Inventory shrinkage

1. Inventory shrinkage Pyeongtaek plant (Korea) November 15, 2012

2. Summary • On September 23 & October 28, 2012, MKL performed inventory cycle count. • Booked KRW 889 million (US$ 808 k) of shrinkage as a method variance • Potential causes: • Inaccurate inventory counting ; KRW 274 million($249 k) • Improper processing of transactions ; KRW 594 million($540 k) • Immediate actions: • Corrective actions taken after process review meeting on Nov 12 • In-depth physical counting to be performed on November 18 • Charge back to Tier 2 for the issued items for defects • Daily monitoring of the transactions having problems such as delayed recording of transaction • Permanent corrective actions: • All the recording of variances is to be approved by Plymouth • All operation and transactions to be frozen before inventory check for accuracy • Roledefinition & re-establish proper process for the inventory transaction • Employee training for QAD and the timely recording of transactions

3. Shrinkage adjusted on book & tracking root cause

4. Potential causes • Inaccurate inventory counting : • Daily WIP inventory level was much higher compared to Oct 28 cycle count quantity. • During the corrective action this week, BSMs with whistling noise returned from customers were not included in the cycle count. Finished goods in customer line were also omitted in the counting. • Many finished goods scattered around in and out of MKL plant were not included in the count. These were samples parts for QC, R&D and etc. • Improper processing of transactions : • BOM’s were not created timely for design changes such as 6 bolt phase 2 or 7 bolt, causing omission of inventory transactions. • QA employees handling inventory do not use QAD, and had to pass the transaction bills to logistics clerk. Transaction bills were often lost or not recorded during this process. • Suspect parts moved out of production line into another location for QC evaluation or confirmation are not recorded properly. • Some of reworked parts that were sent back to production line were omitted on book. • Failed parts in line were not clearly identified with tag which made it hard to record the transactions. • Scrap-out are not recorded timely so that finance group estimates the value for the inventory sitting in scrap area. • Parts to be charged back to Tier2 are not monitored. • Raw material or FGs moving to and from warehouse are not recorded immediately on QAD.

5. Immediate actions • Corrective actions taken after process review meeting on Nov 12 • BOM created for 7 bolt BSMs. • Designated an operator in charge of suspect parts’ transaction.-JH Kim • Tagging on suspect parts for visibility • Immediate recording for parts moving to / from warehouse • In-depth physical counting to be performed on November 18 • Track parts not counted on Oct 28, and collect all of our own parts in/out MKL. • Intensive physical counting preparation with all the employee under training prior to Nov 18-Done on Nov 15. • Charge back to Tier2 for KRW 274 million based on QA issued tickets • Daily monitoring of the transactions having problems such as delayed transaction

6. Permanent corrective actions • All the recording of variances is to be approved by Plymouth. • To ensure that all new BOM’s are prepared, reviewed and entered into the system prior to the production of the new part number, CSE at R&D (Michael Chai) will inform logistics department on the design change so that logistics can generate BOM on QAD timely. • To reflect the transaction of suspect parts in QAD properly and to avoid scrap estimation by finance group, production and quality people are to attach identification tags on the suspect parts for timely recording and monitoring by the managers of production, logistics and quality. • To make sure the recording of daily transaction, logistics manager must review and monitor all transactions. • Designate one QA specialist to control all transactions relate to scrap transaction. • To ensure timely updating of selling price and purchasing price of FGs and components, the plant controller will issue monthly time schedule and control. • In order to record all transactions correctly, QAD training for logistics and quality managers will take place end of November. • Give QAD access to quality person by end of Nov. • All operation and transactions are to be frozen before inventory check for accuracy, • Have employees recognize the importance of minimizing inventory variance. Penalty to be imposed of the procedures and rules are violated.

7. Others • MKL hopes Plymouth can send an expert to MKL to help us find out root cause and set up better corrective actions if possible. • Lower number of logistics people at MKL compared to other foreign automotive companies in Korea of the similar size. Magna Korea has 11, Borgwarner Mostec also has 11and Borgwarner TS has 16, while MKL has only 6 including two outsource people.