GTDC Supply Chain Cost Study

September 2008

Study Objectives & Participants

1. Identify relevant mix of indirect and direct sales channels

2. Identify supply chain cost areas relevant to each sales channel

3. Quantify and compare supply chain costs by sales channel

4. Determine channel profitability by comparing total costs of reaching end users

5. Validate current reasons IT suppliers and VARs rely on distributors

Analysis & ConclusionsSeptember 2008

Costs of IT

Distribution

Study Methodology

► Data collected through in-depth interviews and surveys with appropriate supply chain manager at each participating supplier

► Data based on 2007 financial results in relation to U.S. sales channel

► All company data is confidential

► Data is only presented on aggregate basis

Two-Tier Distribution

VAR-Direct

Enterprise Direct

Mail Order / Retail

Web Direct

CHANNELS ANALYZED

Comparing Sales ChannelsDiscount from List

Special Bids / Spot Offers

MDF (Soft Dollars, Co-Op Advertising, Rebates)

Programs, Promotions, Marketing

AR Reserve / Credit Card Fees

Price Protection / Inventory Depreciation

Direct Sales, Advertising

Shipping, Handling, Warehousing

Collections

Warranty / Returns

Inventory / AR Financing Costs

Some 2-Tier Distribution Costs Higher

Market Development Funds 3% - 4% 2% - 3% 0% 2% - 3% 0%

Price Protection 1% - 2% 0% 0% 1 - 2% 0%

2-Tier 1-Tier Mfgr. Mail Order/ Distribution VAR Direct Direct Retail Direct Web

MOST 2-Tier Distribution Costs Lower

Shipping/Handling/Whsing 1% - 2% 4% - 5% 3% - 4% 2% - 3% 5% - 6%

Collections 0.5% - 1.5% 1.5% - 2.5% 1% - 2% 1% - 2% 0%

Warranty/Returns 1% - 2% 2% - 3% 2% - 3% 1.5% - 2.5% 3% - 4%

Inventory Financing 1% - 2% 2% - 3% 1.5% - 2.5% 1.5% - 2.5% 3% - 4%

A/R Financing 1% - 2% 1.5% - 2.5% 2% - 3% 1.5% - 2.5% 1% - 2%

2-Tier 1-Tier Mfgr. Mail Order/ Distribution VAR Direct Direct Retail Direct WebCHANNEL:

Two-Tier Takeaways TWO-TIER

DISTRIBUTIONLowest cost for B2B and solution sales

MANUFACTURER DIRECTHighest cost, focused on select large enterprises

► Expand market reach► Reduce investment in inventory► Lower shipping, handling and

warehousing costs► Optimize channel credit/collections► Provide better overall service to solution

providers

Two-Tier Takeaways

ONE-TIER VAR DIRECT

MAIL ORDER/RETAIL DIRECT

► Higher costs

► Average margins and sales dollars per transaction

► Credit management issues

► Capacity challenges

TWO-TIER DISTRIBUTION

can reduce costs AND

potentially raise margins

Two-Tier Takeaways

“All things equal, pushing more volume

through the Web would likely translate

into higher margins yet with

significantly higher costs in advertising,

promotions, discounts, etc.”

− IT Vendor Finance Manager

Two-Tier Takeaways

“…and distribution can

efficiently provide the

fulfillment.”

Two-Tier Takeaways

Complete B2B Solutions

One Web interface or sales team for all purchases

Consolidated inventory management Product and compatibility testing Configuration on behalf of VARs Bundled solutions shipped direct

to VARs’ customers

Two-Tier Takeaways

Regulatory Compliance

Export and Trade Control RoHS Transparency and accuracy of point

of sale (POS) reporting Sales and value added tax (VAT) Transfer Pricing support &

documentation Import duty reporting US Office of Foreign Assets Control

(OFAC) transaction procedures. US Foreign Corrupt Practices Act

Now is the Time to Capitalize

MCKINSEY&COMPANY Building Better Links in

High-Tech Supply ChainsWinter 2008

Distributors are…Distributors are…“a strategic asset” “a strategic asset” that vendors should that vendors should “invest “invest in to build strong in to build strong and mutually and mutually beneficial beneficial partnerships.”partnerships.”

THANK YOU!