THE SMARTER SUPPLY CHAIN OF THE FUTURE IBM

THE SMARTER SUPPLY CHAIN OF THE FUTURE IBM Global Chief Supply Chain Officer Study (C) 2008 asbl Atomium / Artists Rights Society (ARS), New York / SABAM, Brussels Photo Number: WC 6 D 8959 © Copyright IBM Corporation 2009

IBM Global Business Services Economic Volatility. . . The best summary of today’s global marketplace. The global recession will result in -1% real GDP 2009 growth with -2% US growth and the “Rest of World” slightly positive Source: Economic Assessments from Global Insight, IBM Finance and IPR, December 2008 Supply chains continue to become more global and complex. . . 2 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services We wanted to gain insight into the challenges facing supply chain executives around the world… to learn what strategies and initiatives they are undertaking. Key Questions • What is our supply chain strategy? Are we working towards a common goal or are we driven by what we’ve done in the past? • Are there opportunities for greater coordination, integration and collaboration between our supply chain functions and with our global network of partners? • How can we can gain visibility and access to economies of expertise to improve responsiveness and agility? • Is our supply chain at risk? How are we mitigating our risk or managing it adequately? • Are we exploiting data and technology to its fullest extent? 3 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services Summary and overview The Smarter Supply Chain The Top Five Supply Chain Challenges Building the Supply Chain of the Future Visibility is vital Instrumented Intelligent Risk must be managed systemically Customerinputshouldpermeatethe thesupplychain Customer Interconnected Flexibility will counteract cost volatility Global supply chains require integration & optimization Five trends define the CSCO agenda According to our extensive study of 400 Supply Chain Executives, we’ve found imperatives among visibility, customer demands, cost containment, risk, and globalization. 4 Instrumented, Interconnected, & Intelligent A new role for the CSCO and a map to the future The smarter supply chain has three new characteristics. Firms across the globe are beginning to see the benefits of building a new vision of supply chain excellence. Building the supply chain of the future will require the emergence of a new kind of CSCO and a comprehensive set of new capabilities. © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services Supply chain executives identify five major challenges that comprise their agenda 70% 55% COST CONTAINMENT Fighting integral costs as such might be futile, but being flexible can create cost savings elsewhere. 60% SUPPLY CHAIN VISIBILITY RISK MANAGEMENT Process, data and technology are identified as the roadblocks to good risk management, yet they are the key enablers. Supply chain visibility is inhibited by a lack of capabilities and an unwillingness to collaborate. 56% INCREASING CUSTOMER DEMANDS Customers are continuing to demand more: right product, right place, right time, right price, sooner. 43% GLOBALIZATION Lead times, delivery and quality are top challenges – however, globalization has been a benefit for the leaders. Based on responses of “to a very great extent” and “to a significant extent” 5 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services Visibility: Supply chain visibility leads the CSCO’s agenda How significant are the following barriers to visibility & collaboration? (respondents answered very to moderately significant) Organizational silos inhibit collaboration 75% Individuals are too busy to assist others across the organizational supply chain 75% Performance measures not aligned to reward individuals for collaboration 68% Technological tools do not effectively support visibility & collaboration 63% Collaboration not viewed as important 52% Concerns about intellectual property limit effective collaboration 31% Very Significant Greatly Significant Moderately Significant To what extent have you adopted the following practices? As #1 Challenge – Why are we NOT integrating & collaborating more to increase visibility? 75% 70% 15% 18% Real-time information transparency inside and outside the enterprise Event management & alert notification Widely adopted 6 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary Somewhat adopted

IBM Global Business Services Future Outlook: The Smart Supply Chain will require more connectivity, collaboration, and integrated processes to improve visibility among network partners as demonstrated by leaders Key Capabilities Extent of implemented Integration Practices Leaders vs. Others 7% Sum: extensive & some extent Largest gap 86% 79% 11% 72% 19% 1% 72% Intelligent 63% 62% 61% 53% Interconnected Instrumented Extensive 30% 16% Planning with Suppliers 24% 19% 11% 16% 24% 9% Customer Continuous Replenishment Inventory Planning & Deployment with customers Leaders: Extensive Some Implementation Others: Extensive Some Implementation Shared, realtime electronic data * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 7 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary • Decision-support based advanced analytics and optimization to automate and self-actuate supply chain transactions. • Multi-partner collaborative platform • Sense-and-respond demand & supply signal notification • Smart devices & sensors (RFID) to capture real-time visibility: • • • Shelf-level replenishment forecasts/orders schedules/commitments pipeline inventory shipment lifecycle status

IBM Global Business Services Risk Management: Managing risks, both operational and financial, is a top concern of supply chain executives world-wide What are the obstacles for implementing risk management programs? 46% Process 42% Data Enabling technology 34% 26% Culture 23% Organization Access/Process controls Financial What is your organization’s approach to performance and risk management? 15% 6% Do not have any formal risk or performance tools 11% Formal performance monitoring doesn’t incorporate risk Formal performance monitoring incorporates risk indicators 31% 20% 38% Formally monitor both performance & risk but separately (e. g. - tools, process) 8 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary 69% manage risk in some fashion

IBM Global Business Services Future Outlook: Leaders have more integrated risk management strategies and compliance programs Key Capabilities What types of and risk management practices have/are you implementing? 96% 92% 82% 79% 80% 72% 76% 57% Intelligent Interconnected Integrating process controls in logistics and operations Compliance programs with suppliers and service providers Leaders Incorporating risk Using supply chain strategies and event management mitigation policies in techniques with supply chain tolerances to monitor planning disruptions Others Currently implemented/Implementing Plan to implement in next 3 years * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 9 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary Instrumented • Risk adjusted inventory optimization • Probability-based risk assessment & predictive analysis: Likelihood, severity, ease of detection for key risk factors with mitigation policies & procedures • Compliance strategies & policies with suppliers, service providers, contract manufacturers • Monitors & sensors for product traceability from ingredients to final customer consumption

IBM Global Business Services Customer intimacy: Rising customer demands ranks as the third highest supply chain challenge Extent of external demand collaboration with customers Very great extent Almost Half (47%) FAIL to Collaborate with Customers! No extent Significant extent 5% 19% 15% 28% Little extent What are the most significant challenges in bringing new products and services to market? 67% 33% Moderate extent Correct identification of customer needs 10 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services Future Outlook: The Smart Supply Chain will require further integration of customer demands from inception to delivery – the entire global network focused on the end consumer. Key Capabilities To what extent do the following statements describe your planning process? 19% 96% 24% 10% 81% 77% 73% Gaps 10% 63% 57% Intelligent 63% 53% Interconnected 30% 18% 19% 11% 12% 4% Sales & Integrated Demand Operations Planning Supply Planning Applications 7% External Supply Collaboration with Suppliers 5% External Demand Collaboration with Customers Leaders: Very great extent Significant extent Some extent Others: Very great extent Significant extent Some extent * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 11 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary Instrumented • Simulation models of customer behavior, buying patterns, and market penetration applied to planning and operations volumes • Cost to serve models and analysis • Networked S&OP with optimized forecast, buy/sell decision support • Customer collaboration throughout all SC processes • Embedded software & analytics for automated product defect and service alerts

IBM Global Business Services Cost containment: Constant cost containment pressures and fluctuating costs require a comprehensive view of the tradeoffs. How do you position your supply chain to meet the challenges affecting your organization? Cost containment efficiencies In support of enterprise growth initiatives 69% 54% 48% For competitive advantage Extremely Effective What efficiency practices and initiatives are you implementing? 42% Formal distribution strategy 38% Collaboration & integration among 3 rd party logistics providers 32% Differentiated logistics services for distinct customer segments 30% Network optimization and simulation tools 24% Supply chain visibility for managing exceptions Extensive implementation 12 CSCOs create flexibility to control the cost equation where they can © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary 83% 79% 70% 58% 67% Some implementation

IBM Global Business Services Future Outlook: Responding to new cost pressures will always be a challenge. What will tomorrow bring? Most have adopted these practices widely/comprehensively Key Capabilities 89% 81% 77% Intelligent Interconnected 13 37% 22% 20% Agile Supply Chain (Rapid Response to changes in market conditions) Maximizing variable supply chain costs to be aligned with revenues Leaders: Extensively adopted Somewhat adopted Others: Extensively adopted Somewhat adopted Instrumented * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary • Simulation models and analyzers to evaluate flexibility factors: service levels, costs, time, quality w/ inventory synchronization. • Variable cost structures that fluctuate with market demand 37% 22% • Outsourcing non. Agile Supply Chain differentiating functions to (Rapid Response to changes in market share risks across the global conditions) network Extensively adopted Leaders: • Sensor based solutions to Extensively adopted Others: reduce inventory costs with increased visibility

IBM Global Business Services Globalization: Low cost country sourcing and operations have caused lead time, cost, quality and service level issues Average percentage of direct materials sourced Central or South America 19% 13% Africa 43% Eastern Europe 6% Asia or Asia Pacific 2% 61% -15% United States, Mexico, or Canada 20% 38% 33% -30% Western Europe (EU 15) What is the anticipated three year change in sourcing to the following regions? Bar indicates respondents average response to increase or decrease The three year outlook indicates a continued increase in sourcing from low cost regions despite on-going and anticipated challenges What are the major challenges that you have in regard to global sourcing & global operations? 80% Delivery issues and reliability of commitments Lead times are greater than expectations 76% Quality issues 75% Capacity issues for new / unproven sources or operations supply 76% 73% Difficulty evaluating / managing new sources Regulatory / legal issues in sourcing or manufacturing country contract Have experienced issues 14 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary 65% Future concern

IBM Global Business Services Future Outlook: The positive advantages of globalization of markets & operations, outweigh the negatives Key Capabilities Percentage who have experienced these outcomes as a result of globalization over the past three years 22 % BETTER 59% Improved overall performance 63% Increased sales 10 % BETTER 43% 3% BETTER 22 % BETTER 37% Intelligent 41% 37% Improved margins • Leveraged global “centers of excellence” to optimize capability and delivery • Demand, supply & distribution network planning & execution • 38% Interconnected 33% • Increased lead times 33% • Increased costs 36% 30% Decreased customer service levels 14% 4% 12% Decreased quality NEGATIVE POSITIVE Top supply chains Others * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 © Copyright IBM Corporation 2009 15 IBM Global Chief Supply Chain Officer Study – Executive Summary Instrumented • Simulation models Optimization of inventory throughout all phases of pipeline activity Scenario strategies for planning Integrated production planning & execution • Sensor solutions connecting the expanding global trading partner infrastructure for increased supply chain visibility

IBM Global Business Services We also inquired about sustainability and green supply chain programs 37% of SCM Executives view green strategies and operations as a significant challenge impacting their supply chain To what extent have you implemented the following green or sustainability practices? Product design & packaging includes environmental considerations 63% Supply chain strategies include plans & initiatives for carbon management, water management, energy usage & waste mgt 57% Manufacturing targets (where applicable) include carbon management goals 51% There is an ongoing program for low carbon design for distribution 39% Supplier selection criteria and contracting reflect suppliers' carbon capabilities. Outsourcing policies seek to minimize carbon impacts such as increased emissions. Contract with warehouse and distribution service providers favors those with low direct and indirect CO 2 emissions. Transportation companies are evaluated for carbon emissions, energy consumption, and strategy or approach to carbon mgt. 36% 29% 27% 25% Respondents who answered “some”, “significant”, or “very great” extent 16 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary Supply chain executives are embracing green programs Sustainability practices differ by region • Supplier selection based upon compliance more prevalent in Asia Pacific • Sustainability practices in Europe focus on carbon reduction in manufacturing & transportation • North America has lower sustainability practices around low carbon distribution network design and supplier selection based on carbon capabilities

IBM Global Business Services And how does talent management fit into all of this? What are your top 3 capability-building challenges facing your organization? 78% Building leadership talent Culture that supports learning & development activities 40% Rotating leadership talent across business units / geos Cross-training individuals needed in other parts of the organization 37% 33% Developing basic skills across the employee base 30% Rapidly getting new employees up to speed 29% Passing on knowledge from older to younger employers 24% Forecasting skills required in the near future 23% Building leadership talent was clearly the largest issue in managing world-wide talent 17 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services The opportunities for improvement abound. Effectiveness % How important are the following programs & how effective is your organization at performing them? Very & Greatly Effective Aligning supply chain and business strategies 91% Continuous process improvement / business improvement 89% Driving cost reduction Driving integration and visibility of information across the supply chain (internal) 42 46 32 85% Measuring / monitoring business performance 81% 45 Developing your people 81% 34 Driving integration and visibility of information across the supply chain (external) Positioning the supply chain as a revenue growth driver Respondents who replied either “critical importance” or “very important” © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary 16 70% Leading SCM-related compliance programs and strengthening internal controls 18 44 31 64% 23 56% Low Med High

IBM Global Business Services What have we learned from talking with 400 multi-industry supply chain executives world-wide? How will we tame the volatility and orchestrate the complexity? 19 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services The Smarter Supply Chain We Must be Smarter Instrumented Intelligent Interconnected Instrumented, Interconnected, & Intelligent The smarter supply chain has three new characteristics. Firms across the globe are beginning to see the benefits of building a new vision of supply chain excellence. 20 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services The Supply Chain of the Future must be SMARTER. . . It will be Instrumented, Interconnected & Intelligent Automated Transactions & Smart Devices Instrumented • Use of sensors, actuators, RFID, & smart devices to automate transactions: inventory location, shelf-level replenishment detection, transportation locations & bottlenecks • Supports real-time data collection & transparency from POS to manufacturing to raw material • Sense-and-respond demand/supply signals allow “predict and act” Optimized Flows Interconnected • Multi-Tier system integration across the network. Standardized data and processes. • Collaborative decision making through decision support and business intelligence – starting with the customer • C-Suite risk management programs for integrated financial controls with operational performance – monitored and measured Networked Planning, Execution & Decision Analysis Intelligent • Simulation models to evaluate trade-offs of cost, time, quality, service and carbon and other criteria • Probability-based risk assessment & predictive analysis • Networked planning/execution with optimized forecasts & decision support 21 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services Our Point of View on the Progression of Supply Chain Management to a Smarter Future Smart Supply Chain Future External Collaboration & Integration Horizontal Process Integration Functional Excellence Static Supply Chain Networked Planning, Execution & Decision Analysis Intelligent Optimized Flows Interconnected CSCO Integrated Transactions (ERP to ERP) Instrumented Automated Transactions (Sensors & Actuators) 22 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary Flexibility & stability Effectively driving profitable growth Balancing risk and performance Managing complexity

IBM Global Business Services Building the Supply Chain of the Future BUT ARE WE READY? A new role for the CSCO and a map to the future Building the supply chain of the future will require the emergence of a new kind of CSCO and a comprehensive set of new capabilities. 23 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services Today, the Supply Chain Executive continues to perform traditional operational and managerial functions What functions does the CSCO oversee? Who does the CSCO report to? Distribution/ Logistics 77% Planning (demand/supply) 72% 63% Sourcing & Procurement Performance Measurement & Analytics 38% 28% Manufacturing Returns Management, Post Sales Support 27% Risk Management 26% Technology Enablement 26% Customer Management Merger/Acquisition Operations Integration 24 23% 45% Strategy development New Product Design, Development, Launch 46% 23% 15% 13% © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary 18% 12% Traditional functions CEO COO Other CFO

IBM Global Business Services The CSCO must take on a new lead role in orchestration of all supply chain resources and must connect with other leaders and groups Address the top challenges: Cost Containment A new role that is strategic and tactical as a conductor coordinating resources and stakeholders: New foundational competencies that will drive success: 25 Visibility The CSCO of the Future Risk Management Customer Intimacy Globalization Optimized Talent • A critical & crucial role to continually balance, optimize and orchestrate global resources • Is the ultimate “Optimizer” of the organization • Requires negotiation skills, stakeholder management skills + supply chain strategy & execution + market knowledge • Includes the functions of the previous CPO & COO, along with bridging the optimization “gap” of sales & marketing and finance aligned with supply, operations, and logistics Key Attributes Instrumented © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary Sustainable Interconnected Intelligent

IBM Global Business Services The “Smartmap” to the Supply Chain of the Future SCM Competency Areas Strategy Planning Lifecycle Mgt Sourcing Operations Asset Mgt Logistics Enterprise Apps Integrated real-time transactions (ERP) with business intelligence Multi-partner collaboration platform Predictive sense-and-respond event detection & resolution Supply chain risk analysis & mitigation models Probability-based risk mgt Risk-adjusted inv. optimization Customer-segmented product lifecycle management Real-time consumption & replenishment programs Variable cost structures that fluctuate with market demand Optimized inventory Asset Mgt / execution Dynamic supply & demand balancing Outsourcing non-differentiating functions Environmental strategies w/ sustainability models for usage impact analysis Global centers of excellence to optimize capability and delivery Each company must plot their unique journey to smarter supply chain capabilities 26 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary

IBM Global Business Services The Smarter Supply Chain of the Future 27 © Copyright IBM Corporation 2009 IBM Global Chief Supply Chain Officer Study – Executive Summary