New rules for global component sourcing: the quality imperative in electronics

Transcription

1 New rules for global component sourcing: the quality imperative in electronics LONDON 15 Regent Street London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) NEW YORK 111 West 57th Street New York NY United States Tel: (1.212) Fax: (1.212) /2 HONG KONG 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) Fax: (852) An Economist Intelligence Unit white paper sponsored by Agilent Technologies

2 Preface New rules for global component sourcing: the quality imperative in electronics is an Economist Intelligence Unit white paper, sponsored by Agilent Technologies. The Economist Intelligence Unit bears sole responsibility for this report. The Economist Intelligence Unit s editorial team executed the survey, conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. John du Pre Gauntt is the author of the report. Our research drew on two main initiatives: We conducted a global online survey in September 2004 of 70 senior executives on the topic of global component sourcing. To supplement the survey results, we also conducted in-depth interviews with senior executives at a number of companies in the electronics industry. Our thanks are due to all survey respondents and interviewees for their time and insights. October 2004 The Economist Intelligence Unit

3 Executive summary The rules are changing for global sourcing in the electronics industry, according to a new survey conducted by the Economist Intelligence Unit in co-operation with Agilent Technologies. Traditional relationships between Original Equipment Manufacturers (OEMs) such as Sony or Philips and their sourcing partners are in a state of flux as world-class production and best practice increasingly originate from Asia. Previously, global sourcing consisted of OEMs turning over low-margin high-volume production to Electronic Manufacturing Service (EMS) providers and/or Original Design Manufacturers (ODMs). But that arrangement has been transformed as OEMs depend more on outsourced manufacturing for highend electronics. At the same time, the increasing complexity of electronic products and the demand for greater customisation have pushed the quality imperative to the top of executive agendas in both OEM and EMS/ODM organisations. OEMs and their manufacturing partners are working hard to standardise best practices in order to reap the economic benefits of global sourcing without jeopardising quality. The survey and in-depth interviews suggest that global sourcing is evolving from a tactical to a strategic business process. The next stage will force companies to share demand forecasts, production schedules, distribution plans and/or intellectual property, sensitive information that tends to be tightly controlled within organisations. Two forces are shaping the next generation of global sourcing: Dealing with complexity: Historically, quality depended upon how faithfully an overseas manufacturer copied an OEM s test and inspection procedures. But the growing contribution of software inside electronics and the need to handle mass customisation have raised the bar for test and inspection. Globalised best practice: Regardless of geographic location for outsourced manufacturing, a small set of global OEMs and their sourcing partners are creating industrystandard best practices for quality control in order to manage the risk and reap the benefit of a global production network. Even so, companies have yet to agree on the scope and degree of information sharing needed to make these best practices work. 2 The Economist Intelligence Unit 2004

4 Introduction The rules are changing for global sourcing, according to a survey of 70 senior executives in the electronics industry conducted by the Economist Intelligence Unit in co-operation with Agilent Technologies. Evenly split between organisations with more than US$500m in annual revenue and smaller companies with less than US$500m, the survey highlights the fact that global sourcing is becoming a strategic business process, as world-class electronics production concentrates in Asia. Industry analysts define global sourcing as the business process of identifying, evaluating, negotiating and configuring supply chains across multiple suppliers and geographies in order to cut cost, improve performance and mitigate risk. This white paper focuses on global sourcing for components and sub-assemblies within the electronics industry because electronics manufacturers have progressed furthest in developing technical and commercial best practice to ensure quality in global production networks. Global sourcing strategies come in various forms. When asked how they would describe their company s global sourcing initiatives, the survey respondents were almost evenly split between those that engaged in international sourcing on an as-needed basis, those that employed a specific geographic or functional angle, and those that have fully integrated global sourcing into all business units. Within the survey pool, the different levels of integration of global sourcing across larger and smaller companies were striking. Among larger firms, nearly one-third reported that they employed global sourcing in all business units, compared with only 14% for smaller companies. Integrating global sourcing into all business units is as much about managing demand swings as optimising a company's cost structure. Large Integrated Device Manufacturers (IDMs) often work 1. How would you describe your company's global sourcing initiatives? Please choose the answer that best applies. Engaged in international sourcing on as-needed basis 34 Specific geographic or functional sourcing is integrated into corporate strategy 21 Global sourcing is fully integrated into all business units and processes 20 Engaged in domestic sourcing only 11 International sourcing is determined by departmental sourcing needs 11 Don t know 1 The Economist Intelligence Unit

5 with contract chip manufacturers to optimise capacity. Using contract manufacturers helps these IDMs because they will not have to build another multibillion-dollar fabrication plant just to get a 20% bump in capacity if the market heats up, says Jack Trautman, president of the Automated Test Group for Agilent Technologies. Equally important, that incremental capacity becomes a lot easier to turn off in a downturn than laying off employees or decommissioning a factory. Nearly all organisations involved in the survey source a significant portion of their total supply from offshore providers. Half of all companies report that they currently procure more than 15% of their total supply from offshore. Within three years, a total of 53% of respondents say that they expect to source more than 20% of their total supply from overseas providers. When the supply base of the survey pool is broken down into specific product categories, the amount of offshore sourcing expands even further. Printed circuit boards, electronic components such as liquid crystal displays (LCDs) and sub-assemblies constituted well over 50% of the current total supply sourced by larger companies from overseas. Such flexibility and breadth for sourcing highquality low-cost electronics components support A global sourcing taxonomy The following list shows the main players involved in global sourcing for electronics, where they add value, and their typical relationship with each other. Original Equipment Manufacturer (OEM): the company behind the brand name of a product. In the electronics industry, wellknown OEMs include IBM, HP, Sony, Motorola, Samsung, Nortel, Panasonic, Nokia, Philips, and so forth. OEMs traditionally designed, manufactured, marketed and provided customer support for their products. However, in many cases of global sourcing, the OEM only owns the design and all manufacturing is outsourced to contract manufacturers. Electronic Manufacturing Service (EMS): the company that performs manufacturing on behalf of an OEM. Typically, the EMS provider does not own any intellectual property, branding or distribution rights to the end-product. EMS companies instead invest in their manufacturing capabilities to offer contract production services to OEMs. Example EMS companies would be Flextronics, Solectron and Celestica. Original Design Manufacturer (ODM): a company developing and manufacturing electronics that are ultimately sold as branded products by OEMs such as Dell. ODMs differ from EMS providers in that they own intellectual property in addition to offering manufacturing services. ODM designs account for more than one-half of all notebook computers and almost threequarters of desktop motherboard designs sold world-wide. Largely based in Taiwan with some in South Korea, ODM companies include BenQ, Compal, Arima, Quanta, Seowon and Telson. Packaging, sub-assembly and testing companies: semiconductors start out as round wafers that must be sliced out, mounted into a package with metal leads, and then loaded onto printed circuit boards for testing and shipment to manufacturers. Nearly 100% of this work is outsourced to companies such as ASE Test in Taiwan and UTAC in Singapore. Integrated Device Manufacturer (IDMs): a semiconductor company that not only designs its own chips, but manufactures them as well. IDMs are companies like Intel, AMD, Texas Instruments, Freescale (formerly Motorola's chip division), ST Micro, Infineon, Toshiba, NEC, among others. In contrast to IDMs, there are socalled fabless semiconductor companies that concentrate exclusively on semiconductor design and contract out all their production. 4 The Economist Intelligence Unit 2004

6 3. Approximately what percent of your company's supply base is sourced from offshore suppliers? More than 20% 40 Less than 5% % Approximately what percent of your company's supply base do you expect to be sourced from offshore suppliers in three years' time? Less than 5% % 9 More than 20% % % % % 13 companies that own no manufacturing capability but outsource 100% of their production to contract manufacturers. So-called fabless semiconductor producers such as Qualcomm, Broadcom or Xylinx concentrate on design expertise and being very agile at contracting for the production, testing and packaging of their products with foundry companies such as Taiwan Semiconductor Manufacturing Corporation (TSMC), which own the actual manufacturing facilities. Even though OEMs are looking to economise on procurement through global sourcing, they must 6. What types of goods does your company primarily source from offshore providers? Please choose up to three types of goods. IT products (eg, printed circuit boards) 64 Electronic components 50 Sub-assemblies 36 Standard and custom parts 19 Office equipment 16 Raw materials 16 Paper and packaging 10 Plastics 3 Chemicals 0 Other 11 The Economist Intelligence Unit

7 carefully manage risks to ensure that hiccups in one part of a sourcing network do not have an adverse impact on everything else. In early 2004, Nintendo and Sony ran into a shortage of LCD screens right at the point they had planned to launch new handheld gaming devices because surging demand for mobile phones had eaten into the available supply. Both companies expect to pay higher prices for LCD units well into Consequently, global sourcing has become literally too important to leave exclusively to the procurement department. Global sourcing is a multi-department decision, according to Merle Hinrichs, president of Global Sources, a leading sourcing information services provider in the Asia-Pacific region. Along with a financial issue, you have a compliance issue, an engineering issue, a manufacturing, assembly and packaging issue which typically engage all of these departments before a sourcing relationship can be established. In companies with less than US$500m in revenue, nearly one-half responded that the global sourcing agenda is driven by the executive suite, whereas larger organisations tended to have more direct involvement by operations departments. Nearly one-quarter of larger companies reported that global sourcing agendas were heavily influenced by operational considerations, implying more formal global sourcing business units. Whether driven by executive-level, procurement or operations departments, the survey suggests that global sourcing strategies are no longer focused exclusively on finding the best deal. The sheer complexity of modern electronics manufacture implies that global sourcing is becoming a competitive differentiator between firms. 2. Which department primarily drives the global sourcing agenda in your company? Please choose one. Executive 40 Procurement 21 Operations 19 Finance 6 Manufacturing 4 Marketing 4 Other 6 6 The Economist Intelligence Unit 2004

8 Dealing with complexity In the past, an OEM s make-or-buy decision boiled down to seizing a tactical opportunity to reduce costs or meet a specialised production need. Global sourcing involved an OEM working with local suppliers in low-cost countries to take an existing design and cut costs, while intellectual property (IP) and branding remained with the OEM. Yet the sheer complexity of electronic product design and manufacture coupled with intense competition means that the time is long past when OEMs could think of electronic components as mere building blocks. So much of the intelligence and functionality of an electronic device is contained in one or two pieces of silicon to where chip design and overall system design are virtually indistinguishable, says Fred Weber, chief technology officer for Advanced Micro Devices (AMD). The semiconductor industry includes, on the one hand, those companies that concentrate on manufacturing excellence and production innovation and, on the other, those that concentrate on design and development of new functionality. It's getting to the point where a lot of the state-of-the-art manufacturing processes have migrated out of the traditional IDMs into these new players, notes Mr Trautman. At the same time, competitive advantage among IDMs is evolving towards design and time-tomarket, which compels them to tap deeper into this global infrastructure for semiconductor manufacturing, packaging and test. 5. What are the most important business benefits underpinning your company's global sourcing initiatives? Please choose up to three benefits. Reduce labour costs 56 Reduce direct materials costs 40 Access to unique materials, services or R&D assets 37 Reduce the carrying cost of inventory 36 Optimise regulatory or taxation strategies 23 Comply with local content rules for markets such as NAFTA or EU 19 Position materials closer to the point of manufacture 16 Position materials closer to customers 14 The Economist Intelligence Unit

9 7. What are the most important aftermarket services provided by your company's global sourcing partners? Please choose up to three services. Fulfillment services 54 End-customer support 40 Inventory management 34 Warehousing 24 Transportation 23 Returns management 13 Spare parts management 13 Recycling 4 Other 9 Time-to-market is crucial as product lifecycles for electronic products are fleeting. The overall cost of electronic components, while important, is not the only factor in determining the eventual value of a globally sourced component or manufacturing service. Survey participants indicated that other aspects such as reducing inventories, tapping a more global talent pool or access to indigenous markets are emerging alongside basic cost as global sourcing drivers. In addition to physical manufacturing, professional services such as managing inventories, supporting end-customers and fulfilment are becoming part of global sourcing agreements. According to an industry insider, the cost of many electronic components is sufficiently transparent to reveal a market price for the bill of materials. Hence the majority of sourcing negotiations hinge on value-added and aftermarket The bullwhip effect If only people consumed at the same speed that goods are produced, life would be much simpler for OEMs and their partners. But consumers and businesses tend to clump big purchases, display seasonal tendencies and change demand for products for no apparent reason. These demand signals become more dissonant the further one moves away from the end-customer and towards the manufacturer, causing a phenomenon commonly called the bullwhip effect, according to Weiyee In, managing director of research for TerraNova Institutional. You have a situation where the further up you move in the value chain, the greater the variability of inventory and demand information and the greater the amount of dollars involved, he says. If retailers feel that there will be extra demand for a particular product, they will often place an order for an extra unit. When the order is received by the distributors, it is not uncommon for them to order an extra unit in anticipation of further orders by other retailers. Because there is an inherent bias against fully trusting the demand signals of partners in a supply chain, partners tend to create buffers or stockpiled inventories. According to Mr In, three forces are amplifying the bullwhip effect: front-end transparency, front-end efficiency, and end-customer empowerment. Heightened competition and the use of electronic commerce allow the buyer to see the progress of a transaction from order to delivery, building expectations even as it places extra demands upon the supply chain. The second force involves greater efficiencies for allowing an end-customer to configure or customise their order to be transmitted back to the manufacturing facilities. Finally, competition and the growing penetration of electronic commerce have empowered customers as never before. Price discovery, terms and conditions, and a host of other factors can be automatically checked across various suppliers. What has happened is that the efficiency and the transparency of the frontend from the customer to the retailer to the distributor have improved because of electronic commerce, but the back-end is still catching up, he says. 8 The Economist Intelligence Unit 2004

10 11. Approximately what percent of the total production cost of your company's best-selling product category can be attributed to software? services such as warehousing and logistics, which were revealed by the survey to be nearly as important as manufacturing prowess for driving discussions. The service element becomes key as electronic products themselves become more intelligent. Whether referring to digital music players that combine sound reproduction with digital rights protection, or cellular phones that double as or instant messaging platforms, the value proposition of electronics increasingly lies in software and its smooth functioning. Survey participants noted that software accounts for nearly one-third of the total input cost of their best-selling product categories. On top of the software component, the amount of customisation that goes into electronic products has ballooned. In the case of personal computers, the industry has migrated to build-to-order (BTO) and configure-to-order (CTO) production models that enable vendors to start production only after an enduser has picked among alternatives such as LCD panel sizes, processing speeds memory and styling. For example, Taiwan notebook ODMs often ship a strippeddown PC chassis to an OEM client or its designated assembly centre (often located in China) rather than the finished product. Not surprisingly, the survey revealed few companies % % % % % 30 (less than 10%) that only offered a standard product with little or no customisation. Participants showed a marked preference for allowing end-users to specify broad levels of functionality and style in the product or offering several versions of a product that customers can choose between, with little or no modification. The investment bank Goldman Sachs notes that before global sourcing became a key differentiating factor, OEMs used vertical integration to make changes and turn around prototypes with close mapping to production because marketing, R&D, and manufacturing goals were aligned at the corporate level, where trade-offs between divisions could be negotiated internally. However, as 100% vertical integration becomes less desirable, establishing and optimising best practices to ensure quality at lower cost over extended supply chains has become a primary differentiator in the industry. 12. Which statement most accurately describes the level of customisation that goes into your company's best-selling product category? We allow the end-user to specify broad levels of functionality and style in the product 29 We offer basic customisation at the level of style and limited functionality 26 We offer several versions of the product that customers can choose between with little or no modification 23 We build the product according to customer specifications almost from the ground up 14 We offer a standard product with little or no customisation 9 The Economist Intelligence Unit

11 Best practice in global sourcing Along with the benefits of global sourcing come the risks to the OEM of a partner s noncompliance or underperformance. Consequently, many OEMs are developing more holistic best practices for certifying suppliers, judging the value they provide and raising the overall performance of their global sourcing networks. Questions of certification and quality control grow in importance as more OEM production is transferred offshore. For many OEMs, it is no longer sufficient for their global sourcing partners to test for quality at the end of a production run. Instead, they are looking for test and inspection procedures at every step of manufacturing. Testing and inspection also play a vital role in reducing the time it takes to produce and deliver products to the market. Many OEMs retain a certain level of test and inspection capability in-house to validate their designs, while setting the stage for large-scale manufacturing. OEMs employ testing capability during the design phase not only to make sure that it works according to its specification, but also to help jump-start volume production, says Mr Trautman. Often, OEMs look for global sourcing partners that have a similar ability to test and measure. This enables the OEM to transfer test design and data directly to a live production system. Software, however, remains a nettlesome area for standardised quality assurance. According to Gordon Aspin, chief operating officer for TTPCom, a supplier of 8. What are the primary procedures used by your company to certify suppliers in its global sourcing network? Select all that apply. Require a supplier to be certified by a global quality assurance standard, such as ISO 9000 or Six Sigma 60 Require a supplier to undergo an on-site inspection and submit sample parts for inspection, test and approval 50 Require suppliers to follow our company-specific quality methodology 49 Require suppliers to employ specific test and inspection equipment to ensure zero-defect shipments 31 Require suppliers to demonstrate their ability to handle product recall and reverse logistics 24 Rely on third-party certification service providers to evaluate and periodically review supplier performance 20 Require suppliers to pre-test and pre-certify all shipments they make to us 20 Other 7 10 The Economist Intelligence Unit 2004

12 intellectual property for telecommunications, formal certification is just one part of the quality assurance (QA) process that is used to maintain a software product s compatibility with multiple product lines. We have a formal test and measurement system that involves a separate delivery team from the R&D team that developed the software in the first place, he says. These people not only put the software through our internal QA process but work with bigger customers and manufacturers to ensure that it works in their final product. The survey participants said that they employed a combination of elements to enable them to certify their suppliers: global quality standards such as ISO 9000 or Six Sigma, on-site inspections and company-specific methodologies. In the case of larger companies, there is an overriding need to adopt global standards. More than 70% said that it is a primary procedure used to certify a potential supplier. One aspect that global sourcing has brought about has been increased standardisation because many world-class buyers don t even consider a company that does not subscribe to 9. What are the most important criteria by which your company judges supplier performance in its global sourcing network? Choose no more than two criteria. Other 1 Inventory management 10 Logistics and delivery 34 Execution against the sourcing contract 40 these standards, notes Mr Hinrichs. Chinese contract manufacturers are rapidly adopting global standards of quality assurance as a prerequisite to bid for OEM business. Minimum certification requirements and the segmenting of suppliers are two methods respondents use to set up a global sourcing network. Once the network is set up, the survey revealed that the top four factors for judging subsequent performance of a sourcing relationship included price/cost, quality Price/cost 54 Quality control What are the best practices used by your company to raise performance across its global sourcing network? Choose up to three practices. Sharing production schedules with suppliers 47 Sharing business risks with suppliers 46 Giving corrective assistance to suppliers with quality or delivery problems 41 Training suppliers in total quality management 31 Providing annual performance reports, periodic updates, and performance awards 27 Showcasing outstanding suppliers in our general marketing communication 13 Other 3 The Economist Intelligence Unit

13 control, execution against the sourcing contract, along with logistics and delivery. The difference between smaller and larger companies was most pronounced after price/cost considerations were excluded. Larger companies with revenue of over US$500m reported that quality control and contract execution held virtually the same importance to them as the overall cost. Yet smaller companies considered quality control and contract execution (43% and 30% respectively) as slightly less crucial. The survey showed that best practices are evolving beyond the ability to score a supplier on a set of price, quality and contract metrics. As global sourcing becomes more strategic, OEMs efforts to raise performance of their supplier networks are expanding to include shared business processes. The survey revealed that OEM customers are sharing production schedules and certain business risks with their preferred suppliers. Larger companies are even investing to provide training in total quality management for their sourcing partners. Yet global sourcing requires a substantial amount of risk management by both the OEM and its sourcing provider to make things work. Creating the fabled win-win relationship between the OEM and the contract manufacturer or ODM is fraught with difficulty. Depending on the geographic location of the sourcing provider, risk management concerns for the OEM vary between losing control over intellectual property to the inherent problems of mitigating risks involved with long-distance business relationships that require multiple handoffs. There is something in human nature that says that if you have lunch with someone everyday, you tend to know them better than if you speak with them on the phone once a week and see them once a year, says Mr Weber at AMD. Beyond the cultural or intellectual property issues lies the very real problem of co-ordinating demand forecasts. More than any other risk management area, it is here where the tension between an OEM sharing too much information and sharing too little 14. For your company, what are the biggest risk management issues in developing a global sourcing initiative? Please choose up to three issues. Ensuring that the sourcing network is responsive toward variations in demand 53 Ensuring that total acquisition costs (materials, logistics, customs) do not erode the net benefits promised by the initial purchase cost 44 Mitigating risks involved with long-distance business relationships and multiple hand-offs 40 Not losing valuable know-how to the vendor 39 Understanding the long-term impact of global sourcing on the company?s supply chain and how it responds to its markets 33 Cross-cultural communication in both negotiation and execution 26 Other 3 12 The Economist Intelligence Unit 2004

14 information comes into view. While some OEMs/IDMs may be willing to share their highly confidential point forecasts with their manufacturing partners, the problem is that these monthly forecasts are highly likely to change. If a contract manufacturer were to put capacity in place based solely on these forecasts, they would probably get it wrong, says Mr Trautman at Agilent. Instead, what contract manufacturers need are range forecasts that tell them the likelihood of demand falling within a certain range within a certain period of time. Survey participants agreed with Mr Trautman that demand forecasting was the most difficult risk management issue for them to control. Over half of all companies, large and small, rated responsiveness to demand shifts as the number one risk they faced. Many shudder when they recall Cisco Systems being forced to write off US$2bn in inventory during 2001 because it could not scale down its supply chain fast enough when market demand softened. Another major concern for large companies was ensuring that total acquisition costs (materials, assembly and logistics) did not erode the benefits promised by the initial purchase cost. OEMs that have outsourced manufacturing face an additional challenge in determining whether or not the primary inputs such as LCD screens or DRAM chips are being procured at the lowest possible cost. Large OEMs such as HP or Motorola often compensate for these tensions by price-masking. The OEM goes to the market to procure components at the lowest possible price and then turns them over to the EMS or ODM provider to use in the production process. The result is that global sourcing has moved out of the corporate back-office. Large OEMs and their partners are being questioned about their sourcing policies by investors, regulators and the public as never before. The Economist Intelligence Unit

15 Hard work ahead Global sourcing takes work and investment to succeed. The survey suggested that OEMs will differentiate by how well they can coordinate their supplier chains with their distribution and sales channels. This requires better organisational practices for ensuring that quality, lowcost and lasting business relationships can co-exist in global sourcing networks. The spread of global sourcing practices raises the question of the future structure of the electronic industry now that design, development, manufacture and distribution are decentralised. Will OEMs be reduced to becoming merely brands and channels to customers? Will a growing number of Asian manufacturers emulate the success of global brands such as Sony or Samsung? Which industry segment will hold the ultimate power to decide how quality standards are determined and implemented? These issues and more will be decided by electronics executives in the future. How they respond to the challenge will determine whether global sourcing fulfils its promise or becomes a treadmill for both OEMs and their partners. 15. How do you see the role of Original Equipment Manufacturers (OEMs) evolving as global sourcing grows? Please choose the answer that best applies. OEMs will differentiate by how well they can co-ordinate their supply chains with their distribution and sales channels 31 OEMs will retain significant manufacturing capacity even as they outsource their standard products 29 OEMs will be reduced to brands, customer relationships and sales channels 23 OEMs will struggle with their sourcing partners to maintain control over the sales channel and the customer relationship 16 Other 0 14 The Economist Intelligence Unit 2004

16 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics Appendix: Survey results Responses received: 70 Please note that not all answers add up to 100, because of rounding or because respondents could give multiple answers to some questions. 1. How would you describe your company's global sourcing initiatives? Please choose the answer that best applies. Engaged in international sourcing on as-needed basis 34 Specific geographic or functional sourcing is integrated into corporate strategy 21 Global sourcing is fully integrated into all business units and processes 20 Engaged in domestic sourcing only 11 International sourcing is determined by departmental sourcing needs 11 Don t know 1 2. Which department primarily drives the global sourcing agenda in your company? Please choose one. Executive 40 Procurement 21 Operations 19 Finance 6 Manufacturing 4 Marketing 4 Other 6 The Economist Intelligence Unit

17 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics 3. Approximately what percent of your company's supply base is sourced from offshore suppliers? Less than 5% 19 More than 20% % % % Approximately what percent of your company's supply base do you expect to be sourced from offshore suppliers in three years' time? Less than 5% % 9 More than 20% % % What are the most important business benefits underpinning your company's global sourcing initiatives? Please choose up to three benefits. Reduce labour costs 56 Reduce direct materials costs 40 Access to unique materials, services or R&D assets 37 Reduce the carrying cost of inventory 36 Optimise regulatory or taxation strategies 23 Comply with local content rules for markets such as NAFTA or EU 19 Position materials closer to the point of manufacture 16 Position materials closer to customers The Economist Intelligence Unit 2004

18 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics 6. What types of goods does your company primarily source from offshore providers? Please choose up to three types of goods. IT products (eg, printed circuit boards) 64 Electronic components 50 Sub-assemblies 36 Standard and custom parts 19 Office equipment 16 Raw materials 16 Paper and packaging 10 Plastics 3 Chemicals 0 Other What are the most important aftermarket services provided by your company's global sourcing partners? Please choose up to three services. Fulfillment services 54 End-customer support 40 Inventory management 34 Warehousing 24 Transportation 23 Returns management 13 Spare parts management 13 Recycling 4 Other 9 The Economist Intelligence Unit

19 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics 8. What are the primary procedures used by your company to certify suppliers in its global sourcing network? Select all that apply. Require a supplier to be certified by a global quality assurance standard, such as ISO 9000 or Six Sigma 60 Require a supplier to undergo an on-site inspection and submit sample parts for inspection, test and approval 50 Require suppliers to follow our company-specific quality methodology 49 Require suppliers to employ specific test and inspection equipment to ensure zero-defect shipments 31 Require suppliers to demonstrate their ability to handle product recall and reverse logistics 24 Rely on third-party certification service providers to evaluate and periodically review supplier performance 20 Require suppliers to pre-test and pre-certify all shipments they make to us 20 Other 7 9. What are the most important criteria by which your company judges supplier performance in its global sourcing network? Choose no more than two criteria. Other 1 Inventory management 10 Logistics and delivery 34 Price/cost 54 Execution against the sourcing contract 40 Quality control The Economist Intelligence Unit 2004

20 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics 10. What are the best practices used by your company to raise performance across its global sourcing network? Choose up to three practices. Sharing production schedules with suppliers 47 Sharing business risks with suppliers 46 Giving corrective assistance to suppliers with quality or delivery problems 41 Training suppliers in total quality management 31 Providing annual performance reports, periodic updates, and performance awards 27 Showcasing outstanding suppliers in our general marketing communication 13 Other Approximately what percent of the total production cost of your company's best-selling product category can be attributed to software? % % % % % Which statement most accurately describes the level of customisation that goes into your company's best-selling product category? We allow the end-user to specify broad levels of functionality and style in the product 29 We offer basic customisation at the level of style and limited functionality 26 We offer several versions of the product that customers can choose between with little or no modification 23 We build the product according to customer specifications almost from the ground up 14 We offer a standard product with little or no customisation 9 The Economist Intelligence Unit

21 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics 13. If your company works with Electronics Manufacturing Services (EMS) or Original Design Manufacturers (ODMs), approximately how much of your company?s total manufacturing output do they account for? % % % % % For your company, what are the biggest risk management issues in developing a global sourcing initiative? Please choose up to three issues. Ensuring that the sourcing network is responsive toward variations in demand 53 Ensuring that total acquisition costs (materials, logistics, customs) do not erode the net benefits promised by the initial purchase cost 44 Mitigating risks involved with long-distance business relationships and multiple hand-offs 40 Not losing valuable know-how to the vendor 39 Understanding the long-term impact of global sourcing on the company?s supply chain and how it responds to its markets 33 Cross-cultural communication in both negotiation and execution 26 Other How do you see the role of Original Equipment Manufacturers (OEMs) evolving as global sourcing grows? Please choose the answer that best applies. OEMs will differentiate by how well they can co-ordinate their supply chains with their distribution and sales channels 31 OEMs will retain significant manufacturing capacity even as they outsource their standard products 29 OEMs will be reduced to brands, customer relationships and sales channels 23 OEMs will struggle with their sourcing partners to maintain control over the sales channel and the customer relationship 16 Other 0 20 The Economist Intelligence Unit 2004

22 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics 16. What is your primary industry? Telecoms equipment 36 Computers and computer parts 20 High-tech equipment 19 Consumer electronics 7 Consumer durables 1 Biotechnology 0 Other What are your organisation's global annual revenues in US dollars? $500m or more 47 $500m or less 53 The Economist Intelligence Unit

23 Appendix: Survey results New rules for global component sourcing: the quality imperative in electronics 18. Which of the following best describes your title? Head of Department 23 Manager 16 SVP/VP/Director 14 Head of Business Unit 11 CEO/President/Managing director 7 CIO/Technology director 7 CFO/Treasurer/Comptroller 6 Board member 4 Other C-level executive 3 Other 9 22 The Economist Intelligence Unit 2004

24 The Economist Intelligence Unit

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26 New rules for global component sourcing: the quality imperative in electronics LONDON 15 Regent Street London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) NEW YORK 111 West 57th Street New York NY United States Tel: (1.212) Fax: (1.212) /2 HONG KONG 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) Fax: (852) An Economist Intelligence Unit white paper sponsored by Agilent Technologies