Cost Reduction On Spare Parts

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Roeland van der Hoeven page 1

Offset the continuous margin erosion of Philips Semiconductors:

Cost Reduction On Spare Parts

Focus on spend or costs?

PUBLIC VERSION

Appendices

Roeland van der Hoeven Faculteit Bedrijfskunde Rijksuniversiteit Groningen December 2005

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Table of Contents Appendices

Table of Contents Appendices ...2

Appendix 1: 2004 Worldwide Top 25 Semiconductor Companies ...3

Appendix 2: One Page Strategy Philips Semiconductors ...4

Appendix 3: Typical BU structure ...4

Appendix 4: One Page Strategy IC Manufacturing Organization...4

Appendix 5: Detailed description of IMO BE Processes ...5

Appendix 6: The effect of purchasing savings on Philips Semiconductors’ Return On Investment shown by the DuPont chart for Q2, 2005 ...6

Appendix 7: Complete Cost model spare parts ...7

Appendix 8: The MSU Model (Purchasing Excellence, NEVI program 2004) ...8

Appendix 9: One Page Strategy Supply Management 2005 ...11

Appendix 10: BBSC Philips Semiconductors Supply Management 2005...11

Appendix 11: MSG Objectives and Strategy ...11

Appendix 12: Organization Chart Purchasing - Philips Taiwan (PSK) (Kaoshing, Taiwan)...11

Appendix 13: Organization Chart Purchasing - Philips Philippines (PSC) (Cabuyao, Philippines)...11

Appendix 14: Organization Chart Purchasing - Philips Thailand (PST) (Bangkok, Thailand) ...11

Appendix 15: COO Model Automatic Test Equipment, Teradyne, A565 ...11

Appendix 16: COO Model Prober ...11

Appendix 17: 4 steps on how to obtain a Quarterly Spares & Consumables Spend Analysis Report ...12

Appendix 18: Capped Spare Parts Contract ...14

Appendix 19: Spares & Consumables Spend Analysis 2004...18

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Appendix 1: 2004 Worldwide Top 25 Semiconductor Companies

2004 Rank 2003 Rank Company Headquarters 2003 ($M) 2004 ($M) 04/03 % change

1 1 Intel U.S. 27,030 30,900 14%

2 2 Samsung South Korea 10,400 15,830 52%

3 3 TI U.S. 8,250 10,700 30%

4 7 Infineon Europe 7,109 9,180 29%

5 4 Renesas Japan 7,970 9,000 13%

6 6 ST Europe 7,238 8,760 21%

7 5 Toshiba Japan 7,355 8,531 16%

8 8 TSMC* Taiwan 5,855 7,648 31%

9 9 NEC Japan 5,603 6,469 15%

10 11 Philips Europe 4,512 5,692 26%

11 10 Freescale U.S. 4,654 5,519 19%

12 13 Sony Japan 3,933 5,070 29%

13 12 AMD/Spansion U.S. 3,940 5,001 27%

14 15 Micron U.S. 3,575 4,652 30%

15 20 Hynix South Korea 2,516 4,648 85%

16 14 Matsushita Japan 3,675 4,265 16%

17 19 UMC* Taiwan 2,740 3,900 42%

18 18 Fujitsu Japan 2,955 3,440 16%

19 17 Sharp Japan 3,035 3,355 11%

20 22 Qualcomm** U.S. 2,466 3,224 31%

21 16 IBM U.S. 3,115 3,150 1%

22 21 Rohm Japan 2,490 2,818 13%

23 24 Analog Devices U.S. 2,100 2,570 22%

24 28 Broadcom** U.S. 1,610 2,401 49%

25 23 Sanyo Japan 2,245 2,150 -4%

*Foundry

**Fabless

***Includes total from Hynix in '03 & '04

Source: IC Insights' Strategic Reviews Database, 16 June 2005 http://www.purchasing.com/article/CA609239.html

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Appendix 2: One Page Strategy Philips Semiconductors

Due to confidentiality reasons, this section has been left out.

Source: Philips²

Appendix 3: Typical BU structure

Semiconductors CONFIDENTIAL 24

BU BUBU

Typical BU structure

BU

Application

BL CTO Global Sales &

Marketing

Execution of roadmaps Direct R&D resources Project Leaders Product marketing Timing, quality & costs

HRM Controller

Innovation roadmap Architectures Competency mgt PCP maturity Quality

Shared R&D resources

Design wins

Mng revenue & margin Marketing mix Interface to regions Value propositions Marketing Plans Enabling

Technology BL

Execution of roadmaps Direct R&D resources Project Leaders Product marketing Timing, quality & costs

SCM

Business fulfillment planning with IMO Strategy Strategy

Portfolio roadmaps Partnerships Business

development Quality

Source: Philips²

Appendix 4: One Page Strategy IC Manufacturing Organization

Source: Philips²

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Appendix 5: Detailed description of IMO BE Processes

Wafer Testing

The final product of IMO FE is a wafer with hundreds or even more than thousand IC’s. Before these IC’s will be separated and encapsulated, they will be tested individually. This is called “Wafer Testing”. The main equipment used in wafer testing are “Probers” and “Testers”. The test

information will be digitally stored and the defect IC’s will be littered by the “pick and place”

machine, used during the “Die Bonding” process.

Sawing & Grinding

The IC’s are still on one wafer. For further processing, they need to be separated. This process is called Sawing. The wafer is first grind to a thickness suitable for cutting (approximately 300µm), after which a piece of tape is adhered to its backside, fixing it to a table. An extremely thin circular blade covered with diamond grains is used to cut the wafer into separate IC’s. After the Sawing process, the Wafer will be thoroughly cleaned.

Die Bonding

The IC’s are still stuck to the tape, which was adhered to its backside. Now the IC’s must be attached to a platform called the "lead frame". This procedure is called "Die Bonding". A lead frame consists of a mount for the IC chip (the "island") and connections for the IC's terminals (the

"leads"). Silver paste resin is applied onto the island and then the IC is adhered by lightly pressing it onto the island. Pick and place equipment handles the individual IC’s and makes sure only working IC’s are processed further. After this process, the IC’s are really separated.

Wire Bonding

In this process, the mounted IC’s are connected to the lead frames. This procedure is called "wire bonding". The IC’s are connected to the lead frame leads with gold fine wires.

Molding

The IC’s and the lead frame islands are encapsulated with molding resin for protection. This keeps the IC safe from dust and moisture. The lead frames with an IC mounted are placed on a mold and then encapsulated with resin made liquid at high temperature and pressure.

Plating & TrimForm

Lead frames, which are not pre-plated need to be plated first. In this process, the lead frames receive a metal layer. After this, the lead frames are cut apart into individual packages first. Now the leads protruding from the packages are shaped (bowed) and cut into the final product form.

This process is called Trimming and Forming.

Marking

The final step of IC chip manufacturing is the printing onto the package surface. After this step, the IC chips are complete. Marking is done by engraving the top few micrometers of the package surface with a laser. Information such as manufacturer name and product code is printed.

Final Testing

Before the IC chips are packaged, the individual IC’s are tested by direct current (DC)

characteristics and function characteristics. The IC chip packages are individually set on a tester (by a handler) and their DC characteristics and function characteristics tested according to a program prepared in advance. After this testing, the IC’s are heated in an oven to erase the test software from the IC.

Packing

IC chips are packed for shipment. Inspected IC chips are stored in trays and magazines.

Cushioning materials are placed between external packages to prevent degradation of quality from impacts while in transport. The outer boxes are labeled and then shipped to the customer.

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Appendix 6: The effect of purchasing savings on Philips Semiconductors’ Return On Investment shown by the DuPont chart for Q2, 2005

Purchasing 530 Million 525 Million*

Other Costs 530 Million Total Assets

2629 Million

Turnover 1088 Million

Costs 1061 Million 1056 Million*

Profit 27 Million 33 Million*

Profit Margin 0.25 % 0.3 %*

Return On Investment 0.6 %

0.7 %*

Turnaround 2.4 x

Turnover 1088 Million

Turnover 1088 Million 17% increase

of ROI

1% Cost reduction

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Appendix 7: Complete Cost model spare parts

Scheduled Maintenance

Maintenance Costs

Reliability (MTBF)

Maintainability (MTTR)

Parts Reliability

(MTBPF)

Unscheduled Maintenance

Low Quality

Equipment Low Quality Spare Parts

Inventory Cost of

Spare Parts

Consumables

Purchasing Costs

Price Spare Parts Quantit

y Spare

Training Costs

Disposal Costs

Logistical Costs

Risk of incurrent

High Inventory

levels Administration Availability

(Uptime)

Production Requirements

Legenda:

Red Æ main cost elements of the COO per unit produced related to spare parts Light blue Æ Not elaborated further in this research

Green Æ elaborated cost drivers Blue Æ elaborated in this research

Æsurplus effect ÆNegative effect Cost Of Ownership

Per unit produced

Scrap/Waste cost Life Cycle cost Production Volume

Fixed costs Operational Cost Overall Equipment

Efficiency

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Appendix 8: The MSU Model (Purchasing Excellence, NEVI program 2004)

The Michigan State University model (MSU model) is an integral framework, which sketches the route to ‘Purchasing Excellence’. The framework includes eight key strategic purchasing processes and six business strategy enablers (see figure 8A and 8B).

Figure 8A: The MSU model, strategic processes All process steps should be integrated, aligned and global.

Insourcing / Outsourcing

In deciding whether certain activities should be handled inside or outside the company, the device criterion is the question whether the activity concerned contributes to achieving competitive advantage. If this is the case, insourcing is a logical choice. If not, outsourcing should be considered.

Develop commodity/ article group strategies

Commodity strategy development contains the process of planning and implementing short term and longer-term goals. It combines various elements such as product and process structuring, supply base structuring, sourcing, contracting, supplier development and supply chain considerations, into an executable plan.

Establish and leverage a World Class Supply base

Supply base management is dealing with establishing the correct number of suppliers and the correct type of suppliers. Structuring the supply base is essential to ensure that opportunities can be maximized and risks minimized.

Develop and manage Supplier Relationships

It is necessary to classify the supplier in a number of categories (commercial, preferred and partners) to focus attention on the most important suppliers, to set the right priorities and to manage every supplier according his importance to the business. The accent in the MSU model is on Supplier Partnership because it is the most profound relationship.

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Roeland van der Hoeven page 9 Integrate Supplier into new Product / Process Development Process

External suppliers are providing information and are directly participating in different phases of the development process of new products, processes and services.

Integrate Supplier into the Order Realization Process

It comprises the series of transformation strategies and activities directed at simplification, standardization and synchronization of operational processes.

Supplier Development and Quality Management

It addresses the buyer’s reactive and pro-active/strategic activities directed at the identification of improvement opportunities and facilitation of the enhancement of supplier’s performance and capabilities.

Strategic Cost Management

Strategic Cost Management includes the identification of all costs, cost drivers and strategies to reduce or eliminate costs throughout the supply chain.

The strategic processes of the MSU model are supported by six strategic enablers. These enabling processes should also be integrated, aligned and global.

Figure 8B: The MSU model, enabling processes

Establishing globally integrated and aligned Purchasing and Supply Chain Strategies and Plans

Purchasing strategies should be aligned with business strategies. The development of an aligned purchasing and supply chain strategy requires a good understanding of the competitive environment and the identification of key business issues that affect general business processes and market performance.

Develop Organization and Teaming Strategies

This process deals with the way in which activities are combined into organizational positions and processes to achieve specific competitive company objectives. Effective teaming is critical to establish coordination and collaboration across functions and business units.

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Roeland van der Hoeven page 10 Deploy Globalization

It is the organization of purchasing activities at world, regional and local level in order to maximize the global sourcing opportunities and to meet business objectives.

Develop Purchasing and Supply Chain Measurements

Develop metrics which focus on performance achievements and ongoing process improvements that maximize results and achieve vertical and horizontal communications of alignment of purpose.

Develop and implement enabling IT/IS systems

It’s almost impossible to work on strategic purchasing activities without having proper support in terms of information systems. It’s imperative for example that commodity team have transparency in complete and high-quality data for all their strategic activities.

Human Resource Management

It is a workforce issue which focuses on five issues: Recruiting educated entry level and experienced purchasing and supply chain personnel, training and exposure to develop individuals and to ensure job satisfaction, performance appraisal to provide individual feedback, compensation and rewards to retain personnel and knowledge transfer and retention.

Source: Dutch companies moving towards Purchasing Excellence – “Purchasing professionalization is profitable but is not easy…”

Interim report Project 2 and 3, Nevi programme ‘Purchasing Excellence’

Nevi – Zoetermeer 2004

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Roeland van der Hoeven

Appendix 9: One Page Strategy Supply Management 2005

Appendix 10: BBSC Philips Semiconductors Supply Management 2005

Appendix 11: MSG Objectives and Strategy

Appendix 12: Organization Chart Purchasing - Philips Taiwan (PSK) (Kaoshing, Taiwan)

Appendix 13: Organization Chart Purchasing - Philips Philippines (PSC) (Cabuyao, Philippines)

Appendix 14: Organization Chart Purchasing - Philips Thailand (PST) (Bangkok, Thailand)

Appendix 15: COO Model Automatic Test Equipment, Teradyne, A565

Appendix 16: COO Model Prober

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Appendix 17: 4 steps on how to obtain a Quarterly Spares & Consumables Spend Analysis Report

This document will guide you on how you should get to the quarterly spare parts report.

The focus will be on the sites Philips Taiwan (PSK), Philips Thailand (PST) and Philips Philippines (PSC). How to get the information from the other sites, should be discussed with Dion. If you have any questions, please let me know as soon as possible. I suggest that you start as soon as possible with collecting the data, because this will take some time for the sites to obtain. Please let me inform you that the first week of October will be my last.

Step 1: Data Collection

In this step the appropriate data has to be retrieved from the sites.

The sites Philips Thailand (PST) and Philips Philippines (PSC) are working with SPEED and Business Warehouse (BW), whereas Philips Taiwan (PSK) have their own system.

Therefore they will need another approach in collecting the data. Preferably all data should be retrieved by the local sites from SPEED. In my case, I had to get the data from both Business Warehouse and SPEED. I suggest you to contact Mae R Red, she can help in collecting the data in the appropriate way.

Off course you don't want to have all spend data from the sites. For spare parts &

consumables the buyers should use the CLOGS codes 8HA800. In the past they specified the CLOGS per platform in the format 5E?800 (?=A-->J), where A-->J stands for the different platforms. Some items are still CLOGGED under for example 5E?800. This means that when collecting the data from either Business Warehouse or SPEED, both the CLOGS code 8HA800 and 5EA800, 5EB800, etc. should be used.

In what format do you need the files? I suggest you to work with MS Access. This

program is not very difficult. Please ask for local support if you have questions about this program. The files can be provided to you in MS Excel format. It is possible to import the Excel files into MS Access. The columns you will need are:

Supplier Name, Material Name, 12NC, Quantity, Amount (in US$).

The contact persons on the sites are:

Philips Taiwan (PSK): C.Y. Huang

Philips Thailand (PST): Piyapat Wanishwattana Philips Philippines (PSC): Mae R Red

Step 2: Prepare the data

First the data has to be imported in to MS Access. After that the tables could be put together into one table (see for example the table: Philips Thailand (PST) Philips Taiwan (PSK) Philips Philippines (PSC) Data 2004). For this purpose you will need one extra column: "Site"

Aligning supplier Names: A lot of suppliers are mentioned more than ones in the list and should get one name, for example: Agilent Technologies, AGILENT TECHNOLOGIES THAILAND LTD. are both "Agilent". Other suppliers have their own local distributor, for example: Aurotech Systems, HAPPY POLE and DISCO CORPORATION are all "Disco". For this purpose a transfer table is in place (see table "SupplierNames", which should be updated to the new situation, because their might be new suppliers or other suppliers have new distributors, etc. The most difficult situation occurs when a certain distributor supplies for more than one supplier. For this situation another transfer table is in place:

"SupplierNamesDIS". With the special update queries: Update SupplierName and Update

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Roeland van der Hoeven page 13 SupplierNameDIS, the names are changed in the original data file. Before you can do this, you have to add extra columns: "SupplierOldName", "SupplierType" and "Platform"

Step 3: Classify the data in the appropriate platforms and consumables The identified platforms are:

Automatic Test Equipment, Handlers, Probers, Packers, Sawing/Grinding/Taping, Molding, TrimForm, Ballmounting, IsolationSawingPunching, Plating, Marking, Die Bonding,

WireBonding, Other. The identified consumables are: Blades (=Grinding wheels + saw blades), Tape, Molding Tear&Wear Parts, Sockets, Capillary, TrimForm Tear&Wear, ProbeCard, Loadboard. Furthermore there are general items that are used among may platforms. These should be classified under general. The items that are left are "Not Allocated".

The following steps have to be taken to classify the data automatically:

The items can be identified by the 12NC codes. By linking the 12NC of the new table (from e.g. Q1 2005) with the table of 2004, it is estimated that about 50% up to 65% of the platforms can be allocated automatically

For all empty fields that are left, Classify the spend by using mandatory text templates (For further information, See the bottom of this e-mail!!)

For all empty fields that are left, the next step will be to classify per supplier. Because there are many suppliers that supply items only for one platform or consumable, about 10% can be further allocated

For all empty fields that are left: classify the spend on the text fields, maybe in combination with supplier names.

It is possible to perform these steps automatically. It is adviced to ask someone who is specialised in MS ACCESS to perform these steps.

Step 4: The report

The spend on spares & consumables should be reported quarterly. Please report the data approximate the same way as the spend analysis report of 2004. It is possible to let MS ACCESS generate an automatic report. This should be done by an expert in MS ACCESS.

I am not an expert in MS ACCESS, therefore I used MS Excel for the report.

The use of a Mandatory text template

We advice you use set up a mandatory text template for all platforms and consumables.

For example: the text fields for all purchases for Wire Bonding spare parts, should start with: WB-"item description", for Die Bonding DB-xxxxxxx, Molding tear & wear parts:

MTW-xxxxxxxxxx, etc. You can make a proposal for the templates. Please discuss this issue further with Dion.

How to improve the spend data?

Increase the usage of 12NC --> The more 12NC's used, the better.

In the future the CLOGS codes used should be changed from 8HA800 to the appropriate platform: 5Ex800

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Appendix 18: Capped Spare Parts Contract

Roeland van der Hoeven

IMO BE – Strategic Equipment Purchasing +31 24 353 2863

Roeland.van.der.Hoeven@Philips.com

This document is a first attempt to explain the capped spare parts contract.

What is a Capped Spare Parts Contract (CSPC)?

A CSPC is an agreement with an Original Equipment Manufacturer (OEM) concerning the spare parts replenishment after the warranty period. A CSPC is part of the Master Purchase Agreement that is in place with the OEM. So negotiating about the terms and conditions of a CSPC takes place at the same time as the negotiating about the terms and conditions of the equipment / master purchase agreement. Spare parts will be invoiced with a total value limited to an agreed percentage of the current system price, prorata temporis for equipment coming out of the warranty. The contracts are in place with several OEM’s of test equipment within IMO BE (PSX sites) and handled by Dion Boerrigter.

The main goals and advantages of a capped spare parts contract are:

• Improve unscheduled equipment downtime (due collaboration with suppliers).

• Reduce number of suppliers

• Reduce total spend on spare parts

• Reduce inventory cost (consignment stock)

• Reduce purchasing costs (due reduced suppliers and call of agreements, etc.) Definition spare part:

Dictionaries provide the following meaning of spare/spare part: ‘an extra component of a machine or other apparatus’ (www.themotoringdirectory.com), or ‘an individual part, subassembly, or assembly supplied for the maintenance or repair of equipment’

(www.its.bldrdoc.gov). A better meaning of spare parts is: ‘A component that is designed to replace an existing identical part that is lost or that has become worn or faulty’

(www.allwords.com). A spare part is not: Parts that ought to be replaced during

preventive maintenance, except if that part fails accidentally. A spare part is also not a consumable or another part that wears down after a certain period.

For the capped spare parts contract a spare part is considered a part that should not have broken down and is therefore replaced during corrective maintenance.

Why CSPC

Current situation at assembly: When new equipment is purchased from the OEM, the warranty period is about one up to two years. During the warranty period the OEM will supply the spares and will take care of all cost, including service man-hours. After this period the spares needed, are ordered at the OEMs or at the OPM/second source. Local buyers are purchasing spare parts. Spare parts are purchased based mainly on price.

There are global contracts in place with OEM’s, which are preferred, however if there is a local supplier who can provide 20% cost reduction, the local sites may purchase locally (Philips Philippines (PSC)). This strategy resulted in a huge scattered supply base, with many small local suppliers. Many suppliers make it very difficult to determine

responsibilities. The purchasing power is limited, because the amount of global spare parts contracts in place is very low.

Currently spares are bought mainly on price, however the real value of “working”

equipment is much higher than the value of cost savings on item level. A high up time

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Roeland van der Hoeven page 15 and a long MTBF¹ are more important then e.g. 20% cost savings on item level (current strategy). A low up time or a short MTBF will cost Philips many resources (money people, investment). When a CSPC is in place, the supplier has an incentive to provide top

quality parts, because of the capped fee. If the spend on spares will be higher than the fixed fee, the supplier has to take the burden and will investigate why the spend is too high. Previous experiences at Test showed that a quality improvement of a spare part by the OEM does not necessarily drive up the costs, whereas the MTBF is substantial

improved. The reason for this is that the OEM concentrates on the parts that fail the most. Other, not necessary more expensive parts that fail less, replace the parts that fail most often. This can even result in a lower spend on maintenance costs and spare parts and a higher up time and MTBF.

On the other hand, if Philips manages to keep the total spend below this fixed fee, the difference between the fixed fee and the actual spend will be deducted from the next payment. In this way Philips maintenance personal will be rewarded, because they did not exceed their maintenance budget. There will be an incentive for both Philips and the supplier to keep the cost on a certain level and, most important, to improve the up time and MTBF.

How does it work?

During the yearly (commercial) negotiating of the master purchasing agreement, the CSPC will also be (re) negotiated. In the CSPC it will be clear what spare parts are included and also what their prices are. The CSPC concerns the spare parts

replenishment after the warranty period and does not include man-hours. The fee paid to the supplier is a certain percentage of the system price per year, paid quarterly. This percentage will be set at a higher percentage than the actual consumption of the consumption. So if the normal consumption will be 1%, the actual fee is capped at e.g.

1,2%. The spend on spare parts will be capped at a fixed fee. When the spares consumption is less than the predicted spend, a refund will take place.

The height of the capped fee differs per platform. Several OEM’s will be compared to benchmark the capped fee. In addition, the current spend on spare parts from comparable equipment, purchased in the past should be taken into account.

Main Conditions:

• Per Platform there should be least 2 preferred OEM’s in order to compare the capped fee. So the capped fee will be determined by comparing the two suppliers.

• There should be regular negotiations concerning new equipment. The supplier needs to have an incentive to cooperate.

Main advantages:

• Supplier will be confronted with quality issues

• Because of the higher spend and the clearer responsibilities, the supplier is more willing to sign up-time contract or consignment stock contracts or cooperate in spare parts lease

• The maximum spend for spares parts is capped and clear (high predictability and transparency)

• Much easier to benchmark suppliers concerning TCO

• Better knowledge of maintenance cost when selecting new equipment

• Much less purchasing effort required on site

• Quarterly Payments, reduced amount of Purchase Order’s

1 MTBF=Mean Time Between Failure

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Roeland van der Hoeven page 16 Side effects:

• Negotiating a price formula for spare parts as part of the initial purchase

negotiation maximizes the leverage (Harding 2001). When negotiating about the price of equipment, the price of the annual spares cost is taken into account at the same time. There will be a stronger negotiating position.

• The IP parts that have to be purchased at the OEM, with minimum purchasing power, will also be part of the contract. Most probably these prices will drop.

• Better predictability and controllability, manageability.

• Responsibilities are more clear

• More bargaining power: contract will apply for all PSX sites

• Supplier reduction What if?

MTBPF (Mean Time Between Failure) Actual

Spend Low Normal High

Up to Normal (0-100%)

Refund. Capped fee is set much too high.

Incentive for Philips to investigate R

Refund

G

Refund. Spare parts pricing is set too high Y Normal

Æcapped fee

e.g. 120%

Refund. Capped fee is set too high. Incentive for Philips to

investigate Y

Refund. Price spare parts too high?

Y

Refund. Spare parts pricing is set too high

R Capped

fee Æ higher

Payment of capped fee.

Incentive for Supplier also to investigate to improve quality G

Spare parts pricing is too high

Y

Spare parts pricing is much too high

R Green (G): Capped fee, MTBPF and prices of spare parts are in balance

Yellow (Y): Investigate and renegotiate conditions of CSPC if necessary

Red (R): Investigate and renegotiate conditions of CSPC, maybe even earlier than the yearly negotiations

The reason for a low MTBPF needs to be investigated at al times!

Explanation of actions (to be elaborated):

Refund

Payment of capped fee Capped fee is set too high

Incentive for Philips to investigate Incentive for Supplier to investigate Spare parts pricing is much too high

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Main Risks: How to overcome?

Some parts are much cheaper at second source (>30). Local sites will still make use of local

suppliers

Raising Prices If the supplier raises the prices, no new equipment will be purchased at that supplier

Current contracts in place Identify per platform

What about cost reductions The capped fee is based on the CURRENT system price of the equipment. If the price of equipment of the same type is lowered, so will the price of the capped fee. Further cost reductions are covered due improvements of equipment efficiency Æ more output, less maintenance costs Distinction old vs. new

equipment? The capped fee will rise each 2 or 3 years Supplier does not want to

cooperate

Why would the Supplier cooperate?

It is part of the selection process. A supplier that cooperates will be preferred for future equipment needs. Furthermore Philips will buy all spare parts from that supplier. The supplier gains more insight in the operations of Philips Semiconductors.

Why would the Supplier NOT cooperate?

The suppliers will be afraid that the costs for them will rise significantly.

What is included in the capped spare parts contract?

• Spare parts list (List of all spare parts including prices)

• Service levels (E.g. next day delivery hit rate 90%)

• Prerequisites: (E.g. Philips must have trained maintenance personal certified by the supplier. Preventive Maintenance should be done according to manuals as provided by the supplier)

Other agreements

• The CSPC can be agreed in combination with the following agreements (in order of preference):

• Up-time (e.g. 98%), MTBF (e.g. 2000 hours) and MTTR² (e.g. 2 hours) guarantees

• Consignment contracts

• Spare parts lease

If the supplier does not agree on any of the above, no equipment will be purchased.

Implementation

• Include all Master Purchase Agreement with a capped spare parts starting with the biggest OEM’s. Before July 2006, at least 90% of the spare parts spend should be covered by a capped spare parts contract.

• Create support!

• Make it a priority

2 MTTR: Mean Time To Recover

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Appendix 19: Spares & Consumables Spend Analysis 2004

Strategic Equipment Purchasing – Dion Boerrigter & Roeland van der Hoeven

Spend Analysis 2004 Spares & Consumables PST PSK PSC - IMO BE

Strategic Equipment Purchasing IMO BE July 2005

Strategic Equipment Purchasing – Dion Boerrigter & Roeland van der Hoeven ₁

Agenda

Spend Analysis

2004

Collecting Spend Data Spend Analysis Conclusions

ABC Analysis per Site Spend per Hulskot

Consumables

Spend

Spend per Hulskot Unit Top Suppliers Spares

per Platform

Spend

Spend per Hulskot Unit Top Suppliers PSX TOTAL Spend Spend overview Assy ÅÆTest

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Roeland van der Hoeven page 19 Due to confidentiality reasons, this section has been left out.