Outsourcing Transition Risk

Date: Nov 14th 2006

Matthew Douglas, VP Operations (Andrew)

Bennett West, Cort Jacoby, Giri Varadarajan (Deloitte)

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Today, we will address the topic of Contract Manufacturing (CM) Outsourcing Transition Risks through our experiences at Andrew

D ata C en te r

A p p lica tion s

E n d U ser S ervices

N etw ork in g

E -C om m erce

O th er

IT O u tsou rc in g

F in an c ia l

H u m an R esou rces

P u rch as in g

M arke tin g

O th er

B u s in ess P rocess O u tsou rc in g C on trac t M an u fac tu rin g

F ood S ervice

Jan ito ria l

B ld g S ecu rity

O th er

N on -b u s in ess S ervices O u tsou rc in g

O u tsou rc in g

Product Lines

Business Units

CM outsourcing is a complex process presenting several transition risks. It is important to develop mitigation strategies prior to outsourcing to

minimize any negative financial or customer impact.

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Key Highlights

• Founded in 1937, Andrew employs 10,000+ people with operations in N. America, S. America, Europe, Africa & Asia Pacific

• Global leader in Wireless Communications Infrastructure

• Ranked #1/#2 in each major product group

Products Key Customers:

Andrew, a $2 B global manufacturer of telecommunications infrastructure equipment, has grown two-fold mainly through acquisitions over the last three years

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Andrew’s Base Station Subsystems Group does business in a very challenging market

Customers

Supplier

Competition

BSSG Marketplace

Customers

• Very large and consolidating

• Strong “buyer power”

Implications to BSSG Mfg

Must be:

• Low cost

• Global

• Flexible

Suppliers

• BSSG products are built using thousands of components and several hundred suppliers

• Raw material prices are increasing (Copper, Aluminum, Silver, etc.,)

Implications to BSSG mfg:

• Simplify the supply chain and focus

• Strategic Sourcing Partnerships

Competition

• Intense price competition

• Continued consolidation is likely

• Customers are also competitors

Implications to BSSG Mfg

• Regional, scalable, & flexible supply chain as a competitive differentiator

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Old Supply Chain Future Regional Outsourced Supply Chain

Americas EMEA APAC Americas EMEA APAC

Legend Inbound Supply Outbound Shipments Plants

• Self funded exit from high cost, highly labor regulated country to improve gross margin & cash flow

• Simplified supply chain

• Variable pricing model directly ties manufacturing costs to volatile sales demand

• Supply chain scalability & flexibility

• Enables Andrew to focus on product innovation, cost reduction, and customer relationships

Outsourcing Rationale

The Legacy BSSG Supply Chain was a “Spaghetti Chart” of Complexity and the need for speed was paramount – Manufacturing Outsourcing is our solution.

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Outsourced Manufacturing Introduces Several Transition Risks

Risk Dimensions

Risk Dimensions

Produ

ct F

ulfil

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Labor Disruption

Customer Relations

Busin

ess

Case

Realiz

atio

n

Product Fulfillment

Description:

• Day 1 “Flip the Switch” production transfer to EMS Partner

Sample risks:• IT handoff failures• “Confidential” knowledge transfer • Supplier order book transfer

Customer Relations

Description:

• Alleviate customer apprehensions to minimize forecast surge & drops

Sample risks:• Site disqualification• Forecast drops/surges• Credibility/reputation risk

Labor Disruption

Description:

• Internal labor strike or sabotage

Sample risks:• Production shutdown• Order fulfillment stoppages• Physical violence/ product sabotage

Business Case Realization

Description:

• Realize outsourcing benefits within anticipated timeline

Sample risks:• Due diligence issues• Expat and severance costs• Capital equipment estimates• Every bus case assumption is a

risk!

Transition risks typically manifests either as a schedule delay or bad cost estimate

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Understanding Key Risks And Implementing Mitigation Strategies Is Critical To A Successful Outsourcing Transition

Category Description Sample Risk Scenarios Sample Mitigation Strategies

Product Fulfillment

Day 1 “Flip the Switch” production transfer to EMS Partner

IT handoff failures

Supplier order book transfer

“Confidential” knowledge transfer issues

Conduct physical/IT systems simulations for critical products

Develop inventory buffers & back up suppliers

Evaluate IP implications & secure protections

Labor Disruption

Internal labor strike or sabotage

Production shutdown

Order fulfillment stoppages

Physical violence/ product sabotage

Phased transfer of sites if multiple sites are involved

Identify alternate backup sites by key product lines

Accelerate NPI launch of replacement SKU’s at CM location

Develop comprehensive security plan

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Risks And Sample Mitigation Strategies Contd…

Category DescriptionPotential Risk

ScenariosSample Mitigation

Strategies

Customer Relations

Alleviate customer apprehensions to minimize forecast surge & drops

Site disqualification

Forecast drops/surges

Credibility/reputation risk

Conduct internal CM audits to enable site qualifications

Create sufficient buffers for critical products

Develop clear & consistent customer communications

Business Case

Realization

Realize outsourcing benefits fully within the anticipated timeline

Due diligence issues

Expat and severance costs

Capital equipment estimates

Every business case assumption is a risk!

Prepare clear information packets for due diligence

Budget conservatively for expat/severance costs

Evaluate CM leaseholder improvements, bldg & equipment requirements

Develop conservative business cases to account for business assumption risks

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Manufacturing Outsourcing Lessons Learned

Outline success criteria and get team alignment; check commitment regularly

Understand country’s cultural nuances to customize mitigation strategies

Get Customs/VAT compliance expertise from local tax and logistics SME’s

Resources, Resources, Resources – right resources minimize transition risks

Strong program management infrastructure to manage a cross-functional effort of simultaneous transitions in multiple continents/countries. Communication and coordination are essential!

TimeTime

Confidentiality, Confidentiality, Confidentiality – critical to mitigate labor disruption

Evaluate Sarbane-Oxley regulations especially FAS 146 implications to understand what can be classified as one time restructuring costs

Understand Freight Vs Labor tradeoff when allocating production to factories

Contract manufacturing is a marriage – understand CM partners profitability criteria and communicate openly to avoid surprise divorce

Involve cross functional leadership to gain 360° alignment on business case

$ Benefit

$ Benefit

Impact Lessons Learned