GTDC Supply Chain Cost Study September 2008

Study Objectives & Participants 1. Identify relevant mix of indirect and direct sales channels 2. Identify supply chain cost areas relevant to each sales channel 3. Quantify and compare supply chain costs by sales channel 4. Determine channel profitability by comparing total costs of reaching end users 5. Validate current reasons IT suppliers and VARs rely on distributors Analysis & Conclusions September 2008 Costs of IT Distribution

Study Methodology ► Data collected through in-depth interviews and surveys with appropriate supply chain manager at each participating supplier ► Data based on 2007 financial results in relation to U.S. sales channel ► All company data is confidential ► Data is only presented on aggregate basis Two-Tier Distribution VAR-Direct Enterprise Direct Mail Order / Retail Web Direct CHANNELS ANALYZED

Comparing Sales Channels  Discount from List  Special Bids / Spot Offers  MDF (Soft Dollars, Co-Op Advertising, Rebates)  Programs, Promotions, Marketing  AR Reserve / Credit Card Fees  Price Protection / Inventory Depreciation  Direct Sales, Advertising  Shipping, Handling, Warehousing  Collections  Warranty / Returns  Inventory / AR Financing Costs

Some 2-Tier Distribution Costs Higher Market Development Funds 3% - 4% 2% - 3% 0% 2% - 3% 0% Price Protection 1% - 2% 0% 0% 1 - 2% 0% 2-Tier 1-Tier Mfgr. Mail Order/ Distribution VAR Direct Direct Retail Direct Web

MOST 2-Tier Distribution Costs Lower Shipping/Handling/Whsing 1% - 2% 4% - 5% 3% - 4% 2% - 3% 5% - 6% Collections 0.5% - 1.5% 1.5% - 2.5% 1% - 2% 1% - 2% 0% Warranty/Returns 1% - 2% 2% - 3% 2% - 3% 1.5% - 2.5% 3% - 4% Inventory Financing 1% - 2% 2% - 3% 1.5% - 2.5% 1.5% - 2.5% 3% - 4% A/R Financing 1% - 2% 1.5% - 2.5% 2% - 3% 1.5% - 2.5% 1% - 2% 2-Tier 1-Tier Mfgr. Mail Order/ Distribution VAR Direct Direct Retail Direct Web CHANNEL:

Two-Tier Takeaways  TWO-TIER DISTRIBUTION Lowest cost for B2B and solution sales MMANUFACTURER DIRECT Highest cost, focused on select large enterprises ► Expand market reach ► Reduce investment in inventory ► Lower shipping, handling and warehousing costs ► Optimize channel credit/collections ► Provide better overall service to solution providers

Two-Tier Takeaways ONE-TIER VAR DIRECT MAIL ORDER/ RETAIL DIRECT ► Higher costs ► Average margins and sales dollars per transaction ► Credit management issues ► Capacity challenges TWO-TIER DISTRIBUTION can reduce costs AND potentially raise margins

Two-Tier Takeaways “All things equal, pushing more volume through the Web would likely translate into higher margins yet with significantly higher costs in advertising, promotions, discounts, etc.” − IT Vendor Finance Manager

Two-Tier Takeaways “…and distribution can efficiently provide the fulfillment.”

Two-Tier Takeaways Complete B2B Solutions  One Web interface or sales team for all purchases  Consolidated inventory management  Product and compatibility testing  Configuration on behalf of VARs  Bundled solutions shipped direct to VARs’ customers

Two-Tier Takeaways Regulatory Compliance  Export and Trade Control  RoHS  Transparency and accuracy of point of sale (POS) reporting  Sales and value added tax (VAT)  Transfer Pricing support & documentation  Import duty reporting  US Office of Foreign Assets Control (OFAC) transaction procedures.  US Foreign Corrupt Practices Act

Now is the Time to Capitalize MCKINSEY&COMPANY Building Better Links in High-Tech Supply Chains Winter 2008 Distributors are… “a strategic asset” that vendors should “invest in to build strong and mutually beneficial partnerships.”

THANK YOU!