THE SMARTER SUPPLY CHAIN OF THE FUTURE

1. 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: WC6D8959

2. 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... IBM Global Chief Supply Chain Officer Study – Executive Summary

3. 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? IBM Global Chief Supply Chain Officer Study – Executive Summary

4. Building the Supply Chain of the Future The Smarter Supply Chain The Top Five Supply Chain Challenges Visibility is vital Visibility is vital Instrumented Intelligent Risk must be managed systemically Risk must be managed systemically Customer input should permeate the supply chain Customer input should permeate the supply chain Flexibility will counteract cost volatility Flexibility will counteract cost volatility Interconnected Global supply chains require integration & optimization Global supply chains require integration & optimization A new role for the CSCO and a map to the future Five trends define the CSCO agenda Instrumented, Interconnected, & Intelligent According to our extensive study of 400 Supply Chain Executives, we’ve found imperatives among visibility, customer demands, cost containment, risk, and globalization. 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. Summary and overview IBM Global Chief Supply Chain Officer Study – Executive Summary

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

6. 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? 75% 70% As #1 Challenge – Why are we NOT integrating & collaborating more to increase visibility? 18% 15% Real-time information transparency inside and outside the enterprise Event management & alert notification Widely adopted Somewhat adopted IBM Global Chief Supply Chain Officer Study – Executive Summary

7. Intelligent Interconnected Instrumented 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 • 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 7% Largest gap Sum: extensive & some extent 86% 19% 11% 79% 72% 1% 72% 63% 62% 61% 53% Extensive 16% 11% 30% 16% 24% 19% 24% 9% Shared, real-time electronic data Customer Inventory Planning & Deployment Planning with Suppliers Continuous Replenishment with customers Leaders: Extensive Some Implementation Others: Extensive Some Implementation * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 IBM Global Chief Supply Chain Officer Study – Executive Summary

8. 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 What is your organization’s approach to performance and risk management? Access/Process controls 15% 6% Financial Do not have any formal risk or performance tools Formal performance monitoring incorporates risk indicators 69% manage risk in some fashion 11% Formal performance monitoring doesn’t incorporate risk 31% 20% 38% 69% Formally monitor both performance & risk but separately (e.g. - tools, process) IBM Global Chief Supply Chain Officer Study – Executive Summary

9. What types of and risk management practices have/are you implementing? 96% 92% 80% 82% 79% 72% 76% 57% Intelligent Interconnected Integrating process controls in logistics and operations Incorporating risk strategies and mitigation policies in supply chain planning Using supply chain event management techniques with tolerances to monitor disruptions Compliance programs with suppliers and service providers Instrumented Leaders Others Currently implemented/Implementing Currently implemented/Implementing Plan to implement in next 3 years Plan to implement in next 3 years Future Outlook: Leaders have more integrated risk management strategies and compliance programs Key Capabilities • 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 * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 IBM Global Chief Supply Chain Officer Study – Executive Summary

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

11. Intelligent Interconnected Instrumented 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% • 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 96% 24% 10% 81% 77% 73% 10% Gaps 63% 63% 57% 53% 19% 11% 30% 18% 12% 4% 7% 5% Sales & Operations Planning Integrated Demand and Supply Planning Applications External Supply Collaboration with Suppliers 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 IBM Global Chief Supply Chain Officer Study – Executive Summary

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

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

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

15. 22 % BETTER % Intelligent 22 BETTER % 10 BETTER Interconnected % 3 BETTER Instrumented Top supply chains Others 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 • Leveraged global “centers of excellence” to optimize capability and delivery • Demand, supply & distribution network planning & execution • 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 59% Improved overall performance 37% 63% Increased sales 41% 37% Improved margins 38% 33% Increased lead times 43% 33% Increased costs 36% 30% Decreased customer service levels 14% 4% Decreased quality 12% NEGATIVE POSITIVE * Leaders determined based on respondents’ ranking in AMR Research Supply Chain Top 25 for 2008 IBM Global Chief Supply Chain Officer Study – Executive Summary

16. 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% Supply chain executives are embracing green programs Supplier selection criteria and contracting reflect suppliers' carbon capabilities. 36% Outsourcing policies seek to minimize carbon impacts such as increased emissions. 29% 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 Contract with warehouse and distribution service providers favors those with low direct and indirect CO2 emissions. 27% Transportation companies are evaluated for carbon emissions, energy consumption, and strategy or approach to carbon mgt. 25% Respondents who answered “some”, “significant”, or “very great” extent IBM Global Chief Supply Chain Officer Study – Executive Summary

17. 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 37% Cross-training individuals needed in other parts of the organization 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 IBM Global Chief Supply Chain Officer Study – Executive Summary

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

19. 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? IBM Global Chief Supply Chain Officer Study – Executive Summary

20. 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. IBM Global Chief Supply Chain Officer Study – Executive Summary

21. The Supply Chain of the Future must be SMARTER...It will be Instrumented, Interconnected & Intelligent Automated Transactions & Smart Devices • 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” Instrumented Optimized Flows • 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 Interconnected Networked Planning, Execution & Decision Analysis • 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 Intelligent IBM Global Chief Supply Chain Officer Study – Executive Summary

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

23. BUT ARE WE READY? Building the Supply Chain of the Future 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. IBM Global Chief Supply Chain Officer Study – Executive Summary

24. 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? 77% Distribution/ Logistics 46% Planning (demand/supply) 72% 63% Sourcing & Procurement 23% Performance Measurement & Analytics 45% 18% Strategy development 12% 38% Traditional functions 28% Manufacturing Returns Management, Post Sales Support CEO COO Other CFO 27% 26% Risk Management 26% Technology Enablement Customer Management 23% New Product Design, Development, Launch 15% Merger/Acquisition Operations Integration 13% IBM Global Chief Supply Chain Officer Study – Executive Summary

25. Address the top challenges: Instrumented Cost Containment Visibility Risk Management Customer Intimacy Globalization Optimized Talent Interconnected Intelligent The CSCO must take on a new lead role in orchestration of all supply chain resources and must connect with other leaders and groups Sustainable • 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 The CSCO of the Future A new role that is strategic and tactical as a conductor coordinating resources and stakeholders: Key Attributes New foundational competencies that will drive success: IBM Global Chief Supply Chain Officer Study – Executive Summary

26. The “Smartmap” to the Supply Chain of the Future SCM Competency Areas Asset Mgt Enterprise Apps LifecycleMgt Strategy Planning Operations Logistics Sourcing 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 Asset Mgt / execution Optimized inventory 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 IBM Global Chief Supply Chain Officer Study – Executive Summary

27. The Smarter Supply Chain of the Future IBM Global Chief Supply Chain Officer Study – Executive Summary