Global Footprint | November 2008 | © 2008 PRTM Proprietary and Confidential Michael Aghajanian...

Global Footprint | November 2008 | © 2008 PRTM Proprietary and Confidential

Michael AghajanianMichael Aghajanian

Managing Director Managing Director PRTMPRTM

Global Footprint OverviewGlobal Footprint Overview


PanelistsPanelists

Name Title/Company Discussion Topic

Michael Aghajanian Managing Director – PRTM Global footprint overview

David Pyott Chairman and CEO – AllerganGlobal supply chain, beyond logistics

Stephen MarlowExecutive Vice President – Toshiba America Electronic Components

Supplying global customers/ geographic risk management

John O’ Connor Director of Global Supply Chain – Cisco Supply chain resiliency

Kate GutmannVice President, Marketing, Europe Region – UPS

Enabling globalization

2


Many Factors are Driving Companies Many Factors are Driving Companies to Globalize…to Globalize…

3

Top Three Globalization Drivers:• Material cost reduction• Labor cost reduction• Gain access to local markets

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


……As a Result, Globalization Is As a Result, Globalization Is AcceleratingAccelerating

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

• More than 50% of manufacturing will be globalized by 2010• Product Development globalization to increase 105% by 2010

4


What Is a Global Footprint?What Is a Global Footprint?

5

Manufacturing & Assembly

Research & Development

Contract manufacturing

Distribution Hubs

Strategic Suppliers

Sales Office

Global Footprints often expand as a result of individual functional initiatives

East coast expansion

Expansion to leverage acquisition

Europeangrowth

Expansion for low-cost manufacturing and market access

Expansion for back office support and software development

Silicon valley startup

?

Future emerging market expansion

?


Global Footprint Dynamics are Becoming Global Footprint Dynamics are Becoming Increasingly VolatileIncreasingly Volatile

Global Footprint Dynamics:

6

Labor Costs

Example:

India's software-and-service association puts wage inflation in its industry at 10% to 15% a year

Can the U.S. Bring Jobs Back from China?June 19, 2008

Typical annual salary increases in China are between 8–15%




Example:

Effective January 1, 2008, the Chinese government has removed the two-year tax holiday for foreign invested manufacturing enterprises in China

In the past, foreign investors in Chinese manufacturing operations were eligible for a two-year, 100 percent tax holiday followed by a 50 percent income tax rate reduction for the next three years

The change will have a significant impact on the taxation of foreign invested enterprises operating in China

Tax Changes

7

Labor Costs




Labor Costs

Tax Changes

8

Example:

Taiwan earthquake caused $8B in damages

Memory chips went from $40 to $160

“…At the end of June, 64 megabytes of memory was selling for about U.S.$40 on the spot market. One week after the earthquake, prices in some cases were four times that level, hitting the U.S.$160 mark, and finally settling at about U.S.$80 one month after the quake.”

Source: “TAIWAN’S 9/21/1999 QUAKE AND WHAT IT MEANS TO THE SEMICONDUCTOR INDUSTRY” by Brian Sherin, CSP, EORM, Inc. and Stacy Bartoletti, PE, Degenkolb Engineers

Natural Disasters




9

Logistics/Shipping Costs

Example:

Volatile crude oil prices ranged between $145 and below $60

Can the U.S. Bring Jobs Back from China?June 19, 2008

Labor Costs

Tax Changes

Natural Disasters



1010


Labor Costs

Tax Changes

Natural Disasters


Example:

Ships carry over 90% of the world’s merchandise; tripled since 1970

Produces 27% of the smog-causing nitrogen-oxide in the world

Releases more sulfur oxides (causes acid rain) than all the world’s cars, trucks, and buses combined

Only six countries in the world emitted more global warming greenhouse gases than ships larger than 100 tons

Ships Draw Fire For Rising Role in Air PollutionNovember 27, 2007

Environmental Impact




Labor Costs

Tax Changes

Natural Disasters



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Example:

U.S. Dollar vs. Brazil Real fluctuated by over 35% in a three-month period; NII Holdings (South American wireless operator) reported a Q308 $56.4M foreign currency transaction loss Source: NII Holdings Q308 Results

Recently, Yen appreciated 15% vs. U.S. Dollar; Honda: Q308, reported a $454M foreign currency affect loss-- Kochi Kondo, EVP, Honda: “Each one-yen rise against the dollar reduces the company’s annual operating profit by 18 billion yen” Source: Honda Q308 Results

STMicroelectronics: Q208, a 17% change in $/Euro resulted in 46% loss in operating income Source: STMicroelectronics Q208 Investor Presentation

Currency Fluctuations


Global Footprint Dynamics Are Becoming Global Footprint Dynamics Are Becoming Increasingly VolatileIncreasingly Volatile

…Dynamics Continued

Duties and Tariffs

Intellectual Property Protection

Geopolitical Stability

Regulatory Changes

Latency of Supply Chain

Government Incentives Changes


Labor Costs

Tax Changes

Natural Disasters



Currency Fluctuations

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Operational Risks are Escalating as a Result of Operational Risks are Escalating as a Result of Footprint Expansion and Volatile Global DynamicsFootprint Expansion and Volatile Global Dynamics

13

+ =Global Footprint

Expansion

Increasing Global

Dynamics Volatility

Escalating Operational

Risks

Out of a random sampling of twenty Fortune 500 manufacturing companies, 100% of them have identified multiple global footprint risks in their annual report


Global Footprints Must Be Strategically Global Footprints Must Be Strategically ManagedManaged

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Assess Current Footprint Optimized FootprintGlobal Footprint Redesign

Global Footprints must be: Dynamically managed with designated resources

Designed with a short-time horizon for break even cost/benefit analysis

Fully evaluated with exit/switching costs and high variance sensitivity analysis

Designed with flexibility by including options that hedge against risks

Benefits

Risks

Non-OptimizedFootprint

OptimizedGlobal Footprint

Efficient Frontier


Case Example: Medical Devices Case Example: Medical Devices CompanyCompany

15

100%

88%

3%

1%6%

1%

1%

SpendAddressed

G&A Indirect Mfg. R&D Logistics TargetSpend

Identified and achieving significant EBITDA improvement

Lowering G&A reducing global operational complexity

Moving to indirect and export models for sub-scale countries

Reconfiguring with low-cost country manufacturing

Realigning the global R&D capability to leverage low cost countries

Identifying risks through high variance sensitivity analysis and mitigating risks with exit strategy planning and hedging

Situation Summary Global Operations Levers Impact

COGSR&DSG&A

12%

Over $100M of EBITDA improvement being delivered


ConclusionsConclusions

16

Most companies are not adequately assessing or mitigating escalating Global

Footprint risks

Companies must closely examine their Global Footprint…

On a semi-annual basis and when major events occur

In a rigorous, repeatable, and structured process

With designated resources and executive support

The Global Footprint must be strategically planed from an end-to-end

perspective, not driven via functional silos (e.g., logistics, manufacturing, R&D)

Do you fully understand the value and risks associated with your Global Footprint?

Global Footprint | November 2008 | © 2008 PRTM Proprietary and Confidential Michael Aghajanian...

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Transcript of Global Footprint | November 2008 | © 2008 PRTM Proprietary and Confidential Michael Aghajanian...