A Competitive Supply Chain Strategy for Mexico

Contents

• Who is SalesLink?• How Industry Trends Drive A Competitive Strategy for

Mexico• Comparative Business Models:

– China Build to Stock– Mexico Configure to Order

• Supply Chain Concepts for Reducing Total Cost and Improving Cash Flow

• High Tech Industry Comparisons• Conclusion

Who Are We?

• SalesLink is a $434 million company (2003 sales)with a work force of 1800 employees worldwide.

• SalesLink has been a division of CMGI for 15 years.The company has been in business for 28 years.

• Headquartered in Boston.

• Network of 14 facilities in North America, Europe, and Asia.

1976 1996 1997 1998 1999 2000 2001 2002

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Literature Distribution

History and Growth Track

2003

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A Commitment to SCM

• $237 million cash and stock acquisition of Modus Media (August 2004)

• $42 million cash acquisition of iLogistix (July, 2002) immediately accretive

• $40 million in supply chain acquisitions 1997 - 1999

• $25M capex on IT

World-Class Global Footprint

Charlestown, MA

Memphis, TN

Guadalajara, Mexico

Santa Clara, CA

Chicago, IL

Newark, CA

San Diego, CA

Fountain, CO

Indianapolis, IN

Miami, FL

Penang, Malaysia

Taipei, Taiwan

Singapore

Tilburg, The Netherlands

Dublin, Ireland

Lindon, UT

Raleigh, NC

Austin, TX

Nashville, TN

Guadalajara, MexicoMonterrey, Mexico

Salt Lake City, UT

Chicago, IL

Waltham, MA HQ

Millington, TN

Tokyo, Japan

Seoul, Korea

Penang, Malaysia

Taipei, TaiwanShenzhen, China

Singapore

Shanghai, China

Futian, China

KunShan, ChinaSongJiang, China

Budapest, Hungary

Apeldoorn, The Netherlands

Orléans, FranceKildare, Ireland

Dublin, Ireland

Limerick, IrelandAngers, France

Cumbernauld, Scotland

Miscolc, Hungary

Suzhou, China

(As of August 2004)

Why SalesLink is Different from the Rest

• Sustained growth right through the recession

• Very solid financials

• Legitimate world class IT tools on a common platform as a strategic differentiator

• Mobile flexibility allows us keep pace with our customers– Not tied to long term brick and mortar

• Problem solving approach creates business models designed to meet tomorrow’s challenges

• Best performance in our industry backed by our customer ratings

Service OfferingAn Optimized Bridge Between Manufacturing & Customer

> Sourcing & Procurement

> Manufacturing Support Services

> Closest-to-Customer Configuration

> Optimized IT Visibility

> Optimized Cash Velocity

> Optimized Final Assembly

> Full-Cycle Logistics

> Optimization Consulting

> Order Management

What Value does SalesLink provide to its Customers?

Increased revenue due to improved product availability

Reduced total cost of ownership

Increased asset utilization

Accelerated time to market

Increased cash velocity; shortened cash conversion cycle (CCC)

Industry Trends and Drivers

Supply Chain DriversSupply Chain Drivers

Time-to-Market Time-to-Market

Flexibility/AgilityFlexibility/Agility

Total Cost and Cash Management

Total Cost and Cash Management

DemandDemand

Shortened life cycles; demanding more…now

Shortened life cycles; demanding more…now

Desire for highly customized products and services

Desire for highly customized products and services

Price is largely market-drivenPrice is largely market-driven

SupplySupply

Frequent New Product Introductions

Frequent New Product Introductions

Product ProliferationProduct Proliferation

Low Cost of Global ManufacturingLow Cost of Global Manufacturing

A Competitive Strategy for Mexico

Supply Chain DriversSupply Chain Drivers

Time-to-Market Time-to-Market

Flexibility/AgilityFlexibility/Agility

Total Cost and Cash Management

Total Cost and Cash Management

Mexico AdvantagesMexico Advantages

• Geographic Position

• Skilled, lower cost of labor than U.S. market

• Competitive logistics cost

• Reliable infrastructure

• Geographic Position

• Skilled, lower cost of labor than U.S. market

• Competitive logistics cost

• Reliable infrastructure

Supply Chain Strategy:Postponement

Supply Chain Strategy:Postponement

Postponement Capabilities and Benefits

Supply Chain Drivers

Time-to-Market

Flexibility/Agility

Total Cost and Cash Management

Mexico Advantages

• Geographic Position

• Skilled, lower cost of labor than U.S. market

• Competitive logistics cost

• Reliable infrastructure

Supply Chain Strategy:Postponement

Capability/Benefit

• Configure-Closest to-Customer

• Configure-to-Order• Customization

• Lower Total Cost• Improved Cash Conversion

Supply Chain Models: Comparing China to Mexico

Manufacture ConfigureDistribute/

ReturnEnd-User

Relationship

Scenario 1

Build-to-Stock CHINA CHINA CUSTOMER CUSTOMER

Scenario 2

Configure-to-Order CHINA MEXICO MEXICO/NA CUSTOMER

Total Cost Management

• Sourcing/procurement• Transportation (Inbound/Outbound)• Manufacturing• Configuration• Rework/Reconfigure• Storage• Returns• Product support

• Inventory investment• Discount/loss of value with excess & obsolescence• Cost of capital/opportunity cost

Cash Conversion Cycle

Cash

Inventory

A/PA/R

Days Sales Outstanding (Receivables Turnover) =

(Receivables $)/(Annualized Revenue $) * 365

Days Payables Outstanding(Payables Turnover) =

(Payables $)/(Annualized Mat’l Cost $) * 365

Days of Supply Inventory (Inventory Turnover) =

(Inventory $)/(Annualized COGS $) * 365

(DSO) (DSI) (DPO)+ -

Customer

Build to Stock in ChinaBuild to Stock in China

Manufacture Platform

&

Component Configuration

Core Hardware Supplier

Component Supplier

DC

Reconfigure

Customer

Manufacture Platform

&

Component Configuration

Core Hardware Supplier

Component Supplier

DC

Collect and Ship to Asia

China China U.S. U.S.

Customer Choice Drives SKU Proliferation

Product A

Component 2 – 8 SKUs

A-1

A-2

A-3

Product B

B-1

B-2

B-3

Product C

C-1

C-2

C-3

D-1

D-2

D-3

Core – 9 SKUs

E-6

E-7

E-8

E-5

Sub-Group 2

E-2

E-3

E-4

E-1

Sub-Group 1

Component 1 – 6 SKUs

Example

D-6

D-4

D-5

Higher Inbound Freight Cost

Monthly Inbound Shipments

Total Units

Shipments 8 14 10 15 7 13 14 12 4 12 10 8Max 3,712 1,934 2,718 2,060 9,354 6,782 3,846 14,733 3,550 12,273 5,352 2,353Min 118 216 470 135 422 62 185 275 760 275 68 157Average 1,290 682 1,052 1,027 2,422 1,629 1,103 2,220 1,852 2,453 1,509 910

Inbound Logistics Air Sea

Cost, $ 70% 30%

Volume 30% 70%

Loading Efficiency 80% 50%

Packaging Design - Fresh Air

50% 50%

10,318 9,548 10,52315,402 16,953

21,17215,438

26,643

7,407

29,439

15,0937,281

Jan

1Feb

2Mar

3Apr

4May

5June

6July

7Aug

8Sep

9Oct

10Nov

11Dec

12

Price Variance% Volume by Supplier

Missed Sourcing Savings

$7.50

$5.14

$1.10

$9.00

$7.95

$2.10

$8.40

$6.99

$2.10

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

Component A Component B Component C

(20%)

(55%)

(90%)

Supply Base

Total Number Component Suppliers; Fragmented

14

% Volume of Largest Supplier 22%

Price and quality variance

Poor metrics of Supplier Relationship Mgmt

Supply-Demand Mismatch

Avg. Inv.

Avg. Demand

Excessive Finished Goods Inventory Levels

Repair/Returns Center

Component Supplier

Manufacture

Platform

Adding Value in Mexico (CTO)Adding Value in Mexico (CTO)

Core Hardware Supplier

Customer

Diagnose and Repair, Ship to Asia as needed

Component Configuration –to-

Order

Component Supplier

Manufacture

Platform

Core Hardware Supplier

Customer

China China Mexico U.S.

Managing Freight to an Advantage

0102030405060708090

100

Index Cost

Scenario 1 Scenario 2

012345

Weeks

Ocean Air

In-Transit Time

Cost Comparison

Bulk Shipment

Cost SavingsSingle Source for Multiple Suppliers

Leveraging Commodity Spend

$7.50

$5.14

$1.10

$9.00

$7.95

$2.10

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

Component 1 Component 2 Component 3

(20%)

(55%)

(90%)

Commodity Management

Component C1

Component C2

Component C3

Component B1

Delayed Ownership Improves Cash Position

Manufacture/Configure

Inbound Freight

StoreDistribute/

Return

Scenario 1

CORE HARDWARE

FOB Hong Kong

COMPONENT FOB Hong Kong

ManufactureInbound Freight

ConfigureDistribute/

Return

Scenario 2

CORE HARDWARE FOB NA

COMPONENT LOCAL

OEM control

Customer controlSupply Chain Integrator control

Reducing Inventory Without Compromising Service Levels

+0.5 Week

Avg. Inv.

Avg. Demand

+1 Week

Low Inv. Reduction High Inv. Reduction

Commonality Lowers Safety Stock

Scenario 1 BTS CORE COMPONENT

Scenario 2 CTO CORE COMPONENT

~10% - 50% Reduction

- + - +- +- +

+ + >

The Benefits of Postponement: Measurable Savings and Increased Service Levels

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

Sour

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Inbo

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reig

ht

Configu

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Stor

age

Distrib

ute

Supp

ort

Tota

l $0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

Sour

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Inbo

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ht

Configu

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age

Distrib

ute

Supp

ort

Tota

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$15.6 M $12.5 M

Scenario 1: Build-to-Stock Scenario 2: Configure-to-Order

Cash Conversion CycleCash

Inventory

A/PA/R

Days Sales Outstanding (Receivables Turnover) =

(Receivables $)/(Annualized Revenue $) * 365

Days Payables Outstanding(Payables Turnover) =

(Payables $)/(Annualized Mat’l Cost $) * 365

Days of Supply Inventory (Inventory Turnover) =

(Inventory $)/(Annualized COGS $) * 365

(DSO) (DSI) (DPO)+ -

Cash Requirements for China BTSCash Requirements for China BTS

Payables (DPO) = 30 Days

Inventory (DSI) = 55 Days

Receivables (DSO) = 30 Days

CCC=55 Days

Customer

Manufacture Platform

&

Component Configuration

Core Hardware Supplier

Component Supplier

DC

Reconfigure

Supplier Owned Company Owned Inventory

Payables (DPO) = 30 Days

Inventory (DSI) = 15 Days

Receivables (DSO) = 30 Days

CCC=15 Days

Customer

Manufacture Platform

&

Component Configuration

Core Hardware Supplier

Component Supplier

DC

Reconfigure

Cash Requirements for Mexico CTOCash Requirements for Mexico CTO

Time savings translates into a cash injection

Days Spend

-10 Days

-20 Days

-30 Days

-40 Days

-50 Days

$10M $0.27M $0.55M $0.82M $1.09M $1.37M

$20M $0.55M $1.09M $1.64M $2.19M $2.74M

$30M $0.82M $1.64M $2.47M $3.29M $4.11M

$40M $1.09M $2.19M $3.29M $4.38M $5.48M

$50M $1.37M $2.74M $4.11M $5.48M $6.85M

Company(June 2003)

Cash Conversion Cycle (Assuming

30 Days Payables)

Inventory Days of Supply

Net Profit

Margin

Hewlett-Packard 100 53 -1.6%

Dell Inc. 1 1 6.0%

IBM Corporation 118 25 6.6%

Apple 10 4 1.1%

Gateway -3 9 -7.1%

Sony 83 53 -0.1%

Sun Micro 83 33 -4.7%

Motorola 92 62 3.3%

Intel 117 111 8.7%

AMD 224 191 -9.1%

High Tech Industry Examples

Source: Benchmark Brief prepared by SCE Ltd.The SCOR Users Resource Center, 2003/2004

Conclusion/Summary

As China supply chains begin to mature we believe there is opportunity

for Mexico to recapture some of the business lost during the past few years using a postponement business model

strategy