Supply Chain Metrics That Matter: A Focus on the High-Tech Industry

A Review of Progress on Supply Chain Excellence for the Period of 2006-2014 01/08/2016

By Lora Cecere Founder and CEO Supply Chain Insights LLC

and Regina Denman Client Services Director Supply Chain Insights LLC

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Contents

Research

Disclosure

Research Methodology

Improving Performance

Driving Profitability

Improving Cycles

Managing Complexity

Defining Improvement

Balance

Strength

Resiliency

Evaluating Supply Chain Excellence: Putting It All Together

Executive Summary: Current State of the High-Tech Industry

Which Companies Performed the Best in Consumer Electronics?

Which Companies Performed the Best in B2B Electronics?

Which Companies Performed the Best in the Semiconductor Industry?

Supply Chains to Admire

A Look Back at History

Cash-To-Cash

Recommendations

Conclusion

Appendix: Metrics Definitions

Prior Reports in This Series

About Supply Chain Insights LLC

About Lora Cecere

Endnotes

3 3

4 6 7 7 8 8

11 12 14 15 16 17 18 19

21 22 36 37 38 39 40 41 41 42

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Research The Supply Chain Metrics That Matter report series is an analysis of supply chain excellence for a

specific industry. The goal is to help supply chain leaders understand what is possible in driving

supply chain excellence programs. In this report we take a closer look at, and share insights on, the

High-Tech industry. The analysis focuses on three sectors: consumer electronics, B2B high-tech, and

semiconductor companies. The analysis is difficult because some companies like Samsung span

these subsegments. When this is the case we group the company by the most similar industry

segment.

These reports are based on data collected from financial balance sheets and income statements over

the period of 2000-2014. Our source of data is YCharts. In these Supply Chain Metrics That Matter

reports we analyze how companies made trade-offs in balancing growth, profitability, cycles, and

complexity during the last decade.

Within the world of Supply Chain Management (SCM) each industry is unique and sectors vary within

industries. As a result, it is dangerous to list all industries in a spreadsheet and declare a supply chain

leader. We believe a better methodology is to evaluate change over time with a focus on overall

performance and improvement within an industry peer group. In this series of reports—Supply Chain

Metrics That Matter—we analyze the potential of each supply chain peer group while sharing insights

and recommendations from industry leaders based on general market trends. In the appendix of this

report we share information and links to other reports in this series which are focused on progress in

other industries.

Disclosure Your trust is important to us. As such, we are open and transparent about our financial relationships

and our research process. This independent research is 100% funded by Supply Chain Insights.

These reports are intended for you to read, share and use. Please share this data freely within your

company and across your industry. All we ask for in return is proper attribution when you use the

materials in this report in public forums. We publish under the Creative Commons License Attribution-

Noncommercial-Share Alike 3.0 United States and our citation policy is outlined on the Supply Chain

Insights Website.

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Research Methodology The methodology to understand supply chain performance and improvement is based on ten years of

data mining of supply chain financial ratios. In Table 1 we share the supply chain ratios we analyzed

to understand the trends in the Supply Chain Metrics That Matter report series.

Table 1. Financial Ratios Considered in the Development of the Supply Chain Index

While there are other measurements which we believe are important in the determination of supply

chain excellence—forecast accuracy, case fill rate, carbon footprint, and inventory write-offs—we

cannot find a reliable and consistent source of data for these metrics which covers all industries and

the years studied. We find the industry data sources for these additional measurements are spotty

and largely inaccurate due to the self-reporting of data. As a result, they are not included in this

analysis. Without a consistent data source across the industries we cannot include these factors,

even though we believe they are important.

The Supply Chain Index methodology was built on the belief that the supply chain is a complex

system with increasing complexity. We believe it is the supply chain leader’s role to build and manage

supply chain performance to drive year-over-year improvements which are balanced, strong, and

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resilient. In our research we find that most companies throw the supply chain system out of balance,

and as a result are able to drive progress only on a single metric, not a balanced metrics portfolio. To

illustrate this point, in the development of the Supply Chains to Admire Report we studied public

manufacturing and retail companies for the period of 2006-2014, and we found that only 21 of the

companies in the study group performed better than their peer group on the portfolio of metrics of

operating margin, inventory turns and Return on Invested Capital (ROIC).

In the management of the supply chain there are many metrics. In fact, we find that most supply chain

leaders measure too many on their scorecards, which drives confusion. Our first goal in the research

was to determine which metrics should be tracked in the portfolio analysis. To understand the

relationship between supply chain performance and market capitalization, we calculated the

correlation of seven years of financial ratios (based on quarterly reporting) to market capitalization

(the number of outstanding shares multiplied by the share price on a quarterly basis). The results of

this study are presented in Table 2. Our goal was to select a portfolio of metrics that could be

meaningful to all industries.

Table 2. Correlation to Supply Chain Financial Ratios to Market Capitalization

For leaders, we find that progress is slow and deliberate. In our research we find it takes at least

three years to drive significant supply chain progress, and the best supply chain transformation

projects take at least five to six years.

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We also find it is difficult for supply chain leaders to sustain progress. A bad project, a quality issue,

or a merger can result in deep balance sheet gyrations. As a result, most companies go through ups

and downs with distinct patterns.

Our work is a study of metric performance patterns. We believe the patterns matter. It is for this

reason that in this report we analyze companies’ progress in time periods—pre-recession, during the

recession, and post-recession—to discover year-over-year trends. In our research, supply chain

excellence is defined as ‘performance better than a competitor on a portfolio of metrics’, and

‘improvement better than the peer group average’. While this sounds easy, what will be seen by the

reader of this report is a tough standard which few can meet.

Improving Performance To evaluate performance we analyzed a portfolio of metrics against industry averages and

improvement for three periods of time: 2006-2014, 2009-2014, and 2011-2014. This allowed us to

analyze the companies for the longer view, and post-recession recovery.

The basis of the analysis in this report is the Effective Frontier model. As shown in Figure 1, the

Effective Frontier model illustrates the principle that a supply chain is a complex system, with

increasing complexity, which needs to be managed using a balanced metrics portfolio.

Figure 1. The Effective Frontier

In our writing it is deliberately not termed the ‘Efficient Frontier’—a term used in economic theory.

Why? Quite simply it is because the term ‘efficiency’ in supply chain processes is usually linked to the

lowest cost or the best revenue per employee. We find that the more efficient supply chain--with the

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lowest cost per unit--seldom is the most effective in the delivery of the supply chain strategy. Instead,

it needs to be about balance of a portfolio to drive value. The concepts of the Effective Frontier are

based on the balance of growth agendas with cost, cycle metrics (a focus on inventory), and

complexity. We use Return on Invested Capital as a proxy for complexity.

In this report we analyze the progress of the High-Tech industry on the Effective Frontier. Across all

industries we find that nine out of ten companies are stalled at the intersection of two important

metrics: inventory turns and operating margin. While some companies made no improvement over

time, most companies were able to either improve inventory turns, or operating margin, but not both

together. The reason? We believe it is due to the rise of unchecked complexity. As will be seen in this

report, unchecked complexity throws the supply chain out of balance.

Driving Profitability There is often an inverse relationship between margin and attaining supply chain excellence. Why?

Industries with the thinnest margins are more serious about delivering on the promise of supply chain

leadership. With shrinking margins in the high-tech industry, the supply chain has been an important

industry imperative. Progress was faster in the last decade than over the past five years.

In our analysis for this report we use operating margin as the measure of profitability. The

methodology is equally applicable to EBITDA.

Improving Cycles When it comes to managing cash-to-cash cycles, a small number is better. The question in the

boardroom is “How small can supply chain working capital cycles be managed to pump cash into the

organization?” There is seldom the question of “How low can we go in working capital cycles before

we put the supply chain at risk?” Or, “When will payables be so low that our suppliers will not be able

to survive?” To answer these questions, and understand the management of cycles in the high-tech

sectors, we evaluated the cycles in three time periods: 2006-2014; 2009-2014; and 2011-2014.

Cash-to-cash is a composite metric of receivables, inventory, and payables. As can be seen through

the charts, the greatest improvement in supply chains in the last decade has been made in

payables—lengthening payment terms to suppliers. Inventory levels and receivables have been more

constant. In our analysis we use inventory turns as our measure of supply chain cycles. The higher

the inventory turn value, the stronger the results (correlation to market capitalization).

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Managing Complexity By definition, the high-tech industry is asset intensive. Factory smokestacks are iconic

representations of manufacturing excellence. Within the high-tech company supply chain there are

many forms of complexity: increase in items, customer policies, geographic reach, and markets. Over

the last decade complexity in the high-tech industry increased. This includes: new product launch; the

speed of software development; the evolution of open source standards; global sourcing alternatives;

and increases in competition.

Return on Invested Capital is a less well-known metric compared to Return on Assets (ROA). Return

on Assets has a narrower focus. Our research indicates that ROIC has a better correlation with stock

market capitalization, and provides a broad perspective on cash flow generation and profitability

based on shareholder equity. The formula used for ROIC is:

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑇𝑜𝑡𝑎𝑙

𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠𝐸𝑞𝑢𝑖𝑡𝑦

ROIC is a measurement of the company’s use of capital. The goal is to drive higher returns than the

market rate of the cost of capital. As will be seen in this report, for many companies this is a struggle.

Defining Improvement In judging improvement, the patterns matter. We built the Supply Chain Index to gauge the progress

of supply chain leaders. The methodology starts with understanding the resulting pattern when two

supply chain metrics (generally ratios) are plotted over time on an orbit chart.

To illustrate the power of patterns, and the limitation of averages, we share Figures 2a-2c. In the case

of Apple, the company has made substantial progress on operating margin while losing ground on

inventory turns. In the case of Intel, shown in Figure 2b, success was made on both operating margin

and inventory turns for the period of 2006-2013, but the company lost ground on operating margins

for the period of 2013-2014. In the case of Cisco Systems, demonstrated in Figure 2c, the pattern is

gnarly with the company losing ground on two important metrics. Distinctly different patterns depicting

very different journeys for industry leaders in delivering on their vision for supply chain excellence in

very different markets.

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Figure 2a. Example Orbit Chart. Apple - Inventory Turns and Operating Margin for 2000-2014

Figure 2c. Example Orbit Chart. Intel - Inventory Turns and Operating Margin for 2006-2014

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Figure 2C. Example Orbit Chart. Cisco Systems - Inventory Turns and Operating Margin for 2006-2014

When you find a supply chain leader you see a clearer pattern of supply chain improvement. This is

the case of Intel. As you trace Intel’s progress in Figure 2b you can see that performance improved in

2006-2010, and then the company’s progress reversed in 2011-2014. This pattern is stronger, with

more balance and resiliency, than Apple or Cisco Systems. Seldom do you find a company making

linear improvement.

Due to the complexity of the charts, our first challenge in the creation of a methodology was to define

‘Supply Chain Improvement’. This was our goal in building the Supply Chain Index. We wanted to

develop a means to analyze improvement across a variety of industries, with applicability to

companies with different levels of revenue, and at different levels of supply chain maturity.

As we shared our findings, and educated supply chain leaders about financial ratios, the interviews

with companies helped us to better understand the data. “What caused this downswing in inventory in

2007?” we would ask. The company would then share that it was a six-month laser-focus brought on

by a new manager. When we asked, “What caused these cash-to-cash cycle gyrations in the period

of 2002-2004?” they told us the story of a difficult merger. We found that this was a new way of

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looking at data; and while it took adjustment and training, it provided a new and fresh perspective at

most organizations.

Our insight? Supply chain progress happens over time; not in months or quarters, but in years. It

usually takes at least three years to see impactful change. The interrelationships between the metrics

are real. The supply chain is a complex system with nonlinear relationships between the metrics of

growth, cost, inventory turns, and ROIC. The effective management of the supply chain requires

embracing it as a system. The data cannot properly be assessed in a spreadsheet. Our approach

was to plot the shifts over time using orbit charts. In this report we share the orbit charts of high-tech

manufacturing leaders.

In 2013 we partnered with Arizona State University’s School of Computing, Informatics and Decision

Systems Engineering. After two years of work we believe that we now have a methodology which

enables the comparison of supply chain progress in the delivery of the Supply Chain Index. We

defined the Index as a whole, and applied the methodology across industries to measure supply

chain improvement. To help the reader understand the Supply Chain Index calculations in this report,

we first define the separate pieces—balance, strength, and resiliency—and then evaluate the input of

the pieces to the total Index. Balance

Balance in the supply chain is a constant struggle. Growth requires an increase

in inventory. Forecasting and managing a new product launch is difficult.

Excessively long Days of Payables leads to weakened supplier health. The

examples are endless. The two metrics which comprise our balance measure

are Revenue Growth and Return on Invested Capital.

The balance measure in the Supply Chain Index is a mathematical calculation

of the vector trajectory of the pattern between growth and ROIC for the periods of 2006-2014 and

2009-2014.To understand this measurement, imagine a four quadrant grid with growth and ROIC on

the two axes. In our calculation, the overall trajectory of this vector from Year 0 (2006) to Year 8

(2014) is simplified into a single value which represents the company’s ability to balance growth while

improving ROIC.

Companies that were able to drive improvement in both metrics scored the best, while companies

that deteriorated in both scored the worst. The companies are then stack ranked based on factor

ratings. In Figure 3 we profile Intel. Intel has made more progress than its peer group.

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Figure 3. Orbit Chart. Growth vs. Return on Invested Capital (ROIC) for 2006-2014 for Intel

The balance factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement

on both year-over-year growth and ROIC indicates a balanced supply chain and is reflected in a high

balance score.

Strength A successful supply chain is strong and reliable. Supply chain leaders strive to

deliver year-over-year improvements in both cost and inventory management.

Our research on pattern recognition has uncovered a rich relationship between

operating margin and inventory turns. For most supply chain leaders these are

some of the most important measures of their performance. Not only are they

important, they are more directly influenced by day-to-day supply chain

decisions than other, and more broadly used, corporate metrics. It is for this reason they are the two

components of our strength factor in the Supply Chain Index.

The strength measure in the Supply Chain Index is a mathematical calculation of the vector trajectory

of the pattern between inventory turns and operating margin for the periods of 2006-2014 and 2009-

2014. Like the balance factor calculation, the work starts with understanding the orbit chart pattern.

To understand the calculation, imagine a plot—an orbit chart—of inventory turns and operating

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margin. In this report, performance is graphed on an annual basis from an origination point

representing performance on the two metrics at Year 0 (2006). The overall trajectory of this vector

from Year 0 (2006) to Year 8 (2014) is simplified into a single value which represents strength.

Improvement on both metrics simultaneously is graphically shown as movement to the upper-right

quadrant with increasing values for both inventory turns and operating margin over the period.

The companies are then stacked ranked based on performance and assigned a strength factor.

The strength factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement

on both inventory turns and operating margin indicates a strong supply chain and is reflected in a high

strength score.

In Figure 4, when comparing Intel to Taiwan Semiconductor Manufacturing Co. (TSMC), while both

companies have made recent progress, TSMC is operating at a significant advantage with a 35%

operating margin and almost 15 inventory turns. TSMC is stronger than Intel in delivering supply

chain performance.

Figure 4. Orbit Chart. Operating Margin vs. Inventory Turn Comparison of Intel and TSMC for 2016-2014

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Resiliency Resiliency is an adjective easily tossed around as one of the most important

qualities of a successful supply chain in today’s volatile world. However, the

concept of resiliency is difficult to define, and there is rarely clarity among

stakeholders as to what resiliency is or should be.

As we plotted orbit chart after orbit chart, we could see that some supply chains

had very tight patterns at the intersection of operating margin and inventory

turns, and that other companies had wild swings. We wanted to find a way to measure the variation.

So we turned to the experts at ASU. After evaluating several methods to determine the pattern in the

orbit chart, we settled upon the Euclidean Mean Distance between the points.

These results were published in our March 2014 report, Supply Chain Metrics That Matter: Improving

Supply Chain Resiliency, where we define resiliency as the tightness of the pattern at the intersection

of inventory turns and operating margin. These metrics, both critical for any supply chain, are

components of both the strength and resiliency metrics in our Supply Chain Index model.

Table 3. Supply Chain Resiliency by Industry

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The tightness of the pattern (mathematically speaking, the Euclidean Mean Distance) indicates the

ability of a supply chain to maintain a tight, consistent pattern across these two metrics as the

business environment shifts and changes over a nine year period (2006-2014). As shown in Table 3,

supply chain resiliency varies considerably by industry. The high-tech industry is more resilient than

contract manufacturing and consumer electronics, but more volatile than consumer packaged goods.

The resiliency metric is similar to the cash-to-cash cycle in that a smaller number is better. A lower

number for resiliency is an indicator of a tighter pattern and greater reliability in results over the time

period. Evaluating Supply Chain Excellence: Putting It All Together In the analysis, each company is judged by their own potential to make progress. While the average

values of a company’s performance may be higher, in the

Supply Chain Index we are evaluating companies on their

ability to drive year-over-year improvement, and reliable

progress on the metrics that we believe matter.

The Supply Chain Index is a measurement of supply chain improvement. Each of the factors—

balance, strength and resiliency—as defined above, comprises 1/3 of the total score.

𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐼𝑛𝑑𝑒𝑥 = 13𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 + 1

3𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ 𝐹𝑎𝑐𝑡𝑜𝑟 + 1

3𝑅𝑒𝑠𝑖𝑙𝑖𝑒𝑛𝑐𝑦 𝐹𝑎𝑐𝑡𝑜𝑟

Companies that are underperforming their peer group can drive supply chain improvement faster than

higher-performing companies. As a result, when evaluating supply chain excellence, it is important to

look at improvement and performance together. We use this analysis to determine the best

performing supply chains through our Supply Chains to Admire methodology.

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Executive Summary: Current State of the High-Tech Industry Globalization. Commodity inflation. Margin squeeze. Economic uncertainty. Warranty issues.

Shortening product life cycles. Recalls. Labor arbitrage and outsourcing. The list of market pressures

could go on and on, but one thing is clear: the high-tech industry was redefined over the course of the

last decade. In Table 4 we show the progress of discrete industries for the periods of 2006-2014 and

2011- 2014. Notice there is more red (lack of progress) than green (progress) in the industry trends.

Table 4. Supply Chain Performance by Industry within the Discrete Industries

High-tech companies have the most advanced practices for inventory management, planning and

analytics. They are just treading water (keeping slightly ahead of the market dynamics). The rate of

change drives innovation. Within this industry there are more supply chain innovators taking a hard

look and driving the adoption of prescriptive analytics and canonical value network infrastructures.

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Taking a closer view at the value chain of the sub-industries within high-tech, i.e. consumer

electronics, B2B Electronics, and semiconductor industries, the impact of the industry drivers and the

importance of supply chain performance becomes clearer.

Table 5. Supply Chain Performance by Industry within the High-Tech Sector

The entire value chain is struggling to maintain margins and improve inventory turns. For consumer

electronics and B2B electronics, growth is down, operating margins are degrading and inventory turns

worsening. Supply chain matters more than ever.

Which Companies Performed the Best in Consumer Electronics? For the period of 2006-2014, and in the face of declining growth, Lexmark outperformed primarily

through the redefinition of the business model and the use of the Internet of Things (IOT) to redefine

service.

While this sector has lower margins than its suppliers in the B2B Electronics or Semiconductor

industries, they struggle with shrinking life cycles, price and margin management, and overall margin

management. It is a very competitive market.

The companies struggle to deliver on a portfolio of metrics. Companies will often make progress in

one or two, but struggle with delivering progress on the balanced portfolio. The results, shown in

Figure 6, speak for themselves.

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Table 6. Comparison of High-Tech Companies for the Period of 2006-2014

Which Companies Performed the Best in B2B Electronics? In the B2B Electronics market, the companies that outperformed using these criteria were Cisco

Systems, EMC, Qualcomm and Western Digital. All four are seasoned B2B leaders with complex,

outsourced supply chains. These four companies have worked to build outside-in channel sensing

and the translation of demand and supply signals across their networks. Sitting three and four layers

back in the value network, and knowing that they are subject to the Bullwhip Effect, these companies

implemented more advanced inventory strategies (to buffer demand and supply) and channel sensing

processes to reduce demand latency. There has been more progress in supply chain practices in this

sector than in the consumer electronics segment.

The segment has led in corporate social responsibility practices, supplier development programs, risk

mitigation strategies, and B2B connectivity. The dependency of the segment on contract

manufacturing, with a more uncertain business model and thinner margins, is a risk.

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Table 7. Comparison of B2B Electronics Companies for the Period of 2006-2014

Which Companies Performed the Best in the Semiconductor Industry? The leader in semiconductors is Intel. While Altera and Taiwan Semiconductor posted strong

performances, they are not driving an equal level of supply chain improvement as Intel and

Qualcomm.

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Table 8. Comparison of Semiconductor Companies for the Period of 2006-2014

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Supply Chains to Admire When it comes to understanding the Supply Chain Metrics That Matter, the performance of each

industry is different. The study needs to be industry specific. In the 2015 Supply Chains to Admire

analysis, seven companies makes the list from the High-Tech Industry. As shown in Figure 5, this

includes: Cisco; EMC; Intel; Lexmark; Qualcomm; Samsung; and Western Digital. Three of the

companies--Cisco, EMC and Intel--made the list for two consecutive years.

Figure 5. Supply Chain Insights’ 2015 Results of the Supply Chains to Admire

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A Look Back at History In reviewing annual reports for the period, several facts are clear:

• Supply Chain Matters More Than Ever: The annual reports have a higher number of supply chain

citations than those in process industries for the same period. The industry has a strong

dependency on suppliers and has aggressively built supplier development programs. While the

automotive industry focused on reducing costs with suppliers (and almost killed its supply base), the

high-tech industry’s focus has been on improving capabilities.

• Volatile Times and Growing Risk: In this period the high-tech industry faced unprecedented levels

of demand and supply volatility. This is reflected in statements on strategic decisions for sole-

sourcing, supplier development, Lean and Kaizen events in operations, and the use of advanced

forms of connectivity.

• Aggression on Corporate Social Responsibility. The companies have been aggressive in

reducing technology waste and eliminating Congo metals. The CSR officer and the programs are

stronger in these high-tech industries than their process equivalents. • Building of Knowledge Workers: The industry is also investing in supply chain talent and pushing

innovation in training programs. The most advanced career development program is at Intel.

The importance of these programs is echoed in the annual report citations for the period of 2006-

2010. Here we share some of the most relevant annual report excerpts:

2006 Alcatel-Lucent

“We must seek out efficiencies as well. We will achieve cost savings by the optimization of our supply

chain and services, the elimination of duplicate resources, and product rationalization, among other

measures. Globally, our planned changes will affect about 12,500 positions.

Alcatel-Lucent is leveraging the integration of its two formative companies to create a strongly

competitive enterprise that is highly efficient in its operations. Identifying synergies that enable cost

reductions is essential to this. Alcatel-Lucent’s synergy plan will help realize a total of €1.7 billion in

pre-tax cost savings within three years–and at least €600 million in 2007 alone. More than 50% of

these savings will be generated through supply-chain and service optimizations and product

rationalizations.”i

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2006 Cisco Systems

“While our inventory balance was $1.4 billion at the end of fiscal 2006 compared to $1.3 billion at the

end of fiscal 2005, our annualized inventory turns increased to 8.5 in the fourth quarter of fiscal 2006

as compared with 6.6 in the fourth quarter of fiscal 2005. The inventory balances and turns for the

fourth quarter of fiscal 2006 reflected increased sales, the initial implementation of the lean

manufacturing model…

In the third quarter of fiscal 2006, we began the initial implementation of the lean manufacturing

model. Lean manufacturing is an industry-standard model that seeks to drive efficiency and flexibility

in manufacturing processes and in the broader supply chain. Over time, consistent with what we have

experienced thus far, we expect this process will result in incremental increases in purchase

commitments with contract manufacturers and suppliers and corresponding decreases in

manufacturing inventory. Inventory management remains an area of focus as we balance the need to

maintain strategic inventory levels to ensure competitive lead times with the risk of inventory

obsolescence because of rapidly changing technology and customer requirements.”ii

2006 EMC

“We produce our products on the basis of our forecast of near-term demand and maintain inventory in

advance of receipt of firm orders from customers. We configure to customer specifications and

generally deliver products shortly after receipt of the order. Service engagements are also included in

certain orders. Customers may reschedule or cancel orders with little or no penalty. We believe that

our backlog at any particular time is not meaningful because it is not necessarily indicative of future

sales levels.iii”

2006 Emerson

“Higher sales prices of approximately 2 percent and market share gains were substantially offset by

volume decreases due to inventory reductions in the supply chain in the United States and China, as

well as decreased wholesaler exports from Europe due to the strong Euro. Sales results for 2005

were mixed across the businesses, with strong growth in U.S. air conditioning compressors during the

fourth quarter driving the overall increase.iv”

“During 2006, rationalization of operations primarily related to the exit of approximately 10 production,

distribution, or office facilities, including the elimination of approximately 1,700 positions, as well as

costs related to facilities exited in previous periods. …moving costs related to the shifting of certain

tool and motor manufacturing operations from the United States and Western Europe to China and

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Mexico in order to consolidate facilities and improve profitability. The Company expects rationalization

expense for 2007 to be approximately $100, including the costs to complete actions initiated before

the end of 2006 and actions anticipated to be approved and initiated during 2007.v

2006 Ericsson

“As a knowledge company, our employees are our greatest asset. During the year we added a net of

7,726 employees. This increase was primarily a result of the Marconi acquisition and the remaining

additions were largely in Services to accommodate the 33 percent growth in that area.vi

At Ericsson we use the term operational excellence to refer to our philosophy of striving to do things

smarter today than yesterday and to do it in a smarter way than our competitors. By driving

excellence and innovation in everything that we do, we create a competitive advantage. Much was

achieved through operational excellence in 2006, including improved R&D lead times and the

successful integration of Marconi operations. We also reorganized our operations into three business

units, creating a more customer-oriented organization and paving the way for continuous efficiency

improvements in the years ahead.”

2006 Qualcomm

“Die, cut from silicon wafers, are the essential components of all of our integrated circuits and a

significant portion of the total integrated circuit cost. We rely on independent third-party suppliers to

perform the manufacturing and assembly, and most of the testing, of our integrated circuits. Our

suppliers are also responsible for the procurement of most of the raw materials used in the production

of our integrated circuits. The majority of our integrated circuits are purchased on a turnkey basis, in

which our foundry suppliers are responsible for delivering fully assembled and tested integrated

circuits. We also employ a two-stage manufacturing business model in which we purchase completed

die directly from semiconductor manufacturing foundries, and directly manage and contract with third-

party manufacturers for back-end assembly and test services. We refer to this two-stage

manufacturing business model as Integrated Fabless Manufacturing (IFM). IBM, Taiwan

Semiconductor Manufacturing Company, Ltd. and United Microelectronics are the primary foundry

suppliers for our family of baseband integrated circuits. Atmel, Freescale (formerly Motorola

Semiconductor) and IBM are the primary foundry suppliers for our family of analog, radio frequency

and power management integrated circuits. Our fabless model provides us the flexibility to select

suppliers that offer advanced process technologies to manufacture, assemble and test our integrated

circuits at a competitive price.vii”

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2006 SanDisk

“All of our flash memory card products require silicon chips for the memory and controller

components. The majority of our memory is supplied from our ventures with Toshiba and our Toshiba

foundry relationship. This represents captive memory supply and we are obligated to take the output

from the ventures with Toshiba. Also, in fiscal year 2006, we purchased noncaptive memory supply

primarily from Samsung. We are guaranteed a certain amount of the total output from Samsung and

Hynix Semiconductor Inc., or Hynix, but we are not obligated to use the guaranteed supply until we

give them an order for future purchases. Our controller wafers are currently supplied by Tower

Semiconductor Ltd., or Tower, and United Microelectronics Corporation, or UMC. We have a foundry

agreement with Tower on a purchase order basis.viii „

2006 Western Digital

“Head technology is one of the variables affecting areal density. Historically, there have been rapid

technological changes resulting in several generations of head technology in a relatively short time.

However, in recent years the time has lengthened between changes in generations of head

technology. Currently, the desktop hard drive industry uses giant magnetoresistive (including

tunneling magnetoresistive) head technology, which allows significantly higher storage capacities

than the previously utilized thin-film head technology. Most of our hard drive product offerings

currently employ giant magnetoresistive head technology.

The WD product line generally leverages a common platform for various products within product

families with different capacities to serve differing market needs. This platform strategy results in

commonality of components across different products within product families and, in some cases,

across product families, which reduces exposure to changes in demand, facilitates inventory

management and allows us to achieve lower costs through purchasing economies. It also enables our

customers to leverage their qualification efforts onto successive product models. In addition to the

development of hard drives, we also invest considerable resources in the development of WD head

technology used in the majority of our hard drive products. The design and manufacturing of WD

heads consists of engineering and fabricating a read element for reading data from a disk, a write

element for writing data to a disk, and slider. The slider functions similar to an airplane wing and

allows the read and write elements to fly over the surface of the disk and to land, on either the disk or

a special ramp, when power is not applied to the hard drive.ix”

“Many of our OEM customers utilize just-in-time inventory management processes or supply chain

business models that combine “build-to-order,” in which the OEM does not build until there is a firm

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order, and “contract manufacturing,” in which the OEM contracts assembly work to a contract

manufacturer who purchases components and assembles the computer based on the OEM’s

instructions. For certain OEMs, we maintain a base stock of finished goods inventory in facilities

located near or adjacent to the OEM’s operations.”

“We generally retain multiple suppliers for each of our component requirements but in some instances

use sole sources for business reasons. For example, during 2006, we purchased media from several

outside vendors including Fuji Electric, Hoya Corp., Komag Inc. and Showa Denko KK. We have

volume purchase agreements with Komag Inc. and Showa Denko KK which obligate us to purchase

from each supplier, and obligates each supplier to supply to us, certain specified media volumes in

accordance with the terms in the agreements. We sole-source some components, such as custom

integrated circuit devices for certain products from STMicroelectronics and Marvell Semiconductor,

Inc. Because of their custom nature, these products require significant design-in periods and long

lead times. There has been a trend in integrated circuit design toward increased integration of various separate circuits. We expect this trend to continue in custom integrated circuits for hard drives.x

As of June 30, 2006, we employed a total of 24,750 employees worldwide. This represents an

increase in headcount of approximately 7% since July 1, 2005 and an increase of approximately 42%

since July 2, 2004. Many of our employees are highly skilled, and our continued success depends in

part upon our ability to attract and retain such employees.xi”

2008 Adtran

“Inventory decreased 8.6% from December 31, 2006 to December 31, 2007, reflecting our efforts

during 2007 to adopt leaner manufacturing processes to reduce average product manufacturing cycle

times and lower on-hand inventory requirements. Inventory levels will fluctuate as we attempt to

maintain sufficient inventory levels to ensure competitive lead times while guarding against the risk of inventory obsolescence that may occur due to rapidly changing technology and customer demand.xii”

2008 Alcatel-Lucent “Telecommunications operators are considerably expanding the scope of their services and becoming

more global. We, their suppliers, are going through a massive consolidation process. Although not

fully complete, this dramatic change to our competitive landscape has taken place in just three

years—when it took decades in other industries—resulting in some immediate challenges to be

addressed.

Going forward however, it means that there will be fewer but larger equipment providers addressing a

market with rapid growth in volume. This is why we have a positive view of our industry in the long

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term.xiii In the framework of a global cost reduction initiative, Alcatel Lucent announced an initial

restructuring plan in February 2007, which will achieve savings in annual pre-tax costs over three

years, with a workforce impact of 12,500 positions by 2009. This is necessary to eliminate

duplications of effort resulting from the merger of Alcatel and Lucent and the acquisition of Nortel’s UMTS activities.xiv

Corporate social responsibility extends beyond the walls of a company to include its relationships with

suppliers and other partners. With this understanding, Alcatel-Lucent worked in 2007 to ensure its

commitments were carried throughout its supply chain, reinforcing sustainable, responsible

purchasing tools and methods. Training programs were rolled out so that all involved in purchasing

understand their roles and responsibilities, working collaboratively to manage CSR throughout the

company’s supply base. Some 500 procurement personnel were made aware of the Responsible

Purchasing program. The Global Procurement and Sourcing Department (GPS), the Corporate Audit

Services (CAS) and the EHS Department within Alcatel-Lucent collaborated to monitor the

commitment and conformance of Alcatel-Lucent suppliers to internationally recognized standards for

ethical, social, health & safety and environmental practices.xv”

2008 Belden

“More than a third of all new hires in 2007 were part of our growing Asia/Pacific team, and we added

several new people to our Lean Enterprise team as this critical initiative expands within our company.

It is especially telling that more than half of our senior management today is either new to the

company or in a new position since 2006.xvi

As a company, Belden has embraced the notion of becoming a Lean Enterprise, eliminating waste

and driving toward continuous improvement, not only in our manufacturing operations but throughout

our company. Clearly, this is a cultural change for our company that will require discipline over a

number of years. But we are driving real progress today. In support of this strategy, we greatly

expanded our Lean operations, adding more than a dozen people to our corporate Lean team and

embedding a dozen more in operations companywide. We ran more than 230 Kaizen events in 2007,

all focused on improving operations and cutting waste.

Lean is our template for transforming Belden from a “build to stock” company, in which manufacturing

is based on inventory, to a “build to order” company that responds to real customer needs. Our

commitment to Lean principles is allowing us to focus on building what the customer wants, when the

customer wants it. The result will be improved customer satisfaction and quality, reduced cycle times,

and increased manufacturing flexibility. It is a result we are already realizing. Companywide, we can

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see the progress in inventory turns. Our goal is to improve our inventory turns by one full turn per

year. In the last quarter of 2007, we were turning inventory 6.6 times, up from 5.9 turns a year earlier

and 4.3 turns at the end of 2005.xvii

We consolidated and closed a number of plants in 2007, transferring production to our new 350,000-

square-foot Nogales operation in Mexico. Additionally, in Europe, we resized our operation and sold

excess real estate at our Netherlands plant.xviii

Over the past three years, the prices of metals, particularly copper, have been highly volatile. Copper

rose rapidly in price for much of this period and remains a volatile commodity. Materials such as PVC

and other plastics cost of raw materials through higher pricing of our finished products. The majority

of our products are sold through distribution, and we manage the pricing of these products through

published price lists which we update from time to time, with new prices taking effect a few weeks

after they are announced. Some OEM customer contracts have derived from petrochemical

feedstocks have also risen in price. Generally, we have recovered much of the higher provisions for

passing through raw material cost changes, generally with a lag of a few weeks to three months.xix”

2008 Cisco Systems “Our pursuit of operational excellence drives us to continually seek ways to improve and streamline

our business processes across our global operations. Fiscal 2007 marked the year in which we

realized greater operating efficiencies as a result of completing our implementation of a new

manufacturing model: lean manufacturing. As a result of this initiative, Cisco achieved annualized

inventory turns of slightly above 10 in the fourth quarter of fiscal 2007. This is a significant accomplishment given the size and breadth of our product lines.xx”

“In the third quarter of fiscal 2006, we began the initial implementation of the lean manufacturing

model. Lean manufacturing is an industry-standard model that seeks to drive efficiency and flexibility

in manufacturing processes and in the broader supply chain. We fully implemented the lean

manufacturing model in the fourth quarter of fiscal 2007.

The amount recorded to cost of sales related to the liability for purchase commitments with contract

manufacturers and suppliers was $34 million, $61 million, and $12 million in fiscal 2007, 2006, and

2005, respectively. If there were to be a sudden and significant decrease in demand for our products,

or if there were a higher incidence of inventory obsolescence because of rapidly changing technology

and customer requirements, we could be required to increase our inventory write downs and our

liability for purchase commitments with contract manufacturers and suppliers, and our gross margin

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could be adversely affected. Inventory and supply chain management remain areas of focus as we

balance the need to maintain supply chain flexibility to help ensure competitive lead times with the

risk of inventory obsolescence.xxi”

“Our headcount increased by 11,609 employees during fiscal 2007, reflecting the investment in R&D

and sales described above and also reflecting increases in investments in our service business; our

Juarez, Mexico manufacturing facility; and acquisitions. Approximately 3,300 of the new employees

were attributable to acquisitions we completed in fiscal 2007. Our headcount is expected to increase,

as we continue to invest in engineering and sales headcount. As a result, if we do not achieve the benefits anticipated from these investments, our operating results may be adversely affected.xxii”

2008 Emerson

“In 2007, we spent $874 million on developing new products, improving existing products, and

providing engineered solutions to our customers. By listening to customers and investing in

engineering and development, Emerson can identify emerging trends and meet them head-on with

innovative technologies. The overall increase in profit was partially offset by declines in certain tools,

storage and motors businesses, reflecting new product introduction costs in the disposer business,

foreign currency losses in the tools and residential storage businesses and restructuring

inefficiencies, including costs related to plant shutdown and ramp up of Mexican capacity in the tools

and motors businesses. Overall, increases in sales prices were offset by higher raw material

(particularly copper, steel and plastics), wage and benefit (pension) costs and negative product mix,

diluting the profit margin.xxiii”

2008 Ericsson

“Operator consolidation continues in several regions. In the Americas, consolidation has reduced the

number of operators by more than half. In Europe, mergers continue as well as other types of

combinations, such as network sharing and outsourcing of network operations. In other regions,

operator consolidation has led to the emergence of rapidly growing pan-regional operators,

particularly in the CEMA markets (Central and Eastern Europe, Middle East and Africa). Although

operator consolidation does not impact the underlying growth of the mobile market, it often disrupts

market development by creating delays in procurement, reducing total capital expenditures, while increasing pricing pressure on vendors as the combined entities have stronger negotiating power.xxiv”

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2008 HP

“PSG gross margin increased primarily as a result of component cost declines and improvements in

supply chain costs per unit, which were partially offset by ASP declines. During fiscal 2007, IPG gross

margin decreased due primarily to unfavorable hardware margins, increased costs associated with

new product introductions and a change in product mix.xxv Restructuring charges for fiscal 2007 were

$387 million, which included $354 million of expenses related to severance and other benefit costs

associated with those employees who elected to participate in the 2007 EER and a net charge of $33

million relating to adjustments to our fiscal 2005, 2003, 2002 and 2001 restructuring programs.xxvi”

2008 Seagate

“In FY2007, Seagate adopted the Electronics Industry Code of Conduct (EICC), and also began

expecting its suppliers to implement programs to meet the Code’s requirements and assisting them in

doing so. Seagate established a simple, online Supplier Collaboration workspace for suppliers and

Seagate’s Commodity Management Teams (CMTs) to speedily share information using a secure

website. This allows faster communication on key strategic issues, as well as maintaining one

common document as the master. The company also held its annual Supplier Day, where Seagate

executives and CMTs hosted key suppliers for each commodity. The intent of the meeting was to

share key information with suppliers to help build relationships and provide insight for planning,

product overviews and future roadmaps. Seagate factory tours were provided for suppliers to see and

learn about the company’s operations. Seagate executives also met with supplier CEOs at the

company’s annual Supplier CEO Advisory Council to share product information and discuss issues in

an open forum.xxvii”

“In FY2007, Seagate established a simple, online Supplier Collaboration workspace for suppliers and

commodity management teams (CMTs) to speedily share information using a secure website. This

allowed faster communication on key strategic issues, as well as one common document used as the

master. The company also held its annual Supplier Day, where Seagate executives and commodity

management teams hosted key suppliers for each commodity. The intent of the meeting was to share

key information with suppliers to help build relationships and provide insight for planning, product

overviews and future roadmaps. Seagate factory tours were also provided for suppliers to see and

learn about the company’s operations. Seagate executives also met with supplier CEOs at the

company’s annual Supplier CEO Advisory Council to share product information and discuss issues in

an open forum.”

Page 31

“Seagate believes that training is an integral and necessary part of our supply chain. Seagate actively

works to educate its supplier base– ensuring that they understand the GC requirements in their

contracts before signing, acknowledging that GC is of critical importance to both Seagate and its

customers, and realizing that future GC requirements might be forthcoming. To that end, the

company began in FY2007 to develop a comprehensive training package for suppliers. The company

expects to roll the training program out at the end of CY2007 to all key suppliers. The training will be

web based and can be accessed conveniently by the company’s suppliers. The website will

track/document the learning and completion activities of each supplier. To support this effort, Seagate

will require that at least one key individual at each supplier will be required to complete training, and that person would then be responsible for cascaded the training within his or her own company.xxviii”

2008 Xerox

“We are currently in the first year of a 2007 master supply agreement with Flextronics, a global

electronics manufacturing services company, to outsource portions of manufacturing for our Office

segment. The agreement is for three years with two additional one-year extension periods at our

option. Our inventory purchases from Flextronics currently represent approximately 20% of our

overall worldwide inventory procurement. We have agreed to purchase from Flextronics some

products and consumables within specified product families. Flextronics must acquire inventory in

anticipation of meeting our forecasted requirements and must maintain sufficient manufacturing

capacity to satisfy these requirements. Under certain circumstances, we may be obligated to

purchase inventory that remains unused for more than 180 days or becomes obsolete, or on the

termination of the supply agreement.”

2008 Alcatel-Lucent

“In another major shift, R&D is being rationalized and optimized by broadening the scope of Bell

Labs. And, finally, the entire organization can tap the resources of Alcatel-Lucent’s corporate

functions, i.e. Finance, Communications and Sustainable Development, Human Resources, Legal

Affairs, Strategy, and Public Affairs. The global Operations function has a key mission under the new

operational model rolled out on January 1, 2009, namely to strive for excellence in the infrastructures

and services supporting Alcatel-Lucent’s businesses.”

“Operations will supply highly efficient, cost effective, best in class services in Information Systems,

Procurement, Supply Chain, Product Maintenance and Repair, Real Estate and General Services.

Because of the consolidated nature of its missions, it is a key partner contributing to the Group’s

overall accountability to customers and society at large. A new procurement policy notably shares

Page 32

common principles and commitments across all Alcatel-Lucent suppliers. A long-lasting procurement

program notably shares common CSR principles and commitments across all Alcatel-Lucent

suppliers. Six hundred of these have been assessed on their CSR practices since 2004 via a

combination of questionnaires and onsite evaluations.”

2009 Cisco Systems

“Our provision for inventory was $102 million, $214 million, and $162 million for fiscal 2008, 2007, and

2006, respectively. The provision for the liability related to purchase commitments with contract

manufacturers and suppliers was $97 million, $34 million, and $61 million in fiscal 2008, 2007, and

2006, respectively. If there were to be a sudden and significant decrease in demand for our products,

or if there were a higher incidence of inventory obsolescence because of rapidly changing technology

and customer requirements, we could be required to increase our inventory write-downs and our

liability for purchase commitments with contract manufacturers and suppliers and gross margin could

be adversely affected. Inventory and supply chain management remain areas of focus as we balance

the need to maintain supply chain flexibility to help ensure competitive lead times with the risk of

inventory obsolescence.xxix”

2009 EMC

“Managing information in a manner that complies with laws, regulations, industry standards, rules,

policies, and the like has never been more complex or challenging. This is especially true since the

sheer volume of information created by and flowing into organizations is at an all-time high and

forecast to rise dramatically each year. All of this information must be properly managed, retained,

and discovered across the enterprise. EMC is investing heavily in helping organizations manage the

risks, costs, and potential opportunities associated with rising levels of information. In the pages that follow we propose a proactive approach to information compliance management.xxx

EMC operates with a company-wide commitment to consistently exceed customers’ expectations for

quality, service, innovation, and interaction. We call this the Total Customer Experience, or TCE. We

make sure we understand what customer’s value most about our products, services, solutions, and

processes. And then we find the most efficient and cost-effective way to deliver this value within the

timeframes and quality standards customers expect. The voice of the customer informs everything we do. All decisions are driven by data and Lean Six Sigma analysis.xxxi”

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2009 Emerson

“Other deductions, net were $303 million in 2008, a $128 million increase from the $175 million in

2007. The increase reflects numerous items including a $31 million impairment charge related to the

North American appliance control business due to a slow economic environment for consumer

appliance and residential end-markets and a major customer’s strategy to diversify suppliers and

transition to and internalize the production of electronic controls. As a result, the operations of this

business will be restructured and integrated into the North American appliance motors business to

leverage the combined cost structure and improve profitability on the lower volume, including

elimination of redundant manufacturing capacity and a substantial reduction in overhead. xxxii”

2009 Ericsson

The synergies generated by the combined strengths of the segments differentiate Ericsson through a

continuous focus on operational excellence to better leverage an economy of scale in technology

development as well as in product and service delivery and customer support. The three strategic

imperatives show Ericsson’s business dynamics and their effects on results. With its scale advantage

secured by being the primary supplier to more operators, the Company plans to balance growth with

margins, focus on leveraging expanded primary supplier relationships and return to higher profitability levels.xxxiii”

“In 2008, Ericsson set a new group-level target to reduce its life-cycle carbon footprint by 40 percent

over the next five years, starting with a 10 percent reduction in 2009. The footprint will include total

CO2 emission from: Ericsson in-house activities, such as production, transports, sites and business

travel by air. The lifetime use of the products sold by Ericsson during the year (portfolio energy-

efficiency improvement). Ericsson ranked second on the Carbon Disclosure Project (CDP) Swedish

Index.xxxiv

“In the first quarter 2008, a cost reduction plan of SEK 4 billion in annual savings was announced,

including estimated charges of the same size. In the third quarter it was announced that further

charges would be taken in the fourth quarter. As part of this cost reduction plan SEK 4.3 billion in

provisions were made. The actual utilization was SEK 1.8 billion, where SEK 0.6 billion was related to

restructuring programs before 2008. The expected utilization for 2009 is estimated to approximately

SEK 3 billion.xxxv “

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2009 Western Digital

“We believe that we have significant know-how, unique product manufacturing processes, execution

skills and human resources to continue to be successful and have the ability to grow, as necessary,

our manufacturing operations. To be competitive, we must manufacture high quality hard drives with

industry leading time-to-volume production at competitive unit costs. We strive to maintain

manufacturing flexibility, high manufacturing yields, reliable products, and high-quality components

that we manufacture ourselves, while insisting that our suppliers provide high-quality components at

competitive prices. The critical elements of our hard drive production are high volume, low cost

assembly and testing, and establishment and maintenance of key supplier relationships. By

establishing close relationships with our strategic component suppliers, we believe we access best-

of-class technology and manufacturing quality. In addition, we believe that our sourcing strategy

currently enables us to have the business flexibility needed to select the highest quality, low cost of

ownership suppliers as product designs and technologies evolve.

We manufacture hard drives in Malaysia and Thailand. We continually evaluate our manufacturing

processes in an effort to increase productivity, sustain and improve quality and decrease

manufacturing costs. We continually evaluate which steps in the manufacturing process would benefit

from automation and how automated manufacturing processes can improve productivity and reduce

manufacturing costs.

We are currently expanding our head wafer fabrication facilities in Fremont, California and expect to

complete the expansion in calendar 2009, which will provide us with adequate wafer fabrication

capacity for the foreseeable future. Following our acquisition of Komag, we also have media and

substrate design and manufacturing facilities in Malaysia. We use these facilities to design and

manufacture most of the media and substrates that we use in our products.xxxvi”

2009: Seagate

“The design and manufacturing of disk drives depends on highly advanced technology and

manufacturing techniques and therefore requires high levels of research and development spending

and capital equipment investments. Manufacturing our disk drives is a complex process that begins

with the production of individual components and ends with a fully assembled unit. We design,

fabricate and assemble a number of the most important components found in our disk drives,

including read/write heads and recording media. Our design and manufacturing operations are based

on technology platforms that are used to produce various disk drive products that serve multiple data

storage applications and markets. Our core technology platforms are focused around the areal

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density of media and read/write head technologies. Using an integrated platform design and

manufacturing leverage approach allows us to deliver a portfolio of disk drive products to service a

wide range of electronic data storage applications and a wide range of industries.xxxvii”

“We pursue a vertically integrated business strategy based on the ownership of critical component

technologies, allowing us to maintain control over our product roadmap and component cost, quality

and availability. We believe that because of our vertical design and manufacturing strategy, we are

well suited to meet the challenges posed by the close interdependence of components for disk drives.

Our manufacturing efficiency and flexibility are critical elements of our integrated business strategy.

However, a vertically integrated model tends to have less flexibility when there is a constraint in

demand, which then exposes us to higher unit costs. Due to the significant challenges posed by the

need to continually innovate and improve manufacturing efficiency and the required investments in

capital equipment and research and development, the disk drive industry has undergone significant

consolidation as disk drive manufacturers and component manufacturers have merged with other

companies or exited the industry. The global macroeconomic environment as well as the increasing

technological challenges, associated levels of investment and competitive necessity of large-scale

operations may continue to drive future industry consolidation. Additionally, we may in the future face

indirect competition from customers who from time to time evaluate whether to offer electronic data

storage products that may compete with our products.xxxviii”

“Due to industry consolidation, there are a limited number of independent suppliers of components,

such as recording heads and media, available to disk drive manufacturers. Vertically integrated disk

drive manufacturers, who manufacture their own components, are less dependent on external

component suppliers than less vertically integrated disk drive manufacturers. Generally, we believe

that there is more than adequate supply of components to meet currently identified industry demand.

However, we believe that the supply of glass substrates, a component in mobile disk drives, may be

below adequate levels to support demand for mobile drives. This supply constraint may be

particularly pronounced if global macroeconomic conditions improve in the near term or if the shift in

demand from desktop compute to mobile compute accelerates. Drive manufacturers have adjusted

their capital spending plans in reaction to the reduction in demand. As a result, capital equipment

manufacturers may be increasingly financially constrained and, therefore, may be less able to supply

equipment when needed. The production of disk drives requires precious metals, scarce alloys and

industrial commodities, that are subject to fluctuations in prices, and the supply of which has at times

been constrained. In order to mitigate susceptibility to these conditions, we may maintain increased

inventory of precious metals, scarce alloys and industrial commodities. We believe that currently

Page 36

there is adequate supply of these precious metals, scarce alloys and industrial commodities.

Additionally, volatility in fuel costs may increase our costs related to commodities, manufacturing and

freight, therefore, we may increase our use of ocean shipments to help offset any increase in freight

costs. From time to time the industry has experienced periods of imbalances between supply and

demand. To the extent that the disk drive industry builds capacity based on expectations of demand

that do not materialize, price erosion may become more pronounced. Conversely, during periods

where demand exceeds supply, price erosion is generally more benign.xxxix”

Cash-To-Cash Cash-to-Cash (C2C) analysis is a compound metric. It is the combination of: Days of Receivables

plus Days of Inventory minus Days of Payables. When comparing the periods of 2006-2009 and

2010-2014, the average high-tech company has reduced C2C by four days. In contrast, within the

automotive industry the C2C cycle for the same comparison was reduced by 22 days. Why the

difference? The industry was not as aggressive on payables, and had less room for inventory

improvement than other discrete industries.

As seen in Figure 6, the best C2C cycles were managed at Apple, Cisco Systems, and Lenovo.

Figure 6. Comparison of High-Tech Companies’ Cash-To-Cash Cycles for 2010-2014

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Recommendations In supply chain benchmarking it is important to look at the performance and improvement of peer

companies over time. The orbit charts are useful to see these patterns. The patterns matter more

than the averages.

As companies work to define supply chain excellence to enable their strategies, we recommend that

they:

• 1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data. Organizations should benchmark companies within their industry to determine what is possible and

feasible. Each industry has unique rhythms and cycles. As a result, supply chain excellence

analysis needs to be industry-specific.

• 2) Understand the Potential of Your Supply Chain and Orchestrate Trade-offs on the Effective Frontier. Supply chain leadership teams should analyze the total portfolio of metrics and study

progress at the intersections of the Effective Frontier. Companies with higher performance are using

more advanced analytics to plan outcomes and design the supply chain. Teams should align cross-

functionally to the metrics that matter with the functional metrics focused on improving reliability. An

example is shown in Figure 7.

Figure 7. Metrics Systems to Drive Alignment

• 3) Apply Systems Theory. Teams should evaluate performance over time to understand

improvement while realizing that they are managing a complex system. The functions should be

aligned to a balanced portfolio of metrics representing the Effective Frontier while functional metrics

should be focused on improving reliability (first-pass yield, OEE, hands-free orders, etc.).

Page 38

• 4) Focus on Building Value Networks. The high-tech industry more successfully built global

supply chain capabilities when compared to other industries. Traditional supply chain planning

techniques have not been sufficient with supply chain leaders adopting new techniques for

forecasting, inventory management, and demand sensing. With the rise of commodity prices, the

principles of market-driven value networks matter more than ever for these industries. Companies

need to be able to orchestrate volume/mix/cost implications strategies bidirectionally from channel

to supplier.

• 5) Learn from Other Industries and Use a Steady Hand to Drive Improvement. While the high-

tech industries led in the innovation of supply and product innovation processes, they can learn

about demand sensing and channel data management from consumer goods.

Conclusion The High-Tech industry innovated today’s supply chain practices. The pace of innovation in the

industry is fierce with a growing gap between high-tech supply chain practices and other industries.

Supply chain planning, inventory techniques, and value network connectivity are not options: they are

a necessity.

The Supply Chains to Admire Analysis methodology is a litmus test. As a yardstick of supply chain

excellence, the analysis helps clarify what is the right stuff to drive performance and improvement.

Overall, the High-Tech industry led the pack with seven out of the 24 winners.

Page 39

Appendix - Metrics Definitions The definitions of additional financial metrics used in this report are outlined in Table A.

Table A. Metrics Definitions

Page 40

Prior Reports in This Series Over the course of the last four years our methodology has changed and matured. You can track our

progress and find industry-specific information in these Supply Chain Insights publications:

Supply Chain Metrics That Matter: A Focus on Retail August 2012. Supply Chain Metrics That Matter: A Focus on Consumer Products September 2012. Supply Chain Metrics That Matter: The Cash-to-Cash Cycle November 2012. Supply Chain Metrics That Matter: A Focus on the Food and Beverage Industry December 2012. Supply Chain Metrics That Matter: Driving Reliability in Margins January 2013. Supply Chain Metrics That Matter: A Focus on Hospitals January 2013. Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail February 2013. Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers February 2013. Supply Chain Metrics That Matter: A Focus on Consumer Electronics April 2013. Supply Chain Metrics That Matter: A Focus on Apparel May 2013 Supply Chain Metrics That Matter: A Focus on Contract Manufacturing August 2013 Supply Chain Metrics That Matter: A Focus on the High-tech Industry October 2013 Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (2000-2012) November 2013 Supply Chain Metrics That Matter: Third Party Logistics Providers December 2013 Supply Chain Metrics That Matter: A Critical Look at Operating Margin December 2013 Supply Chain Metrics That Matter: A Closer Look at Pharmaceutical Companies April 2014 Supply Chain Metrics That Matter: A Closer Look at Chemical Companies May 2014 Supply Chain Metrics That Matter: A Closer Look at Food and Beverage Companies June 2014 Supply Chain Metrics That Matter – A Focus on Pharmaceutical Companies April 2015 Supply Chain Metrics That Matter – A Focus on Chemical Companies – 2015 May 2015 Supply Chain Metrics That Matter: A Focus on Food and Beverage Companies-2015 June 2015 Supply Chain Metrics That Matter: A Focus on Consumer Products – 2015 August 2015 Supply Chain Metrics That Matter: A Focus on the Automotive Industry – 2015 October 2015 Supply Chains to Admire – 2015 September 2015 These reports, and additional information on the Supply Chain Metrics That Matter methodology, are available at our Supply Chain Insights website and in the Beet Fusion community.

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About Supply Chain Insights LLC Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is now beginning its fifth year

of operation. The Company’s mission is to deliver independent, actionable, and objective advice for supply chain leaders. If you need to know which practices and technologies make the biggest

difference to corporate performance, we want you to turn to us. We are a company dedicated to this

research. Our goal is to help leaders understand supply chain trends, evolving technologies and

which metrics matter.

About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and

the author of popular enterprise software blog Supply Chain Shaman currently read

by 5,000 supply chain professionals. She also writes as a Linkedin Influencer and

is a a contributor for Forbes. She has written four books. The first book, Bricks

Matter, (co-authored with Charlie Chase) published in 2012. The second book, The

Shaman’s Journal 2014 published in September 2014; the third book, Supply Chain

Metrics That Matter, published in December 2014; and the fourth book, The

Shaman’s Journal 2015, in September 2015.

With over 12 years as a research analyst with AMR Research, Altimeter Group, and Gartner Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has

worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a

year on the evolution of supply chain processes and technologies. Her research is designed for the

early adopter seeking first mover advantage.

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Endnotes i Alcatel-Lucent 2006 Annual Report, February 2007, p.8, https://www.alcatel-lucent.com/investors/annual-reports, accessed 30 October 2015. ii Cisco Systems 2006 Annual Report, 2007, p. 36, http://www.cisco.com/web/about/ac49/ac20/downloads/annualreport/ar2006/pdf/ar_2006_complete.pdf, accessed 30 October 20015. iii EMC 2006 Annual Report, March 2007, p.5, http://uk.emc.com/about/emc-at-glance/annual-overview/2005-06/annual-report-2005-06.pdf, accessed 30 October 2015. iv Emerson 2006 Annual Report, Date 2007, p.29, http://www.emerson.com/SiteCollectionImages/investors/documents/AnnualReports/2006EmersonAnnualReport.pdf, accessed 30 October 2015. v Emerson 2006 Annual Report, March 2007, p.44, http://www.emerson.com/SiteCollectionImages/investors/documents/AnnualReports/2006EmersonAnnualReport.pdf, accessed 30 October 2015. vi Ericsson 2006 Annual Report, March 2007, p.20, http://www.ericsson.com/res/investors/docs/2006/annual-report/ar_en_complete.pdf, accessed 30 October 2015. vii Qualcomm 2006 Annual Report, February 2007, p. 38, https://www.qualcomm.com/documents/qualcomm-2006-annual-report, accessed 5 November 2015. viii SanDisk 2006 Annual Report, 10 April 2007, p. 7, http://media.corporate-ir.net/media_files/irol/86/86495/06AR.pdf, accessed 5 November 2015. ix Western Digital 2006 Annual Report, November 2007, p. 9, http://www.wdc.com/wdproducts/library/company/annualreport/2278-001005-A02.pdf, accessed 5 November 2015. x Western Digital 2006 Annual Report, November 2007, p.12, http://www.wdc.com/wdproducts/library/company/annualreport/2278-001005-A02.pdf, accessed 5 November 2015. xi Western Digital 2006 Annual Report, November 2007, p.13, http://www.wdc.com/wdproducts/library/company/annualreport/2278-001005-A02.pdf, accessed 5 November 2015. xii Adtran 2007 Annual Report, Date, p. 18, http://www.adtran.com/pub/Library/Corporate/Annual%20Reports/2007_ADTRAN_Annual_Report.pdf, accessed, 7 November 2015. xiii Alcatel-Lucent 2007 Annual Report, Date, p.5, https://www.alcatel-lucent.com/investors/annual-reports, accessed, 7 November 2015. xiv Alcatel-Lucent 2007 Annual Report, March 2008, p.59, https://www.alcatel-lucent.com/investors/annual-reports, accessed, 7 November 2015. xv Alcatel-Lucent 2007 Annual Report, March 2008, p.66, https://www.alcatel-lucent.com/investors/annual-reports, accessed, 7 November 2015. xvi Belden 2006 Letter to Shareholders, 2008, p. 3, http://s2.q4cdn.com/591876415/files/doc_financials/2007/Belden2007AR.pdf, accessed 7 November 2015. xvii Belden 2006 Letter to Shareholders, 2008, p. 4, http://s2.q4cdn.com/591876415/files/doc_financials/2007/Belden2007AR.pdf, accessed 7 November 2015. xviii Belden 2006 Letter to Shareholders, 2008, p. 5, http://s2.q4cdn.com/591876415/files/doc_financials/2007/Belden2007AR.pdf, accessed 7 November 2015. xix Belden 2007 Annual Report, Date, p. 5, http://s2.q4cdn.com/591876415/files/doc_financials/2007/Belden2007AR.pdf, accessed 7 November 2015. xx Cisco Systems 2007 Annual Report, 2008, p. 14, http://www.cisco.com/web/about/ac49/ac20/downloads/annualreport/ar2007/pdf/cisco_ar2007_complete.pdf, accessed 10 November 2015.

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xxi Cisco Systems 2007 Annual Report, 2008, p. 21, http://www.cisco.com/web/about/ac49/ac20/downloads/annualreport/ar2007/pdf/cisco_ar2007_complete.pdf, accessed 10 November 2015. xxii Cisco Systems 2007 Annual Report, 2008, p. 30, http://www.cisco.com/web/about/ac49/ac20/downloads/annualreport/ar2007/pdf/cisco_ar2007_complete.pdf, accessed 10 November 2015. xxiii Emerson 2007 Annual Report, 2008, p. 28, http://www.emerson.com/SiteCollectionDocuments/Annual%20Reports/flash/07annual/pdf/complete_2007_annual_report.pdf, accessed, 10 November 2015. xxiv Ericsson 2007 Annual Report, 2008, p. 28, http://www.ericsson.com/res/investors/docs/2007/annual-report/ar_en_complete.pdf, accessed 10 November 2015. xxv HP 2007 Annual Report, 2008, p. 48, http://h30261.www3.hp.com/~/media/Files/H/HP-IR/documents/reports/2008/hp-annual-report-2007.pdf, accessed 11 November 2015. xxvi HP 2007 Annual Report, 2008, p. 49, http://h30261.www3.hp.com/~/media/Files/H/HP-IR/documents/reports/2008/hp-annual-report-2007.pdf, accessed 11 November 2015. xxvii Seagate 2007 Annual Report, 2008, p. 4, http://www.seagate.com/files/staticfiles/docs/pdf/corporate/2007_gcar.pdf, accessed 11 November 2015. xxviii Seagate 2007 Annual Report, 2008, p. 26, http://www.seagate.com/files/staticfiles/docs/pdf/corporate/2007_gcar.pdf, accessed 11 November 2015. xxix Cisco Systems 2008 Annual Report, 2009, p. 22, http://www.cisco.com/web/about/ac49/ac20/downloads/annualreport/ar2008/pdf/cisco_ar2008_complete.pdf, accessed 15 November 2015. xxx EMC 2008 Annual Report, 2009, p. 26, https://www.emc.com/about/emc-at-glance/annual-overview/2008/h4182-2008-annual-overview.pdf, accessed 15 November 2015. xxxi EMC 2008 Annual Report, 2009, p. 30, https://www.emc.com/about/emc-at-glance/annual-overview/2008/h4182-2008-annual-overview.pdf, accessed 15 November 2015. xxxii Emerson 2008 Annual Report, 2009, p. 20, http://www.emerson.com/SiteCollectionImages/investors/documents/AnnualReports/2008EmersonAnnualReport.pdf, accessed 15 November 2015. xxxiii Ericsson 2008 Annual report, 2009, p. 8, http://www.ericsson.com/res/investors/docs/2008/Complete_Annual_Report_2008_EN.pdf, accessed 18 November 2015. xxxiv Ericsson 2008 Annual report, 2009, p. 28, http://www.ericsson.com/res/investors/docs/2008/Complete_Annual_Report_2008_EN.pdf, accessed 18 November 2015. xxxv Ericsson 2008 Annual report, 2009, p. 72, http://www.ericsson.com/res/investors/docs/2008/Complete_Annual_Report_2008_EN.pdf, accessed 18 November 2015. xxxvi Western Digital, 2008 Annual Report, 2009, p. 13, https://materials.proxyvote.com/Approved/958102/20080917/AR_27910/images/Western_Digital-AR2008.pdf, accessed 18 November 2015. xxxvii Seagate 2006 Annual Report, August 2007, p. 6-7, http://investor.shareholder.com/seagate/secfiling.cfm?filingid=1047469-09-7888&cik=1137789#A2194209Z10-K_HTM_DA79801_ITEM_1__BUSINESS, accessed 20 November 2015. xxxviii Seagate 2006 Annual Report, August 2007, p. 8, http://investor.shareholder.com/seagate/secfiling.cfm?filingid=1047469-09-7888&cik=1137789#A2194209Z10-K_HTM_DA79801_ITEM_1__BUSINESS, accessed 20 November 2015. xxxix Seagate 2006 Annual Report, August 2007, p. 9-10, http://investor.shareholder.com/seagate/secfiling.cfm?filingid=1047469-09-7888&cik=1137789#A2194209Z10-K_HTM_DA79801_ITEM_1__BUSINESS, accessed 20 November 2015.