Supply Chain Risk Mitigation: Minimizing Exposure to Supplier Failure, Volatile Commodity Prices, and Manufacturing Disruptions

Welcome to Today’s Webcast

Supply Chain Risk Mitigation: Minimizing Exposure to Supplier Failure, Volatile Commodity Prices, and

Manufacturing Disruptions

Copyright © 2012 IHS Inc. All Rights Reserved.

Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/SupplierRisk www.ihs.com/SupplierRisk 2

Today’s Speakers

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.

Barry Hochfelder

Editor, Supply & Demand Chain Executive

http://www.ihs.com/SupplierRisk


Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/SupplierRisk www.ihs.com/SupplierRisk

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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.

www.ihs.com/SupplierRisk


Copyright © 2012 IHS Inc. All Rights Reserved. 5

Early Survey Findings Reveal Priorities

0% 10% 20% 30% 40% 50% 60% 70%

Parts Management

Geographic Mapping of Supplier Mfg

Benchmarking

Low Cost Country Sourcing

Material Risk Management/Hedging

Gaining Greater Visibility into the Supplier Network

Managing Inventory Levels

Negotiating Contracts/Individual Supplier Relationships

Greatest Supply Chain Focus Areas

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

•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 Risk Managing Scheduled Variations

Eric Pratt





Insight: IHS Analyzes NPI, PCN, EOL Data

Business Driver Stated by Manufacturers

Demand

Demand-Side Economics

LOW DEMAND, LOW SALES

LOW INVENTORY

LOW FORECAST

…

Environment

Compliance and Sustainability

PB-Free Conversion

REACH CONVERSION

ROHS CONVERSION

…

Technology

Innovation, Technology,

and Manufacturing

DIE CHANGE, MANUFACTURING PROCESS CHANGE

NEW VERSION, TECHNOLOGY INNOVATION

QUALITY ISSUES

OBSOLETE MFG PROCESS, OBSOLETE TECHNOLOGY

…

Organization

Consolidation / Rationalization of

Company and its Products

COMPANY ACQUISITION

FAB/FACILITY CLOSURE

PRODUCT RATIONALIZATION/CONSOLIDATION

…

Supply

Supply-Side Economics

SHORTAGE OF MATERIAL

SUPPLIER OBSOLESCENSE

…




Insight: PCN/EOL Correlate with Market Trends,

Business Drivers, and Volatility

2003 2004 2005 2006 2007 2008 2009

End of Life (EOL)

Specific to RoHS/Pb-free Environmental Compliance

.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 EOL actions in 2009, vs. more typical 15-20% citations during 2004-2008

Millions Square Inches Silicon Processed - Semi

Parts: IHS Electronics Database

Component PCN 40% CAGR from 1997-2010

Component EOL 40% CAGR from ‘97 to ‘10

Lead-free creates 20% new EOL 2006-2007

Demand weakness 90% of EOL in 2009

Charts Courtesy of IHS Inc., 2011




Today, Counterfeits Are A Big Deal Risks to Company, Brand, and Performance

65%

64%

62%

51%

38%

84%

67%

57%

36%

71%

55%

42%

37%

44%

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

Expose product safety / legal liability

Expose contractual liability

Compromise device/product security

Undermine compliance claims

FIN

AN

CIA

L&

PE

RF

OR

MA

NC

E

PR

OD

UC

T&

OP

ER

AT

ION

S

CO

MP

AN

Y&

BR

AN

D

What is the Impact of Counterfeit Electronics? (% Respondents)

Source: Benchmarking Counterfeit & Inferior Grade Components,

Supply & Demand Chain Executive & IHS Inc., April 2009




Insight:

Counterfeit Incidents vs. Revenues 2001 – 2011

ERAI Accounted for Over 90% of High Risk and Suspect Counterfeit Parts Verified

and Reported from 2001-2011

Reactive Risk Managing Supply Chain Disruption: Thailand & Japan


Thailand Flood -Update

• Over 800 fatalities

• More than one-third of

Thailand flooded

• 7 million people affected

• 14,000 factories flooded

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

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 from non-flooded HDD makers and component manufacturers. Price may start to decline for certain drives.

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 before flood

Toshiba plant during flood

-40.00%

-30.00%

-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 Analysis SHIPMENTS CHANGE % ASP'S CHANGE % DAYS OF INVENTORY CHANGE %


To what extent has your company’s increased

normal purchasing for commodities, materials,

or components believed to be impacted?

How have prices changed for impacted

commodities, materials, or components?

How have you or your suppliers increased the

use of open market or other independent

supply chains to source critical parts?

Which of the following do you believe are true?

Disaster Effect: Japan Crisis

Not at all 9.2% Somewhat 21.7% Moderately 34.2% Significantly 6.7% Very significantly 2.5% Not applicable 25.8%

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% 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 will increase

49.2%

Counterfeiting of electronics will increase 55.0%

We will use new suppliers or open market sources to satisfy demands

27.5%

Other 7.5%

Source: IHS Online Poll

60%+

40%+

45%


PCNalert: Actual PCN Show Disaster Impact




PCNalert: Illustrate Material/Price Volatility



Material Risk What Was Reactive Becomes Routine:

Rising Commodity Volatility

John Mothersole





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

• 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

0

400

800

1200

1600

2000

0

2000

4000

6000

8000

10000

2000 2002 2004 2006 2008 2010 2012

Copper, $/metric ton, left Gold, $/troy ounce, right

Which to Choose?




3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1982-85 1986-89 1990-93 1994-97 1998-

2001

2002-05 2006-09 2010-

2011

Standard Deviation in Monthly Price Changes*

*Gold, silver, oil, aluminum, copper, coffee, sugar, rubber, cotton, corn, w heat, lumber, steel

scrap, steel plate, HR carbon steel sheet

Price Volatility Has Increased




North America27.1%

Other Americas

6.3%

Western Europe25.2%

Emerging Europe6.4%

Japan8.7%

Other Asia, Pacific20.5%

Mideast, Africa5.8%

2010

US 22.9%

China 9.4%

India 2.7%

The ‘West’s’ Influence is Waning

Share of world GDP, measured in US dollars

2020

North America20.1%

Other Americas

7.1%Western Europe19.6%

Emerging Europe7.5%

Japan5.7%

Other Asia, Pacific33.8%

Mideast, Africa6.1%

US 16.9%

China 19.6%

India 5.5%




Is the Investment Climate Worsening?

36

40

44

48

52

Fraser Institute Global [Mining] Policy Potential Index

Lo

we

r sco

re s

ign

als

le

ss a

ttra

ctive

min

ing

en

vir

on

me

nt




Country Risk Analysis




Quantified Risk Correlates With Volatility




The Role of Investors

65

75

85

95

105

1150.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

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 permanent feature of supply chains

• This raises the need to not just track commodity prices but also the 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 influence investor flows

• Be prepared for volatility • Formal hedging strategies should be considered if not already in place



Supplier Risk

Managing Risk in the Supplier Network

Katie Lewis

Director Procurement & Sourcing Solutions, IHS Inc.




Risk Survey (Preliminary) Results

• Survey results confirm supplier risk management is integral to 2012

operational plans

• Delays and disruption are the biggest concern, with quality and cost

following closely behind

0% 10% 20% 30% 40%

Not At All Significant

Not Very Significant

Moderately Significant

Very Significant

Extremely Significant

Significance of Managing Supplier Risk to

Operational Plan

0% 10% 20% 30% 40% 50% 60% 70% 80%

Supplier Bankruptcy

Counterfeit Risk

Environmental Compliance

Reliability

Cost

Quality

Supply Delay/Disruption

Most Pressing Supplier Risks

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

• Understanding Risk

• Avoiding Disruption

• Achieving Cost Savings




Valu

e o

f Spend

Assessing Supplier Risk

Partner

Bottleneck

Substitutes Available

For the most integral and high-value inputs to your supply

chain, grow strategic partnerships with your suppliers

For lower value, but still integral inputs coming

from a short list of suppliers, close inventory

monitoring is required

For highly competitive commodities and

parts, strategic timing of buys, effective

contract negotiation, and benchmarking

mean cost savings

• The impact of a disruption to the supplier relationship should

influence your relationships with suppliers

• Balancing risk and cost is integral to effective supplier

management


Thailand Floods

I read in the news that flooding during

the monsoon season in Thailand has

impacted manufacturing facilities in the

region.

•Will it impact my supply chain?

•What producers could be impacted?

•What facilities are in the path of the

floodwaters?

•Could these disruptions impact my

production schedule?




Thailand Floods

If I know which suppliers were affected, and which ones supply my

production lines, I can react quickly when disaster strikes.

My suppliers

are clearly

marked, so I

can measure

the impact to

my supply

chain

What if I knew instantly which of my suppliers had manufacturing

facilities in the region?




Managing the Supplier Network

• Make informed decisions, balancing cost

and risk based on detailed supplier

information

• The majority of manufacturers do not

have tier 2 or 3 visibility, increasing the

risk of unforeseen disruptions

Know Your Suppliers

• 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

• 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. www.ihs.com/SupplierRisk www.ihs.com/SupplierRisk 38

Katie Lewis

Director, Procurement & Sourcing Solutions, IHS Global Insight

Eric Pratt


John Mothersole


Barry Hochfelder

Editor, Supply & Demand Chain Executive

Questions?



Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/SupplierRisk www.ihs.com/SupplierRisk

For More Information

Send questions and requests for information to:

[email protected]

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