Transforming The Supply Chain

1. Transforming The Supply Chain A Discussion Document May 29, 2001

2. Issues Addressed • Mergers, acquisitions and regulatory changes are redefining the competitive landscape, raising the criticality of effective cost containment • The exhaustion of traditional avenues for improved cost performance is placing a premium on supply chain opportunities such as strategic procurement • Advances in technology and emerging eProcurement and eMarket developments are offering supply management tools that provide cost and revenue advantages through supply management improvements • Increasing access to information is making companies, suppliers and consumers smarter, driving increasing cost pressures and competition • The move toward “virtual” companies is making the ability to manage strategic supply side relationships a core competency • Continued supply/demand market consolidation is shifting the power in traditional buyer/supplier relationships The industry is faced with market challenges that are making it increasingly difficult to realize the synergies of the supply chain.

3. Stage One Where CVCs are today Stage Two Where CVCs will be in the short run Stage Three Where this is all headed E-Procurement & Other Transaction Automation Collaborative Commerce & Business Innovation Value Chain Integration What is a Collaborative Value Chain? • A Collaborative Value Chain is a multi-company, Internet-based process and technology framework for communicating, transacting, collaborating, and creating new business. Collaborative solutions offer tremendous opportunities in all areas of the value chain. Major processes include: • eProcurement • Collaborative Planning, Forecasting and Replenishment (CPFR) • Order Management/Available to Promise • Value/Supply Chain Management • Collaborative Product Development • Collaborative R&D • E-billing, presentment and payment • Content management for collaboration CVC Evolution

4. CVC Industry-Wide Architecture • The collaborative architecture depicts industry-wide business and technology linkage of trading partners within a value chain. ENTERPRISE OPTIMIZATION (Single Business) NETWORK OPTIMIZATION (Multi-Business) ENTERPRISE eBUSINESS CVC (via Exchanges) Creating New Business Models ERP CORE Physical flow Company Company Public Exchange Company Company Procure Produce Products Manage Logistics Forecast Demand Company Company Company Private Exchange Company Company Information flow

5. However… Some Barriers Remain That Impact Expected Benefits • Insufficient detailed global spend visibility • Compliance with established contracts • Limited qualified resources to facilitate the process • Limitations of technical tools to sustain results • Scope limited to indirect spend and select suppliers • Effectiveness limited to catalog buying • Limited search capabilities • Access to contracted positions • Slow to develop robust, value adding capabilities • Slow supplier adoption • Unclear cost/benefit proposition • Limited monitoring capabilities of auctions • Business wide adoption • Stand alone solutions with limited system visibility • Limited availability to true performance data • Lack user friendly interface and require deep training • Costly and time consuming to maintain • Multiple systems with limited to no integration • Inflexible Strategic Sourcing eProcurement eMarkets Supplier Programs ERP/MMS Systems

6. Not Enough Attention is Given to Total Costs $2.83B Total Supply Chain Cost $80M S.C. Costs $1.67B Supplier Price $1B Maintenance, Operation, Repair & Installation Costs $80M Planning & Design Costs (est.) + + + = Suppliers Business Unit • Acquisition Cost • Plan • Design Requisition • Purchase • Receive Inventory • Deliver • Payment • Product Value Chain • R&D • Design • Make/Service • Inspect • Inventory • Deliver • Invoice • Life Cycle Cost • Plan • Receive • Install • Operate • Inspect • Trouble-shoot • Repair • Decommission • Dispose Supply-sideDemand-side

7. Most Companies Have Difficulty Achieving Sustained Strategic Sourcing Maturity Due to Lack in Infrastructure Supply side Focused Demand & Supply side Focused High • Supply Strategy • Demand planning • Total Cost of Ownership approach • Parts & Services standardization to industry standards • Early supplier involvement • Supplier TQM development • Global sourcing • Strategic supplier performance-based Alliances • Dock-to-Stock pull systems with JIT 5 Most companies reach this level of maturity and then experience a decline in benefit realization • Cross-enterprise decision making • Fully integrated competitive supply chains with external customer focus and business measures • Early sourcing • Full service suppliers • Insourcing/ outsourcing to maximize core competencies of firms & resources throughout the supply chain 4 3 • Cross-functional, cross-locational sourcing teams • Supply base optimization • International sourcing • Ad hoc supplier alliances Strategic Sourcing Approach Competitiveness 2 • Quality/cost teams • Volume leveraging • Supply base consolidation • Long term contracts 1 0 Low Initial Phases Supply-side Processes Demand-side Processes Fully Integrated Supply Chains Maturity • Key enablers to demand-side excellence: • Executive leadership, planning and skilled personnel • Institutionalized approach • Measurements

8. Supplier Collaboration Consumers and Channels Collaboration and connectivity, optimized across enterprises Supply Chain Management Collaborative Planning Enterprise Connectivity Customer Management Product Lifecycle Management Design Partners

9. Materials/Services Flow Information Flow Company Boundaries Forecasting/Planning Transforming the Value Chain is About Making Collaborative Business Solutions Possible Marketing Logistics Manufacturing Sales Manufacturing DC Collaborative Private Exchange or Public eMarket Subcontractors / Customer Service Contractors Commercial & Industrial Customers Local/Regional Suppliers National/Global Suppliers Individual Consumers Real-time collaboration Concurrent planning Real-time planning with shared plan Partnership Value-added service Lower inventory levels High inventory turns Optimized labor deployment

10. Upstream Collaboration (Extranet, EDI and eMarkets) Downstream Collaboration(Extranet, EDI and eMarkets) Material Requirements Sales Forecasts Production Schedules Orders Forecasts Integrate Integrate Integrate Integrate Plan Plan Plan Plan Integrate Integrate Integrate Integrate Purchase Plans Promotions/Price Source Source Source Source Make Make Make Make Deliver Deliver Deliver Deliver VMI/Inventory Levels VMI/Inventory Levels Shipment Schedules Shipment Schedules Transact Transact Transact Transact Monitor Monitor Monitor Monitor Extending Processes across the Value Chain via B2B CollaborationCreating the Collaborative Value Chain • Collaborationis a negotiated co-operation between independent companies, exchanging capabilities and constraints to improve collective responsiveness & profitability. Supplier(s) Focal Company Customer(s) Functional/ Horizontal Collaboration 3PL & Service Providers • Inter-organizational collaboration is defined as a process in which organizations: • exchange information, • alter activities, • share resources and • enhance each others capacity for mutual benefit and a • common purpose by sharing risks, responsibilities and rewards Integrated Value Chains (B2B relationships) Source: Adapted from PwC, AMR and SCOR templates

11. E-Market Other Buyers Suppliers Buyers Suppliers Buyers Suppliers Buyers E-hub Suppliers/ Partners Your company E-Market Customers Suppliers/ Partners Regional Market E-hub Suppliers/ Partners Suppliers/ Partners Other Buyers Regional Market Suppliers / Partners Suppliers / Partners Suppliers / Partners Suppliers / Partners There are multiple ways that a company can “participate” in an e-environment

12. The CVC Solution Connected to the Existing Enterprise External Internal Enterprise Intra-Enterprise • Public / Private Customer Supply Chain Management Legacy/Other Business Unit A Customer ERP Partner Relationship Management Legacy/ Other Supplier Sales and Distribution Supplier Materials Management Middleware Collaborative Product Development Production Planning Supplier EAI Security / Controls Authorization Planning & Demand Mgmt Private Exchange Financial Settlement Sales/Order Mgmt. Procurement Supplier Content Management Inventory Management Business Unit B Supplier Logistics Public Exchange Marketplace Support Business Unit C Manufacturing Public Exchange

13. The Benefits are Enormous • Substantial benefits can be achieved through the single company effort, however integrated supply chain processes raise the level of benefit to world class Integrated Supply Chain Tier 1 and 2 Supplier Excellence End to End Supply Process Management Integrated Logistics 14-22% Supplier Value Engineering Multi-Company Collaboration and Integration Benefits - as % of Spend Shift Collaborative Planning Cost Modeling Single Company E-Enablement 11-14% Total Cost Management Inventory Management and VMI 5-8% Planning and Forecasting Indirect Purchasing Supply Base Optimization Insourcing/Outsourcing Leveraging Globalization 3-5% Strategic Supplier Alliances Process and materials simplification and standardization Supplier Measures and Development Org, Process, and Category team optimization ERP Enablement Strategic Sourcing High Low Flexibility & Competitiveness

14. +50% 7.5 A 5% reduction in purchase cost can result in a 50% increase in profit margin. 45 0% - 5% 47.5 • In order to obtain an equivalent impact, a company would have to... • Increase sales by 50% • Reduce overheads by up to 20% • Significantly reduce staff numbers Supply chain transformation, supported by SRM enabling technology, can result in significant cost savings and business process efficiencies 100 100 Revenue 5 Profit Other Costs 45 External spend can represent up to 70% of a companies revenues External Expenditures 50 Results of a fully integrated approach to strategic supply management can demonstrate up to a 5% reduction in a companies total spend portfolio corresponding in direct benefits to the bottom line.

15. eBusiness Strategy - A Structured Framework Phase 1: Assess eBusiness Strategy and Identify Opportunities Phase 2: Build eMarket Participation Strategy and Business Case(s) Phase 3: Build eMarket Participation Execution Plans Output: Latest eBusiness Strategy and Potential eMarket Opportunities Output: Near Term Opportunities and readiness assessment Output: Business Cases of Opportunities with Strategic or Positive Returns Output: Execution Plans for each Opportunity Assess eBusiness Strategy Identify Near Term Opportunities Develop Business Case(s) Develop Execution Plan • Is the current eBusiness strategy up to date? • Are the assumptions in this strategy valid? • Have new opportunities arisen? • Is the eBusiness strategy consistent with the overall business strategy? • How do eMarkets fit into the eBusiness strategy? • Is the foundation for executing the eBusiness strategy in place? If not, which pieces are in place? • Research tools and solutions available • Future Release Schedules • Other Vendors • Assess internal readiness: • Technological infrastructure • Business processes • Organizational readiness • Enterprise readiness • Suppliers • Customers • Understand current initiatives and integrate • Define participation strategy, including opportunities with strategic and positive returns • Prioritize opportunities on eMarkets Participation roadmap • Develop opportunity details into business case model to support Participation road map: • Staffing • Timing • Costs • Benefits • Strategic Benefits • Evaluate alternative roll-out strategies • Identify potential areas of risk for management through project lifecycles • Identify benefits tracking approach • Internal Preparation: • Business Process • Technology Architecture • Organizational Change • Enterprise Preparation (Suppliers/Customers) • Solution Adoption Plan • Reliant deployment • Other Vendors • Build plans • Integration Plan • EDI/XML Integration • Legacy Integration • Private Exchange • Work plan Development • Program Mgmt Structure • Budget, Resources, Approvals • Risks Assessments & Plans • Communications Plans • Timing and Dependencies

16. Collaborative Value Chain Diagnostic (CDVD) Approach Mobilization Prototyping Implementation Launch Supplier Collaboration Roll-Out Strategy Pilot Suppliers Marquis Suppliers 2nd Tier Suppliers Supply Chain Value Levers Prioritization Best-in-Class Organization Value Chain Convergence Planning & Forecasting Sourcing Procurement Product Development Manufacturing Fulfillment Collaboration Requirements Supplier Collaboration Information Technology Organizational Optimization e-Business Transformation

17. Key Improvement Opportunities (SG&A, Cost of Capital Savings, etc.) Financial Metrics (NPV, IRR, Payback Period, Cost of Capital etc.) Cycle Time Improvements Cash Flow Impact (Hard/Soft Savings, Cash-to-Cash Reduction, Investments) Net Cash Flow Impact CVCD Results (Illustration)

18. Client offerings • TWO DAY WORKSHOP • E-PARTICIPATE SOLUTION SELECTION • BUSINESS CASE DEVELOPMENT • SYSTEMS TOOLS SELECTION • SYSTEMS INTEGRATION SUPPORT • BUSINESS SOLUTION DEVELOPMENT • INTEGRATED PROCESS RE-DESIGN • E-MARKET CONNECTIVITY • INTEGRATED CATALOG DESIGN AND IMPLEMENTATION • GLOBAL CROSS-DIVISION IMPLEMENTATIONS • COST REDUCTION INITIATION • TECHNOLOGY TRAINING IN THE i2 SOLUTION SUITE or other technology