1. Presentation title 1 LGO/SDM Web Seminar Series Development of a Total Landed Cost and Risk Model for Strategic Sourcing Brian Feller July 18, 2008

2. Presentation title 2 Presentation Purpose 1.Provide a brief overview of PerkinElmer, Inc. 2.Review the project objectives 3.Describe the cost model functionality 4.Describe the risk model functionality 5.Present a case study where the model was used 6.Discuss overall model benefits and opportunities

3. Presentation title 3 About PerkinElmer Project focus is on the Analytical Sciences business Primary products manufactured are diagnostic instruments used in a variety of industries including biopharma, consumer products, academia, and environmental services Manufacturing operations in Shelton, CT, Llantrisant, Wales, and Singapore Manufacturing is high mix and low volume Majority of existing supply base is regionally located to the manufacturing sites A global technology leader driving growth and innovation in Health Sciences and Photonics markets to improve the quality of life. Optical Sensors Specialty Lighting Health Sciences Detection and Analysis 63% Diagnostics 20% Photonics 17% Environmental Biopharma Medical Imaging Genetic Screening Service Health Sciences Detection and Analysis 63% Diagnostics 20% Photonics 17%

4. Presentation title 4 Project Objectives Facilitate global sourcing decisions by including major costs associated with a supplier selection Create a common supplier evaluation tool for all global manufacturing sites Standardize the supplier selection process Promote supply chain risk to be considered in sourcing decisions Leverage spend with suppliers that are capable of developing long-term partnerships with PerkinElmer Engage suppliers in low cost countries after balancing landed cost, supply chain risk, and material complexity Raise awareness of impact on sourcing decisions related to all other cost factors beyond material cost (e.g. trade compliance, finance, inventory, etc.) Provide a learning opportunity for the entire project team

5. Presentation title 5 Cost Model Overview Summary of costs included in the model: LOGISTICS Freight (air, ground, and ocean) Fuel surcharges Accessorial charges TRADE COMPLIANCE Duty Tariffs Custom clearance fees INVENTORY Safety stock cost Inventory carrying cost Pipeline inventory cost Warehousing fees PURCHASING Material cost Packaging cost One-time charges Supplier qualification charges FINANCE Tooling and fixture cost Payment term differences Discount valuation Key factors in determining freight: Order quantity/demand Package weight Shipping carton dimensions Order frequency Transportation mode Supplier origin Key Cost Model Assumptions: Included costs “95%” of costs are included Designed as a sourcing decision making tool, NOT a freight cost calculator

6. Presentation title 6 Confidential Confidential Model Features Allows for three suppliers to be reviewed at one time Allows for up to three different transportation modes per supplier Allows for up to three different packaging configurations per supplier to compare freight savings opportunities Requests the user to input the order frequency, which can have as many as three different values, to compare freight cost vs. inventory holding cost Develops cost based on inputs that can be unique for each supplier (e.g. service level, freight terms, payment terms, etc.) Determines the value of discounts vs. contracted payment terms Includes a template to compare quote packages for the optimal award mix Allows for “what-if” scenarios to be analyzed to compare trade-offs for freight, inventory, material cost, payment terms, etc. History and Archives Includes full reporting capability for all scenarios Maintains quote history for future comparison and sourcing decisions Allows the reuse of existing data to expedite supplier profile data entry Allows for future analysis of past sourcing decisions Total Landed Cost Model

7. Presentation title 7 Cost Model Overview – Freight Cost Methodology Scenario 2 Scenario 3 Scenario 1 Scenario 2Scenario 3Scenario 1 SUPPLIER 1 SUPPLIER 2 SUPPLIER 3 Freight Mode Lead Time Packaging Order Frequency Carrier Service Type Using the supplier and shipment characteristics listed below, the estimated landed cost is calculated for each supplier and scenario utilized. The model was created using a cost matrix design shown below. Manufacturing Origin/Country 207 Options 3 Options >2 Options Unlimited

8. Presentation title 8 Cost Analysis Functionality and Opportunities Use the model for simple OR complex supplier comparisons Consider cost differences between freight modes Compare varying part costs for one supplier Encourage suppliers to provide detailed quotes so specific cost components can be analyzed Compare freight services (e.g. priority, economy, etc.) for cost savings opportunities Partner with suppliers to understand shipping carton capacity Understand how forward stocking locations may reduce freight cost Use the model for an incumbent supplier to do what-if analysis: Order less often Use ocean freight Utilize multi-mode shipping Demand Profile Predictable Demand  Ocean Freight Opportunity  Ground Freight Opportunity Variable Demand  Air Freight Opportunity months units

9. Presentation title 9 Cost Analysis Opportunities Consider total cost savings opportunities, not just material cost variance Understand cost inflection point for low cost country or domestic sourcing Include all relevant costs that may impact the sourcing decision (e.g. tooling, payment terms, warehouse fees, qualification expenses, etc.) Engage other areas of expertise for sourcing decisions (e.g. Logistics, Trade Compliance, Inventory, Quality, etc.) and supply chain strategy Freight Cost Material Cost Landed Cost Supplier 1 Supplier 2 Supplier 1 Supplier 2 Quantity Cost

10. Presentation title 10 Cost Model GUI

11. Presentation title 11 Risk Model Overview Primary Risk Model Attributes Creates a risk portfolio following FMEA results Normalizes risk scaling (0..100) Minimizes subjectivity Standardizes analysis methodology Generates a risk adjusted cost Risk Portfolio

12. Presentation title 12 Risk Analysis – Risk Portfolio Statistics from FMEA

13. Presentation title 13 Supplier A Lead Time Weight = 5.6% 1 DAY5 DAYS10 DAYS15 DAYS20+ DAYS 0 PTS 25 PTS50 PTS75 PTS100 PTS 37 62 Experience Weight = 4.1% >20 YEARS15 YEARS10 YEARS5 YEARS<=1 YEAR 0 PTS 25 PTS50 PTS75 PTS100 PTS 8020 Supplier A Risk Index = E(A) = (37 * 0.056) + (80 * 0.041) + (18 * 0.059) = 6.41 Supplier B Risk Index = E(B) = (62 * 0.056) + (20 * 0.041) + (65 * 0.059) = 8.13 Capacity Util. Weight = 5.9% 0 PTS 25 PTS75 PTS 100 PTS 25 PTS50 PTS75 PTS 18 65 64% 88% 7 DAYS 13 DAYS 17 YRS 4 YRS Cost Risk 45%60%80%75%30%90%100% Risk Index - A utility-weight risk index calculation process Supplier B

14. Presentation title 14 Risk Adjusted Cost Methodology Risk Index Supplier A Risk Index = E(A) = 36.3 Supplier B Risk Index = E(B) = 50.1 0 100 36.3 50.1 ∆ = 13.8 $915,500 $800,000 ∆ = $115,000 r f = 15.00 ∆ = 21.3 ∆ = 35.1 … For example, after all 19 risk factors have be evaluated… Does lower risk justify higher cost? Total Landed Cost

15. Presentation title 15 Risk CategoryComputed Risk Index Logistics/Trade Compliance11.3 Inventory/Quality9.1 Purchasing/Organization12.7 Finance/R&D3.2 Total Risk Index36.3 Cost CategoryLanded Cost (USD) Freight$200,000 Inventory Carrying Cost$18,000 Packaging$5,000 Warehousing$10,000 Material$650,000 Tooling$30,000 Finance$2,500 Total Landed Cost$915,500 Risk-Adjusted Cost Calculations $200,000 * 1.113 = $222,600 Adjustment factor = 11.3% Adjustment factor = 9.1% Adjustment factor = 12.7% Adjustment factor = 3.2% $33,000 * 1.091 = $36,000 $680,000 * 1.127 = $766,360 $2,500 * 1.032 = $2,600 Total Risk-Adjusted Cost = $1,027,560 Cost associated with supplier risk = $1,027,560 - $915,500 = $112,060 Risk Adjusted Cost Calculation

16. Presentation title 16 Risk Adjusted Cost and an Efficient Frontier * Graphic from riskglossary.com An investment portfolio can be created for any point in green Any point on the curve represents the optimal return for a specified risk (or vice-versa) Portfolios do NOT exist for the risk-return points outside the space or the curve Portfolios on the frontier are generally diverse Relative to Supplier Risk… Cost Risk Index Over time, gather data on the following: Supplier risk index results Part type Cost (cost/unit) Use the data to plot an efficient frontier for supplier/part type relationships to help assess potential new suppliers Consider selecting suppliers that are on or close to the curve to minimize the cost/risk tradeoff

17. Presentation title 17 Risk Analysis Functionality and Opportunities Consider the risk adjusted cost along with the estimated landed cost Analyze and compare the total risk indices of each supplier Many low level risk factors vs. few high level risk factors Balanced risk portfolio Acceptable risk levels based on part(s) being sourced Understand risk by operational category (logistics, purchasing, etc.) Develop mitigation plans for the highest risk factors Partner with suppliers to help them improve in those areas that PKI considers high risk Utilize the risk analysis process with initial supplier qualifications and periodic reviews Incorporate risk indices when determining a sourcing strategy (see next slide)

18. Presentation title 18 Risk Analysis Opportunities 1 2 Sourcing decision 1 Sourcing decision 2 Cost Risk 1 Single Sourcing Cost Risk 3 Multi Sourcing Cost Risk 1-A 2-A 1-B 2-B 1 2 3 Example Cost 2 Dual Sourcing Risk

19. Presentation title 19 Risk Model GUI

20. Presentation title 20 Case Study – Risk Analysis Dashboard 1 2 3 4

21. Presentation title 21 Case Study – Landed Cost Model Output

22. Presentation title 22 Overall Model Benefits and Functionality Provides a holistic view of sourcing costs and risks Calculates a risk-adjusted cost using the supplier risk indices Standardizes the cost and risk analysis process within the business around one tool Presents support for sourcing decisions in low cost countries, domestically, or otherwise Contributes to other business factors used in the decision making process Consolidation of spend Cost reductions for volume increases Utilizes current and real-time data sources to ensure model accuracy Archives quote and risk information for future use and reference Landed cost estimates Risk indices Sourcing alternatives by supplier and selection documentation Includes operational differences for global sites Supports expansion and portability for other PerkinElmer businesses to adopt

23. Presentation title 23 Questions and Discussion Contact information: bfeller@sloan.mit.edu