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September 2008

Global Supply Chain Trends


2008–2010

DRIVING GLOBAL SUPPLY CHAIN FLEXIBILITY


THROUGH INNOVATION

Management
Consultants
Where Innovation Operates
Table of Contents
Global Supply Chain Trends 2008–2010
ƒ Study Background and Motivation
ƒ Ten Global Supply Chain Trends
Global Supply Chain Trends by Industry
ƒ Automotive and Industrial
ƒ Software, Electronics, Telecommunication, Services
ƒ Consumer Packaged Goods
ƒ Life Sciences
Introduction to PRTM
Appendices
ƒ Additional and Detailed Results by Industry, Region and Supply Chain Maturity

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL |2


Global Supply Chain Trends
2008–2010
STUDY BACKGROUND AND MOTIVATION

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Study Motivation
Companies today are working in an increasingly competitive environment and
require perspective on global trends.

Those who know how to set up, manage and rapidly re-configure the value chain
worldwide will outpace competitors in seizing market share.

Now in its sixth year, the annual Supply Chain Trends study has been modified
from a regional to a global focus to provide critical insights to supply chain
executives.

The purpose of the study is to provide supply chain executives with an


understanding of the key supply chain trends that will enable
superior growth and profitability in a global economy.

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Key Questions Explored in the Study

What are the


What are the
key drivers of
preferred target
globalization now,
locations for
and what will they be
globalization?
in 2010?

What is the level


of supply chain What are major
globalization today, barriers and risks
and how will this of globalization?
change by 2010?

What are the key supply chain


priorities for 2010?

Focus Industries
Automotive and Consumer
Electronics Life Sciences
Industrial Goods

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Over 300 Global Companies Participated
Executive management interest is reflected in the response population
ƒ Most participants are senior supply chain executives, and 16% are at the CxO-level
While the majority of survey participants are companies with annual revenues
greater than $1 billion, more than 10% have revenues less than $100 million

Participants by Level, Region, and Industry

21%
21%
31%
32% 37%
52%
10%

42%
16% 32%

Director, Vice President North America Automotive and Industrial Other Industries
Manager, Others Asia Pacific Consumer Goods Electronics, Telecoms,
CxO Europe Life Sciences Services

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Summary of Findings

TOP TEN GLOBAL SUPPLY CHAIN TRENDS

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We Have Derived Ten Key Trends from the Survey Results
11 22 33
Pressures
Pressures to to reduce
reduce cost
cost Despite
Despite 17%
17% average
average cost
cost
Globalization
Globalization is
is accelerating,
accelerating, and
and penetrate
penetrate local
local markets
markets reduction
reduction from
from globalization,
globalization,
leading
leading to
to large
large structural
structural shifts
shifts are
are the
the two
two key
key drivers
drivers of
of many
many companies
companies do do not
not save
save on
on
for
for supply
supply chain
chain organizations
organizations accelerated
accelerated globalization
globalization management
management costs
costs

10
10 44
The
The COO
COO agenda
agenda is
is China
China and
and India
India are
are primary
primary
converging
converging on improving supply
on improving supply targets
targets for
for globalization,
globalization, while
while
chain
chain flexibility
flexibility and
and delivery
delivery Eastern
Eastern Europe
Europe is
is catching
catching up
up
performance
performance
Ten Key Global
Supply Chain
99 55
By
By 2010,
higher
2010, the
higher supply
the need
need for
supply chain
for
chain flexibility
flexibility
Trends Product
Product quality,
quality, safety,
safety, and
and
supply
supply chain
chain delivery
delivery and
and
will
will be
be the
the major
major driver
driver ofof security
security are
are critical
critical concerns
concerns
supply chain strategy
supply chain strategy

88 77 Environmental
Environmental sustainability
sustainability
66
Supply
Supply chain
chain maturity,
maturity, Limited
Limited flexibility
flexibility and
and the
the lack
lack
is
is driven
driven by
by the
the need
need for
for
enabled
enabled byby advanced
advanced supply
supply of
of internal
internal competency
competency to to
regulatory
regulatory compliance
compliance
chain
chain practices,
practices, appears
appears manage
manage partners
partners are
are major
major
and
and satisfaction
satisfaction of
of
to
to have
have reached
reached aa plateau
plateau barriers
barriers toto globalization
globalization
customer
customer demands
demands

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11
Globalization is Accelerating

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

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11
Globalization Leads to Supply Chain Organization Shifts
Continued
Globalization, the level of value creation outside the home country, is gaining
momentum
Within the 300 participants, 42% of all manufacturing activities and 38% of final
assembly have already been globalized
ƒ The primary shift of manufacturing and assembly operations has been to low-cost locations like
China, India, and Eastern Europe
ƒ The trend of outsourcing IT and other shared services such as HR and finance is decreasing,
as most of the surveyed companies have already achieved anticipated benefits from offshoring
these functions
As a result of manufacturing and assembly globalization, support functions such
as warehousing and procurement have also been globalized in support of
international locations
This year’s survey shows a new trend—rapidly increasing globalization of
product and technology development
ƒ By 2010, offshoring of R&D and technology development activities will almost double

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 10


Pressures to Reduce Cost and Ensure Market Access 22
Continue to Drive Globalization

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 11


Pressures to Reduce Cost and Ensure Market Access 22
Continue to Drive Globalization
Continued
In the years to come, supply chain cost discipline and efficiency will remain at the
top of the management agenda
ƒ While reasons vary somewhat by industry and region, reducing material and labor costs is the
main area of focus
While cost reduction continues to be a primary driver of supply chain
globalization, access to local markets is also a key objective, ranking third as a
driver of globalization
ƒ Nearly half of respondents expect local market access to increase in importance as a driver of
globalization, although this trend is more pronounced for Asian and North American companies
than for European companies
ƒ Asian and North American respondents also cite investment of capital in emerging markets as a
driver of their globalization strategies, while European companies are more likely to focus on
gaining access to technical resources

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 12


Globalization Has Only Moderate Impact on 33
Management Costs

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 13


Globalization Has Only Moderate Impact on 33
Management Costs
Continued
A significant majority has achieved some or all planned benefits of globalization
Despite these results, a gap remains between plans to “go global” and realization
of the anticipated payback
ƒ Only a third of participants achieve all or most of their expected globalization benefits
ƒ Controlling supply chains that span continents requires sophisticated management capabilities
ƒ Lose potential benefits due to lack of efficient processes and supply chain coordination
Supply chain leaders achieve more benefits than challengers or followers
ƒ Those that are aware of the challenges involved are better equipped to both build a
globalization strategy and capitalize on it

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Globalization Has Only Moderate Impact on 33
Management Costs
Percent cost reduction achieved by group and industry Continued

Material Cost Labor Cost Management Cost

Automotive and Automotive and Automotive and


Industrial -15% -25% Industrial -8%
Industrial

Electronics, Telecoms, Electronics, Telecoms, Electronics, Telecoms,


Services -20% Services -32% -11%
Services

Consumer Goods -19% Consumer Goods -25% Consumer Goods -9%

Life Sciences Life Sciences Life Sciences


-13% -14% -5%
and Others and Others and Others

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44
Globalization Targets: China, India, and Eastern Europe

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

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44
Globalization Targets: China, India, and Eastern Europe
Continued

The globalization focus for manufacturing and assembly continues to move


toward China and India
ƒ China outranks all other countries as a manufacturing and sourcing destination, accounting for
almost one-third of the globalization investments planned by 2010
ƒ China’s strong, low-cost manufacturing base and the increasing importance of the Chinese
consumer market are major factors attracting these investments
ƒ India has gained momentum as the premier destination for IT, R&D, and technology
investments
Eastern Europe is rapidly gaining investment momentum from investments by
European industrial companies and global automotive and electronics
manufacturers
ƒ Proximity to key markets in Western Europe as well as an attractive skill/cost mix are factors
behind an expected investment volume growth of 13% by 2010

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44
Globalization Targets: China, India, and Eastern Europe
Continued

Despite significant cost disadvantages, both North America and Western Europe
will remain major destinations for globalization investments, especially in R&D,
technology, and supply chain coordination
ƒ Companies cite the available personnel and infrastructure resources, as well as the proximity to
target sales markets, as their primary reasons for planned investments

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 18


Product Quality and Safety, as well as Supply Chain 55
Delivery and Security, Are Critical Concerns

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 19


Product Quality and Safety, as well as Supply Chain 55
Delivery and Security, Are Critical Concerns
Continued

Cost benefits gained through globalization are not without risk


ƒ The majority of respondents report that they have experienced issues with product safety and
quality; more than 20% say that these issues are frequent and serious
ƒ In some cases, decisions to offshore products have been reversed because quality problems
could not be resolved
ƒ The incidence of product safety and quality problems varies by industry; automotive and
industrial equipment companies are the most likely to experience major issues and electronics
and consumer goods companies the least likely
On-time delivery of critical products as well as overall product/supply availability
are also noted as major risks

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Product Quality and Safety, as well as Supply Chain 55
Delivery and Security, Are Critical Concerns
Continued

Companies have developed numerous ways to minimize disruption related to


quality and delivery issues
ƒ Increasing the frequency of on-site audits is the most commonly cited approach, followed by
physical deployment of a company’s resources within the supplier’s location, increased
inspection, and increased supplier training
ƒ Other risk mitigation strategies include consistent dual sourcing strategies, early integration of
product development and supply chain management, and late customization of products in
home market facilities
Industry leaders are more likely to focus on deployment of their own resources
within supplier locations, while followers rely more on supplier audits

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Loss of Agility and Inability to Manage Partners Are 66
Major Barriers to Globalization

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

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66
Major Barriers to Globalization
Continued

Managing supply chain flexibility to ensure efficient product flow and on-time
delivery is a major challenge
More than half of the survey participants state that they lack internal
competencies to adequately manage their external partners
ƒ Clearly, the push to globalize does not always go hand-in-hand with preparation for challenges
The lack of appropriate partner-selection process is also a major barrier
ƒ Strategic partners, managing substantial parts of value creation, are often selected too quickly
and with a pure cost focus in mind
ƒ The diligent selection of long-term strategic partners is key to enabling the globally integrated
supply chain and helps mitigate the risk of IP theft
A clear and consistent approach to partner management will become a
prerequisite for success as globalization of innovation and R&D functions
accelerate

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Regulatory Requirements Drive Environmental 77
Sustainability

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

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Regulatory Requirements Drive Environmental 77
Sustainability
Continued

While most respondents say regulatory compliance is not a primary


driver of their supply chain strategy today, more than half expect it
to increase in importance by 2010
ƒ Two-thirds noted that environmental sustainability is a factor in their globalization strategies,
although this focus varies significantly by industry sector
− Electronics and consumer products companies are far more likely to consider sustainability than
industrial companies
− Twice as many North American companies consider environmental sustainability within their globalization
plans as businesses based in Asia and Europe

A focus on environmental sustainability and a “green” supply chain is more likely


to result from government regulation and customer requirements than a desire to
improve a company’s image or achieve competitive differentiation

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88
Supply Chain Maturity Reaches Plateau

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

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88
Supply Chain Maturity Reaches Plateau
Continued

Supply Chain Maturity Level:


Percent of All Respondents per Industry Group
80%
Followers
Challengers
Leaders

54%

68%

26%
75% 21% Ø 24
27%
16%

4% 5% 14% 11%

Industrial and Consumer Goods Life Sciences Electronics


Automotive

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88
Supply Chain Maturity Reaches Plateau
Continued
74%
Followers
67%
64% Challengers
Leaders

28%

19%
15% 15%
11%
8%

Americas Europe Asia

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99
Flexibility Will Drive Supply Chain Strategy by 2010

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

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99
Flexibility Will Drive Supply Chain Strategy by 2010
Continued

More than 90% of surveyed companies report that customer service and product
quality are key drivers of their current supply chain strategy
While these two drivers will continue to be a primary focus over the
next three years, increasing supply chain flexibility will be the top focus
between now and 2010
ƒ This focus on flexibility is consistent with reported plans to increase the level of globalization
Almost 90% plan to increase focus on delivery performance, including renewed
focus on demand and supply forecasting
Four out of five plan to better integrate key suppliers
65% plan to maintain higher buffer stocks along key supply chain functions

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COO Agenda: Supply Chain Flexibility and 10
10
Delivery Performance

Source: PRTM Management Consultants, Global Supply Chain Trends 2008–2010, 2008.

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 31


COO Agenda: Supply Chain Flexibility and 10
10
Delivery Performance
Continued

By 2010, the COO agenda will be focused on supply chain flexibility, delivery
performance, and acceleration of globalization
ƒ The top priorities are almost identical across industries and geographical regions
While the challenges facing supply chain executives are similar, the solutions to
resolve these challenges differ significantly
ƒ Careful selection and integration of network partners is one key to success, whether or not
international facilities are managed by the company itself or are operated by external partners
ƒ A new focus on effective supply chain planning, with sophisticated demand and supply
balancing, is key

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Summary of Key Industry-specific Trends
Automotive & Industrial Consumer Goods
ƒ Local market presence is major driver ƒ Product innovation is a major driver
ƒ Outsourcing trends will continue ƒ Brand focus leads to higher product
safety and sustainability concerns than in
ƒ Product development outsourcing will
other industries
help drive local market access and
presence ƒ Mass customization a challenge as
companies seek emerging market growth

Life Sciences Electronics, Telecoms, Services


ƒ Product cost emerging as major driver ƒ Overall SC maturity has declined as
and concern electronics supply chains have become
more complex
ƒ Globalization has been forcing function
for better internal collaboration ƒ Highest level of physical globalization of
all industries
ƒ External partner capabilities are seen as
a major barrier ƒ Flexibility is the major concern

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Turning Challenges into Opportunities
Challenge Opportunity

• Global planning
Flexibility • Network optimization

• Partner selection
Partner Integration • Cross-enterprise processes &
systems

• Design for Supply Chain


Global Scale / Local Markets • Mass customization

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Introduction to PRTM

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Who We Are

PRTM is the premier operational strategy


consulting firm, focusing on operational
innovations that drive growth, boost profitability,
and set new standards for market leadership

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Changing the Game

Operational Innovation

Business Operational Operational


Strategy—Where Strategy—How Transformation
and Why We’ll Win We’ll Win Big Executing to Win

Game-Changing Ways to Win Big

New ways of approaching, organizing for,


and executing work that significantly alter
the way a company competes, creating
enduring sources of business value,
and competitive advantage

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PRTM Global Experience
ƒ 30 years of operational strategy and innovation ƒ Major Commercial and Government Sectors:
ƒ More than 600 consultants worldwide − Aerospace and Defense

ƒ 16 offices worldwide − Automotive


− Chemicals and Process Industries
ƒ Over 1,200 clients and 6,000 projects
− Communications and Media
ƒ 90% level of repeat business
− Consumer Goods
− Electronics and Computing
− Energy
− Financial Services
− Government
Bengaluru Boston Chicago − Life Sciences and Healthcare
Dallas Detroit Frankfurt Glasgow − Industrial Products
London Munich New York Orange County − Software
Paris Shanghai Silicon Valley Tokyo
Washington, D.C.

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Our Supply Chain Innovation Credentials
Established the Supply-Chain Council Contribute regularly to industry publications
and events

Developed the Supply-Chain Operations


Reference-model® (SCOR®)

Maintain a database of supply chain


performance metrics

Supply-Chain Operations Reference-model® (SCOR®) is a registered trademark of the Supply-Chain Council, Inc.

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PRTM’s Supply Chain Breadth and Depth

Logistics and Logistics Strategy • Global Network Analysis and Footprint •


Strategy and Integration Solution Architecture • Performance Improvement • Value Chain Analysis

Demand/Supply Balancing • Forecasting • Capacity Planning •


Planning Collaborative Planning, Forecasting and Replenishment (CPFR) • Vendor-
Managed Inventory • Product Development and Supply Chain Integration

Strategic Sourcing • Transaction Management • Supplier Management •


Sourcing and Procurement Supplier Development • Electronic Procurement

Operations Improvement • Lean • Six Sigma • Outsourcing • Divestiture •


Manufacturing Operations Contract Manufacturer Management • New Product Introduction

Order Management • Third-Party Logistics Provider Selection and


Customer Service,
Management • Warehouse and Transportation Operations • Channel
Logistics, and Distribution Integration • Call Center Management

Returns • Warranty Returns Management • Service Parts Planning • Repair


Reverse Logistics and Disposition • Parts and Distribution Management

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Our Perspective
Five Core Disciplines Drive Supply Chain Performance Business Performance

View your Develop an Design your Build Use metrics Results


supply chain end-to-end organization the right to drive
as a process for collaborative business
strategic asset architecture performance model success

Supply Chain Innovation

Business Strategy

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How We Do It

Supply Chain Strategy


Lean Operations

Supply Chain Benchmarking Environmental and Regulatory Compliance

Strategic Procurement Supply Chain Organizational Design

Sales and Operations Planning

Scale and Complexity Management Supply Chain Systems Implementation

Supply Chain Design and Network Optimization

Outsourcing and Restructuring

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PRTM/PMG: Differentiated Benchmarking Services
We maintain the most robust supply chain benchmarking database in
the world
ƒ More than 20 years of benchmarking experience
ƒ Over 700 participant companies
Our studies include quantitative performance data, as well as the specific
practices that drive best-in-class performance
ƒ We use this analysis to build plans for improvement
ƒ Our benchmarking provides the insight to implement practices that enable advancement to a
higher stage of maturity

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Our Approach to Consulting Is Truly Different
We work in many capacities… …in collaborative teams with high
ƒ Operational innovation leveraging operations to involvement of PRTM partners
achieve market leadership
ƒ Operations scalability supporting rapid growth and
new business setup Client

ƒ Multidivisional enterprise integration and acquisition


PRTM
integration
ƒ Operations transformation and step function Our staff-to-director ratio is 4:1
operational performance improvement
ƒ Critical project recovery and interim management …focused on results, not reports
Other Consultants PRTM
Diagnose
…with a distinct style Diagnose Mobilize

ƒ Identify innovative solutions Plan Implement

ƒ Measure results early and often Monitor Implementation

ƒ Sweat the details ??? Results


They spend money We use our hands-on
and time getting experience to get
up to speed you results fast

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Contact Information

Global Supply Chain Trends 2008–2010 | © 2008 PRTM Proprietary CONFIDENTIAL | 45


Insert Your Name Cards Here

Brad Householder
Director

T +781.434.1297 1050 Winter Street


F +781.647.2804 Waltham, MA 02451-1297
M+508.259.0432 USA

bhouseholder@prtm.com
www.prtm.com

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