DRIVING INNOVATION AND ABILITY TO COMPETE THROUGH OUTSOURCING Anthony (Tony) C. Bernardo, Alloy Polymers Inc. NPE 2003 bernardo:

INTRODUCTION BENEFITS OF OUTSOURCING WHY OUTSOURCE OUTSOURCING STRATEGIES WHAT IS IMPORTANT IN SUCCESSFUL OUTSOURCING RELATIONSHIP RELIABILITY QUALITY CONFIDENTIALITY SERVICES OFFERED VALUE TOPICS OF DISCUSSION

A Contract Manufacturer Plays a Key Role In The Supply Chain Resin Manufacturer Concentrate Supplier Additive Supplier Fabricator/ OEM Contract Manufacturer Custom Compounder Captive Compounder Fabricator Owned Cmpd. INTRODUCTION All are contractor’s possible clients or customers

Contract Manufacturers typically interact with the Resin, Concentrate, or Additive Manufacturer and the Fabricator Resin Manufacturer Concentrate Supplier Additive Supplier Fabricator Contractor Manufacturer INTRODUCTION

THE PLASTICS INDUSTRY– DYNAMIC AND EVER CHANGING Resin suppliers have been, and continue to, go back to their core competencies Fewer and fewer materials can be engineered in the reactor The marketplace continues to demand unique materials and properties. Innovation drives continued market growth! INTRODUCTION

I - BENEFITS OF OUTSOURCING WHY OUTSOURCE? OUTSOURCING STRATEGIES

RESPONSIVENESS TO CUSTOMERS AND PROSPECTS COST CONTROL AND PRODUCTIVITY INNOVATION TO MAINTAIN COMPETITIVE EDGE EMPLOYEE SATISFACTION AND SAFETY ORGANIZATION AND PRODUCT QUALITY WHAT IS THE OBJECTIVE OF YOUR BUSINESS? WHY OUTSOURCE?

THE RESULT OF ANY OUTSOURCING RELATIONSHIP SHOULD BE: HIGHER RETURN ON INVESTED CAPITAL AND/OR INCREASED ABILITY TO INNOVATE AND COMPETE WHY OUTSOURCE?

THERE ARE MANY SITUATIONS WHERE OUTSOURCING TO A CONTRACT MANUFACTURER IS THE SOLUTION Client is out of capacity. Client does not possess manufacturing assets. Products are difficult to manufacture. Products are low volume or require special expertise. Products do not cover fixed costs of equipment required for manufacturing, but cannot be dropped. Products are not considered core. Products that can bring higher value if sold by a second party. Products that can create higher marketplace value for both parties if manufactured and sold by a Service Provider. Products that are more profitable if sold to the customer without value added manufacturing steps. Why Outsource?

CLIENT IS OUT OF CAPACITY OR CLIENT DOES NOT HAVE MANUFACTURING ASSETS CONTRACT MANUFACTURER NEEDS TO OPERATE WITH EXCESS CAPACITY AND HAVE ESTABLISHED RELATIONSHIPS AND TECHNOLOGY EXPERIENCE WITH CLIENT AND DEDICATED MACHINE TIME WHY OUTSOURCE?

CLIENT HAS PRODUCTS THAT ARE DIFFICULT TO MANUFACTURE, REQUIRE SPECIAL EQUIPMENT, OR ARE NOT STRATEGICALLY CORE PRODUCTS EQUIPMENT AND TECHNOLOGY TO PRODUCE A WIDE VARIETY OF PRODUCTS AND ADDITIVES. AN EFFICIENT COST STRUCTURE WHY OUTSOURCE?

PRODUCTS THAT CREATE MORE VALUE IF BOTH MANUFACTURED AND SOLD BY A FULL SERVICE PROVIDER LATE LIFE CYCLE PRODUCTS EARLY LIFE CYCLE PRODUCTS NOT WITHIN THE CLIENTS CORE FOCUS SPECIALTIES THAT ARE DISRUPTIVE OR LOW VOLUME WHY OUTSOURCE?

PRODUCTS THAT PROVIDE GREATER VALUE IF SOLD BY CLIENT WITHOUT VALUE ADDED STEPS CLIENT WANTS TO FOCUS ON NEAT RESIN SALES CONTRACTOR CAN ADD VALUE AT A LOWER OVERALL COST WHY OUTSOURCE?

ROLE OF A CONTRACT MANUFACTURER IS TO MEET THE NEEDS OF BOTH THE CLIENT AND THE CLIENT’S CUSTOMERS High degree of Supply Chain Expertise and Efficient Operations Technology to Scale Up laboratory developments and make modifications which meet customer schedules Flexibility and Responsiveness to Provide Service in new environment Technology which Protects the Client’s Assets and Investment and allows continued Development initiatives Client’s Existing ProductsClient’s New Products Client’s Existing Customer Client’s New Customer Outsourcing Strategy

PRODUCTIVITY INCREASES ARE ACHIEVED BY OUTSOURCING LOW OR DISRUPTIVE VOLUME High volume customers are supplied by CLIENT with high volume “core” products High volume customers using low volume products are CONTRACTED or supplied by a LICENSEE Low volume customers using high volume products are supplied by DISTRIBUTORS Low volume customers using low volume products supplied by LICENSEE High Volume ProductsLow Volume Products High Volume Customer Low Volume Customer Outsourcing Strategy

NUMBER OF PRODUCTS IN PRODUCT LINE RANKED BY CUMULATIVE VOLUME OF PRODUCT. CUMULATIVE PROFIT 20% 80% NORMALLY, 80% OF A BUSINESS’ PROFIT COMES FROM ONLY 20% OF IT’S PRODUCT LINE. LOWER VOLUME OR DISRUPTIVE PRODUCTS MAY OFTEN SUBTRACT FROM OVERALL PROFITABILITY MUST GROW TO CORE OR BE PRODUCED/SOLD MORE EFFICIENTLY $ CORE BUSINESS Profitability Can Be Increased by Focusing on Core Business and Outsourcing Supportive Business Outsourcing Strategy

PRODUCTION LOT SIZE CAPACITY AS PRODUCTION LOT SIZE IS INCREASED, THE EFFECTIVE CAPACITY OF A PLANT WILL INCREASE DUE TO INCREASED EFFICIENCY AND DECREASED DOWN TIME RETURN ON CAPITAL DEPLOYED CAN BE SIGNIFICANTLY INCREASED Outsourcing Strategy

UNIT COST PRODUCTION LOT SIZE COST PER UNIT DECREASES SIGNIFICANTLY AS PRODUCTION LOT SIZE INCREASES. HIGHER YIELDS HIGHER PRODUCTIVITY HIGHER EFFICIENCY Outsourcing Strategy

BY UTILIZING A CONTRACTOR INTERNAL RESOURCES ARE FOCUSED ON: INNOVATION COMPETITIVE ADVANTAGE AND FLEXIBILITY MARKET GROWTH. Outsourcing Strategy

TIME $ Incremental Growth Augmented with Step Function Growth will Dynamically increase the Growth Rate of the Business. Outsourcing Strategy A CONTRACTOR CAN PROVIDE RESOURCES TO ACHIEVE STEP GROWTH

II - WHAT IS IMPORTANT IN ESTABLISHING AN OUTSOURCING PARTNER STRATEGIC PARTNER RELIABILITY QUALITY TECHNOLOGY SERVICES VALUE Partnership

A CONTRACT MANUFACTURER NEEDS TO BE CONSIDERED A STRATEGIC PARTNER AND NOT ONLY AN OPPORTUNISTIC OR EMERGENCY PARTNER A CONTRACT MANUFACTURER NEEDS TO BE AN EXTENSION OF A CLIENTS INTERNAL MANUFACTURING FACILITIES. STRATEGIC PARTNERSHIP Partnership

IN SEEKING A CONTRACTOR, THE CLIENT NEEDS TO CONSIDER NOT ONLY CAPABILITIES, BUT ALSO THE CONTRACTOR’S VALUES AND COMMITMENT STRATEGIC PARTNERSHIP Partnership

RELIABILITY DELIVERS ON TIME MEETS ALL PRODUCT AND PACKAGING REQUIREMENTS FULL SUPPLY CHAIN CAPABILITY INCLUDING CLIENT COMPATIBLE SOFTWARE FOCUSED ON MAXIMIZING YIELD AND MINIMIZING COST TO CLIENT Partnership

QUALITY FULL QUALITY CERTIFICATIONS SUCH AS ISO 9002, QS 9000, UL OR OTHER REQUIRMENTS MUST BE PROVIDED BY THE CONTRACTOR FULL TESTING CAPABILITY, A2LA CERTIFICATION Partnership

TECHNOLOGY EXTRUSION AND AUXILIARY EQUIPMENT SPECIAL TECHNOLOGY SUCH AS COLOR, FDA/CLEAN ROOM, ADDITIVES. MASTERBATCHES Partnership

SERVICES FULL SUPPLY CHAIN MANAGEMENT CAPABILITY- FROM RAW MATERIAL PURCHASE TO SHIPPING ABILITY TO HANDLE ALL PACKAGE SIZES INCLUDING BULK RAIL ABILITY TO SERVICE CLIENT’S CUSTOMER WITH SALES AND TECHNICAL SERVICE Partnership

CLIENT’S EXPECTATIONS OF A CONTRACT MANUFACTURER High Yields Ability to Service Client’s Customers Strict Customer Confidentiality Consistent Quality Production Capacity On-Time Delivery Ease of Doing Business Technology support Logistical Capabilities Materials Management VALUE Source: Alloy Polymers Research of Prospects and Customers

IN CLOSING, THE CONTRACTOR NEEDS TO BE CAPABLE OF THE SAME OR BETTER STANDARDS THAN THE CLIENT EXPECTS FROM THEIR OWN OPERATIONS. STRATEGIC PARTNER RELIABILITY QUALITY TECHNOLOGY SERVICES VALUE Partnership CONFIDENTIALITY

SHARED VISION AND COMMON GOALS MUST GUIDE THE RELATIONSHIP. Partnership

 To meet agreed upon performance output, quality, yield, delivery, cost, and service  To practice partnership with our clients and customers  To provide state-of-the-art technology, know- how, and innovation  To provide safe secure jobs and a promising future for all of our diverse employees  To embrace the concepts of continual transformation and extraordinary customer service Clients Commitments Our Commitments COMMITMENTSCOMMITMENTS Partnership

A Contractor’s model to focus on Client’s Goals CLIENTS GOALS Partnership Maximization Process Maximization Performance Maximization Shared Vision Open Communications Clear Expectations Collaborative Solutions Continuous Improvement Quality Plan Quality Audits Customer Visits High Performance Assurance Partnership

TECHNOLOGY SUPPORT DURING PROCESS AND PRODUCT DEVELOPMENT TECHNOLOGY AND CAPACITY TO SUPPORT GROWTH LICENSE PRODUCT TECHNOLOGY AND/OR CAPACITY SUPPORT LICENSE PRODUCT TECHNOLOGY AND PROVIDE SERVICE TO MARKET TIME $ A FULL SERVICE CONTRACTOR CAN SUPPORT GROWTH THROUGH THE PRODUCT LIFE CYCLE WITH TECHNOLOGY, CAPACITY, OR FULL SERVICE PROVIDER EXPERTISE Conclusions

SUMMARY - I THERE ARE MANY REASONS TO OUTSOURCE PRODUCTION OR SERVICES, BUT THE MOST IMPORTANT IS TO ENABLE INTERNAL RESOURCES TO FOCUS ON CORE FUNCTIONS AND INNOVATION Conclusions

A FULL SERVICE CONTRACTOR CAN PROVIDE NOT ONLY SUPPLY CHAIN SUPPORT, BUT ALSO PROCESS TECHNOLOGY THAT SUPPORTS THE CLIENT’S PRODUCT DEVELOPMENT, AND SALES/MARKETING SUPPORT OF CLIENT’S CUSTOMER SUMMARY - II Conclusions

THE CLIENT AND CONTRACTOR MUST SHARE COMMON GOALS AND VISION FOR THE CLIENT’S BUSINESS. SUMMARY III Conclusions BUILD LONG TERM STRATEGIC RELATIONSHIPS.