Not Very Significant
0% 10% 20% 30% 40% 50% 60% 70% 80%
Supplier Bankruptcy
Counterfeit Risk
Environmental Compliance
IHS Inc and Supply & Demand Chain Executive magazine, 2012 Preliminary Survey Results (survey is on-going)
Understanding the Supplier Network
Supplier Relationship Management
• Building Partnerships
• Gaining Visibility
Copyright © 2012 IHS Inc. All Rights Reserved. 31
• Understanding Risk
• Avoiding Disruption
• Achieving Cost Savings
Assessing Supplier Risk
PartnerFor the most integral and high-value inputs to your supplychain, grow strategic partnerships with your suppliers
• The impact of a disruption to the supplier relationship shouldinfluence your relationships with suppliers
• Balancing risk and cost is integral to effective suppliermanagement
Copyright © 2012 IHS Inc. All Rights Reserved. 32
Valu
eofS
pend
Partner
Bottleneck
Substitutes Available
chain, grow strategic partnerships with your suppliers
For lower value, but still integral inputs comingfrom a short list of suppliers, close inventorymonitoring is required
For highly competitive commodities andparts, strategic timing of buys, effectivecontract negotiation, and benchmarkingmean cost savings
Thailand Floods
I read in the news that flooding duringthe monsoon season in Thailand hasimpacted manufacturing facilities in theregion.
•Will it impact my supply chain?
Copyright © 2012 IHS Inc. All Rights Reserved. 33
•What producers could be impacted?
•What facilities are in the path of thefloodwaters?
•Could these disruptions impact myproduction schedule?
Thailand Floods
My suppliersare clearly
marked, so I
What if I knew instantly which of my suppliers had manufacturingfacilities in the region?
Copyright © 2012 IHS Inc. All Rights Reserved. 34
If I know which suppliers were affected, and which ones supply myproduction lines, I can react quickly when disaster strikes.
marked, so Ican measurethe impact to
my supplychain
Managing the Supplier Network
Know Your Suppliers
Copyright © 2012 IHS Inc. All Rights Reserved. 35
• Make informed decisions, balancing costand risk based on detailed supplierinformation
• The majority of manufacturers do nothave tier 2 or 3 visibility, increasing therisk of unforeseen disruptions
• Tier 1
• Tier 2
• Tier 3
Copyright © 2012 IHS Inc. All Rights Reserved.
Supply Chain Risk Ratings
• Supplier Database• Financial viability
• Revenues• Cost of Goods Sold• Debt
• Security of Supply• Capacity• Inventories
Diversity of production facilities
Copyright © 2012 IHS Inc. All Rights Reserved. 36
• Diversity of production facilities
• Counterfeit notices, responsiveness,correctness
• Quality• Reliability
• Innovation and Investment• Capital Expenditure• Growth Prospects
• Geographic risk based on production• Diversification• Cost/Productivity balance• Infrastructure obstacles
IHS Connect: Supply Chain Workbench
Copyright © 2012 IHS Inc. All Rights Reserved. 37
Katie Lewis
Director, Procurement & Sourcing Solutions, IHS Global Insight
Eric Pratt
Senior Director, Pricing & Competitive Analysis, IHS Inc.
Questions?
Copyright © 2012 IHS Inc. All Rights Reserved. 38
John Mothersole
Principal, Industry Practices Group, IHS Inc.
Barry HochfelderEditor, Supply & Demand Chain Executive
For More Information
Send questions and requests for information to:
Copyright © 2012 IHS Inc. All Rights Reserved.
IHS_SupplyChain
IHS - Design & Supply Chain
@IHS_SupplyChain
39