RISK ASSESSMENT Phase 1: Financial Data January 29, 2008 Pamela Hanson Global Procurement anuary 2008

Strategy Summary Purpose: Our strategy is to use risk assessment to develop a core list of preferred global suppliers that can address a project from the industrial design conception to the completed full production. Advantages: This allows Global Procurement to be ready to communicate the names of qualified suppliers based on accurate data and confirmed conclusions at conception of a project. Global Procurement anuary 2008

Issues: Risk assessment as a process is extremely broad. Need to simplify and isolate the areas of assessment required. Begin risk assessment by defining the financial data and add to existing decision matrixes. Use a mathematical model drawn from the financial data to trend year to year financial changes of suppliers. Elimination of marginal and non-performing suppliers taking into account all information for Bayer stakeholders. Identify a list of suppliers with a global footprint.

Financial Analysis Sources and Definitions Credit Analysis - Focus on the downside risk since they gain none of the upside from capital improvements. Attention is paid to: Leverage Ratios Liquidity Ratios Solvency Ratios Equity Analysis – Focus on the upside potential to determine the future profits that will accrue to the shareholder. Attention is paid to: Operational Ratios Profitability Ratios

Ratio Categories Available Leverage Ratios – Measures the firm’s use of debt and its ability to avoid financial distress in the long run. Solvency Ratios – Gives a picture of a company's ability to generate cash flow and pay its financial obligations. Operational Ratios – Shows how efficient a company is in its operations and use of assets. Profitability Ratios – Shows the return on sales and capital employed.

Financial Data used for Risk Assessment Global procurement chose to enforce a limitation on data points from specific ratios. Liquidity ratios - The ability to pay short-term (up to 12 months) debt. Profitability ratios - The use of assets and control of expenses to generate an acceptable rate of return. Turnover ratios - How fast a firm is completing processes and turning financial areas over. Bayer share - Looking for a measurement between 15% and 22%. Important enough that supplier will not sell capacity to another customer.

Liquidity ratio: Quick Ratio Quick ratio - Measure ability of a company to use its near cash or quick assets to immediately extinguish its current liabilities. Looks at current assets, inventories, prepayments, current liabilities, and bank overdrafts. Should be used when inventory valuations are questionable or difficult to sell. Inventory liquidity is an issue when inventory is perishable, seasonal, or customized. The higher the ratios are, the more likely the company will pay back its short-term debt. The ratio should be 1. Should only be compared to competitor or similar business. If < 1, reason for concern. Ignores timing of cash received and pay out.

Profitability Ratios Profit Margin = Net Income/Sales Measures the overall efficiency of the firm. Gross Margin = Operating Profits/Sales Measures the operational efficiency of the firm. Return on Assets = Net Income/Total Assets Measures the relative efficient use of assets. Return on Equity = Net Income/Total Owner’s Equity Measures the relative efficient use of invested capital.

Profitability ratio: Operating margin Operating margin - Refers to the amount of cash a company generates from the revenues. Provides information on a firm’s liquidity and solvency and it’s ability to change cash flow in future circumstances. Provides additional information for evaluating changes in assets, liability, and equity. Indicate the amount, timing, and probability of future cash flows. High operating margins are associated with owning IP, paying for R&D costs. HTL owns design (36 – 41%), Benchmark does not (7 – 8%).

Profitability ratio: Return on sales Return on sales = Income/Revenue Measures the return on sales and capital employed. Measures the firm’s use of its assets and control of its expenses to generate an acceptable

Turnover ratios: Inventory turnover Inventory turnover = Cost of goods sold/Average inventory Measures how fast the company is moving product. When comparing firms, it is useful to know if FIFO, LIFO, or weighted average inventory is used.

Turnover ratios: Days receivables Days receivables = Accounts receivables/Revenue/365 Measures how fast a firm is collecting debt. Indicates how long, on average, it takes for the firm to collect on its sales to customers.

Turnover ratio: Days payable Days payable = Accounts payable/Revenue/365 Measures how fast a firm is paying debt. Indicates how long, on average, it takes for the firm to pay its suppliers. Compare Days receivable to days payable – If days payable is lower than days receivable than firm is not managing its cash well. It is paying bills faster than it is collecting cash.

Sources of financial data Dunn and Bradstreet Report - Credit worthiness of the firm. Will provide limited data about private firm. Also has a red, green, yellow report on supplier health. Hoover’s - Financial credit worthiness of firm. Company Financial Reports – Source of all financial data for public firms. Will also report insider stock sales, large block >5% stock sales, etc. Not available for private firms. Executive Board Procurement Strategy Council - Companies share best practices with council members. CAPS - working in partnership with its global network of executives and academics, is dedicated to the discovery and dissemination of strategic supply management knowledge and best practices. Industry Standard – Source of analysis and opinions by individuals who study particular industries. There is a charge for these reports. Robert Morris Report – Publishes ratios for each industry and by revenue classes.

Preparing, presenting, and using resulting information Summer intern – Annual support. Gather information using known sources as defined. Data entry into spreadsheet in common drive. Elementary analysis of statistical data as comparison. Global Procurement Detailed analysis including trending. Defined chosen suppliers to include in list of preferred global suppliers. Refine and update analysis criteria. Notify Bayer stakeholders in statistically significant changes in financial state of current suppliers.

Financial data table Supplier HTL Year 2003 2004 2005 2006 2007 Quick ratio 0.52 0.72 0.73 0.69 0.51 Operating margin 41% 38% 37% 36% Return on sales 33% 7% 9% 10% 12% Inventory turnover 7.21 7.68 7.73 8.02 8.33 Days receivable 50 63 65 60 55 Days payable 34 52 43 40 36 Bayer % 43% 40% 31% 25%

WIIFM Financial data and analysis available at conception of project. Information updated once a year. Financial data and analysis available at time of significant financial change. Financial data and analysis available at significant political change. Ability to inform Bayer stakeholders of potential risk. Use data to make informed decisions.

Comments and questions Global Procurement as a leader for future supplier competitive information.