Case Study-Risk Management & Supply Continuity for Low Cost Country Supply

Risk Management and Supply Continuity:
Establishing Low Cost Country Supply
September 13, 2011
Dragon Sourcing - 龙源
Your Tailored Sourcing Approach to LCC Sourcing

Agenda
A. Background
B. Macro Market Understanding
C. Micro Cost To Serve
D. Managing Risk and Continuity
© 2011 Dragon Sourcing. All rights reserved.

Introduction
• Many companies, as part of their global portfolio, are manufacturing or considering
manufacturing in low-cost countries.
• Historically, the critical driver of this decision has been low-cost labor however this underplays
the total potential value in a low-cost strategy. For example, products exported from Mexico to
the United States today only include on average 5% Mexican value added, a lot of effort for a
marginal impact.
• When total costs, changing market dynamics, and supply risks are considered many
companies have been retrenching from their initial decisions. But is the pendulum swinging
too far the other way today?
• The Issues are:
– What are they keys to developing a successful Low Cost Country Strategy?
– What are the critical steps to ensuring benefit, managing risk and continuity?
– What role does Sourcing and Procurement play?
• We will explore two cases and the critical lessons learned.

Driving a Strategy
• What is the driver behind my strategy?
– Low Cost? -- Expanded Capabilities?
– Market Access? -- New Growth (Acquisitions)?
• How do I choose to source or site LCC capabilities?
– Macro Economics -- Sub-Regional Dynamics
– Financials and Business Attractiveness
– Availability of local or proximate supply
• How do I manage risks?
– Political and Economic Risk
– Business and Financial Risks
– Supply Chain Risks
– Supply Risk

© 2010 Dragon Sourcing. All rights reserved. 5
Massively Changing Market Dynamics
• China, Vietnam, India, Turkey Mexico and Brazil are
countries experiencing unprecedented and exponential
economic growth which offer unique opportunities (and
risks)
• After a period of decline in Chinese exports caused by
the financial crisis of 2008  exports from China to the
western world have once again reached unprecedented
speed in 2011.
• Tension in bilateral relations between the EU and China
and the US and China
• Chinese government modified its exchange rate policy
by shifting from a hard peg to the US$ to a link to a
basket of international currencies
• In addition, we are seeing…
– Renewed labor wage inflation on the eastern coast of
China
– Labor unrest in several factories that have made
headlines recently (Foxconn, Toyota)
– Significant increases in container transportation costs
– The imposition of new anti dumping taxes by US and
EU
These trends combined with changing
market dynamics is triggering some
strategic rethinking in companies' global
sourcing strategies
Source: World Bank.

Case Study Background
• About a $200 Million Dollar Division of a major company was under significant economic pressure
in its traditional manufacturing structure
• The current default strategy was to source from China, but that led to competitive vulnerability
• The issue was whether there was an opportunity to leap frog competition and gain leverage
through a low cost country strategy.
• The issue was where is the world? At what economics? And what was necessary to manage
risks?
• The analysis involved four stages:
– A Macro Look at Markets for the best cost country and location to potentially position
operations
– A Micro look at comparative economics and risks by down selected location
– Supply localization for targeted regions
– Site Selection, support contacting and launch planning

Starting Point -- Macro Market Analysis
Main Criteria
Total
Weight
Subcriteria Weight Indicators
Political stability 8% World Bank - Governance indicator
Commitment to reforms 4% Composite indicator
Corruption and bureaucracy 4% Transparency International - Corruption Perception Index
Legal framework and rule of law 4% World Bank - Governance indicator
International performance 12% External trade, product portfolio, FDI
International competitivity 12% GDP/capita, labor costs level and evolution
National performance 8% Growth, unemployment rate, inflation
Financial situation 8% Indebtness, savings and banking performance
Education 8% Literacy rate, tertiary enrolment
Human development 8% Poverty, health, sanitation, access to PC, internet
Age profile 4% Age distribution and expected evolution
Transport infrastructure 8% Ports, roads
Energy and power supply 8% Consumption, dependency, diversification
R&D expenditure 4% Public spending
TOTAL 100% 100%
Infrastructure
and
technologies
20%
Political and
legal
20%
Economic 40%
Social and
demographic
20%

Comparison of Asian Economies
Pakistan
India
China
Thailand
Indonesia
Philippines
Vietnam
0%
2%
4%
6%
8%
10%
12%
0 500 1 000 1 500 2 000 2 500 3 000
GDP / Capita ($)
GDPGrowthRate
Political and Economic
Political Economic
IRAQ
ICELAND
VIETNAM
CHINA
THAILAND
INDIA
PHILIPPINES
INDONESIA
PAKISTAN
Politicalstability
OECD
SOMALIA
ICELAND
VIETNAM
CHINA
THAILAND
INDIA
PHILIPPINES
INDONESIA
PAKISTAN
RuleofLaw
OECD
Source:WorldBank
Population
Sources:ADB,IMF
MEXICO
MEXICO

Energy per capita
(kg of oil equivalent)
and per sources
0
250
500
750
1 000
1 250
1 500
China India Indonesia Pakistan Philippines Thailand Vietnam
Coal Gas
Hydro Oil
Nuclear Geothermal
Social and Infrastructure
Socio-demographic Infrastructure
Own
production
Source:WorldBank
MALI
UNITED STATES
VIETNAM
CHINA
THAILAND
INDIA
PHILIPPINES
INDONESIA
PAKISTAN
Poverty/Wealth
Health
AccessPC/internet
TAJIKISTAN
UNITED STATES
VIETNAM
CHINA
THAILAND
INDIA
PHILIPPINES
INDONESIA
PAKISTAN
Source:UnitedNationsDevpmtPrg.(UNDP)
EQUAT. GUINEA
UNITED STATES
VIETNAM
CHINA
THAILAND
INDIA
PHILIPPINES
INDONESIA
PAKISTAN
Source:UnitedNationsDevpmtPrg.(UNDP)
Source:ADB,WorldBank,JapanBank
forInternationalCooperation(JBIC)
Education
Pakistan
India
Thailand
Philippines
Vietnam
Indonesia
China
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50%
University enrolment
Literacyrate
Investment in education
= 1% GDP Transportation (roads, maritime)
Pakistan
India
Vietnam
Thailand
Philippines
China
Indonesia
0
10
20
30
40
0 5 10 15 20
Paved road density
(km / 100km2)
Maritime
export(TEU/
1000$export)
Investment in infrastructure
= 1% of GDP
*
(*) TEU: Ton-Equivalent Unit

One of Many Economic Drivers -- Relative
Factor
Sub Criteria
Total tax rate
(TTR)
Wages &
Social Security Logistics Cost
Import Duty
Rates
 China offer highest social security to workers.
 Vietnam is the lowest in total average wages.
Social Security
Source: www. eiu.com
China 20-30%
Mexico 15-25%
Vietnam 19.0%
Malaysia 12.0%
Indonesia 4.89%
Thailand 4.5%
Social Security
US $ 490-530
US $ 529
US $ 390
US $ 281
US $ 138
China
Malaysia
Thailand
Indonesia
Vietnam
Total average wages
including Social Security
Mexico US $ 495- 538

Macro View of Supply Market Attractiveness…
• At a Macro Level Certain markets continue to be very attractive…
• … but need to understand in both a static and dynamic context and in the context of your strategy

.. And a Total Cost View of Relative Value Added Costs
$3,203,983
$3,736,323
$2,761,897
$3,722,127
$3,647,270

Beyond Country Economics  Regional Understanding
• What skill base and capabilities exist?
• What are the financial incentives?
• What is the local infrastructure?
• What is the export infrastructure?
• How accessible and comfortable for
expats or visitors?

Critical Issue Available Supply as purchase costs were
80% of total costs

Critical - Sourcing and Supply Market Understanding
Top 50 Best Qualified
China 40
Mexico 6
Vietnam 2
Indonesia 2

A strategic view to Supplier capabilities

Laminates
Machined Castings
Tube Housing
Leadwire
Hardware
Painting
Plastics
And, “safe” locations proximate to the market and supply
base
19© 2012 Dragon Sourcing. All rights reserved.
Target C
Target B
Target A

Supported by Detailed Site Selection
• Operates as an industrial as an
industrial developer in 1987 with 5
major developments between
Tijuana and Mexicali
• Services
– Maximum Security: Controlled Access,
Wall Perimeter and CCTV 24/7
– 7 Public Bus lines
– Food, Medical, police and fire either
outside main gain or within 5km
– Solar energy
– Concrete Tilt-Up Buildings with the
same quality standard as US.
Proposed - El Dorado Park
Established: 2000
Size: 34 ha
Sq ft Sold: 5,621,155
Facility – 78,500 sq ft, $0.35/sq ft

Bringing It Together – In the Client’s Case -- Mexico
• Beyond The Macro the Key Became…
– Specifically targeting regions and
capabilities
– Identifying and qualifying suppliers
– Sourcing and working with suppliers
for low cost supply
– Mitigating sub-scale operations and
lack of local knowledge

Time Phased Estimate of Results
2012 2013 2014 2015
Product A Forecast - 80,540 146,081 145,631
Hours Fcst - 18,920 34,317 34,211
People Fcst 0 10.31 18.13 18.08
Staff Plan 0 14.42 19.17 15.50
Product B Forecast - 3,916 22,910 23,374
Hours Fcst - 2,136 12,499 12,752
People Fcst 0 1.33 7.17 7.33
Staff Plan 0 2.83 8.00 7.50
Product C Forecast 26,709 169,625 170,938 172,900
Hours Fcst 5,427 34,464 34,731 35,130
People Fcst 13.00 18.58 19.50 19.75
Staff Plan 16.67 18.58 19.17 20.08
Total Forecast 26,709 254,081 339,929 341,905
Hours Fcst 5,427 55,521 81,547 82,093
People Fcst 13.00 30.22 44.80 45.16
Staff Plan 16.67 35.83 46.33 43.08
Draft Plan
2012 2013 2014 2015
Baseline Manufacturing Costs
Product A -$ 896,709$ 1,626,417$ 1,621,407$
Product B -$ 119,880$ 701,338$ 715,542$
Product C -$ 1,016,589$ 2,327,755$ 2,336,949$
New Manfacturing Costs
Labor -$ 110,943$ 174,722$ 147,924$
Mfg Overhead 380,400$ 965,800$ 965,800$ 965,800$
Support Overhead 290,444$ 1,253,895$ 1,253,895$ 1,253,895$
Les LU Absorbed (143,408)$ (910,772)$ (917,823)$ (928,357)$
Total Manufacturing 527,437$ 1,419,866$ 1,476,593$ 1,439,262$
Net Manufacturing savings (527,437)$ (403,277)$ 851,162$ 897,687$
Lower Unit Savings 114,488$ 727,105$ 732,735$ 741,144$
Materials Savings 266,140$ 532,527$ 532,571$
Total Manufacturing Savings (412,949)$ 589,968$ 2,116,423$ 2,171,401$
Less Unasorbed Burden (13,056)$ (186,308)$ (461,507)$ (461,507)$
Less Logistics Penalty (57,084) (204,916)$ (410,021)$ (410,055)$
(483,088)$ 198,744$ 1,244,895$ 1,299,839$
Draft Plan
Net savings

Managing Political and Economic Risk – Market Intelligence
CLIENT
BENEFITS
Clarifying
Supply Chain
Risks
Discovering
Market
Opportunities
Informed
Buying
Decisions
PROCUREMENT INTELLIGENCE
SUITE
Supply Market Analysis
Supplier Analysis
Industry Best Practices Analysis
Price Tracking & Forecasting
Category Executive Dashboards
Dynamic Should-Cost Models
Value Chain Analysis
Supplier Financial Assessment
Supplier Ethics Assessment
- Which countries have potential?
- Should we buy-in or manufacture?
- Who are the top suppliers?
- What are the market dynamics?
- Should we buy now or later?
- Latest category news?
- What will the impact of inflation be?
- Is the market trending up?
- What are the raw materials?
- What are the key risks to supply?
- Do these suppliers meet our CSR
requirements?
KEY CLIENT
QUESTIONS

Business Challenges
Supplier Performance
Management
Improve Cost Position
Approach
• Competent Global Sourcing
• Focus on Key Cost Driver
• Strategic Globalization Plan
• Supplier Selection Process
• Systematic Supplier Performance
Management
• Technical Support (Six Sigma/Lean)
Competitiveness • Flexible Supply Chain
• Compresses Supply Chain Lead-times
• Supply Chain Integration
Managing Business Risk – A Clear Strategy
Results
Reduced Cost
Improved
Market Position
Global Supply Chain Becomes Competitive Advantage
Improved PPM
>95% OTD

Managing Business Risk - In Country Management Resources
DS Mexico
•Over Twenty Years of Aerospace Supply Chain Experience
• Experienced in Developing /Maintaining Supplier Performance
• Enhanced Supplier Management Process
• Strong Collaborative Effort with Mexican Economical Development
Staff
• Experienced in High Risk Sourcing to Achieve Improved Business
Performance
• Strong Bilingual In-Country Sourcing Team

Managing Supply Risk - Localize Supplier Management

Overall methodology & 7-step process
Managing Supply Chain Risk - Formalized In Country
Supplier and Quality Management
Sampling & Criterias
Checkitem #
Box #
Marking Inner carton Mug Quantity Mug heigth
Mug upper
diameter
Mug lower
diameter
Wall
thickness
Mug weigth Material type Quality
1 OK OK 48 104.3 64.9 3.6 326 OK OK
2 OK OK 48 103.4 64.5 4.2 346 OK OK
3 OK OK 48 104 64.6 3.9 344 OK OK
4 OK OK 48 104.6 64.8 3.8 317 OK OK
5 OK OK 48 104.3 57 3.6 308 OK OK
6 OK OK 48 104.8 61 3.8 317 OK OK
7 OK OK 48 103.7 64.5 3.9 328 OK OK
8 OK NO 48 103.8 62 3.9 345 OK OK
9 OK OK 48 103.3 64.1 3.1 322 OK OK
10 OK OK 48 103.2 63.4 3.7 325 OK OK
11 OK OK 48 104.4 64.8 3.9 317 OK OK
12 OK OK 48 102.3 64.2 3.2 316 OK OK
13 OK OK 48 105.4 63 4 316 MO OK
14 OK OK 45 105.6 65 4 322 OK OK
15 OK OK 48 106.3 65.6 4.1 357 OK OK
16 OK OK 48 103.4 65.5 3.9 311 NO OK
17 OK NO 48 104.7 64.1 3.8 300 OK OK
18 OK OK 48 104 60 3.8 342 OK OK
28
Supplier Summary
Supplier Capabilities
Supplier Assessments
On Going
QC Reporting and
Supplier Development

Dragon Sourcing - 龙源
Your Tailored Sourcing Approach to LCC Sourcing
Steve Griffiths
Managing Director USA
Phone: 216-533-8972
steven.griffiths@dragonsourcing .com
Richard Laub
CEO
Phone: +32 (499) 56.72.71
richard.laub@dragonsourcing .com

Case Study-Risk Management & Supply Continuity for Low Cost Country Supply

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