Comprehensive Consulting Report

Comprehensive Consulting Report
Based on 5-day Survey (Dec 7, 2009 through Dec 11, 2009) Consulted by Choong-Hwan Park, Technology & Business Evaluation Center

- Table of Contents - 1. Company Profile
2. External Environmental Analysis 3. Internal Environmental Analysis 4. Core Competence Diagnosis 5. Road Map & Action Plan 6. Comments 2

Competition Intensity Average Attractiveness Competition Intensity
2. External Environmental Analysis Industry Attractiveness KPI Result 5 Low Attractiveness Competition Intensity Average Attractiveness Industry Cycle (Matured) 4 Diagnosed Company External Environ- mental Analysis 3 Industry Environment (Normal) 2 1 High Attractiveness Competition Intensity (Normal) Initial Growth Matured Declined Industry Maturity Market segment exists based on differentiated quality of viscous rayon. But competition with low-cost substitutes and insufficient market expansion limits the potential for profit creation through sales growth. The company is in trouble at networking in Chinese market and meeting consumer needs, price, even if it targets Chinese local market. Comment

3. Internal Environmental Analysis
3.1 Analysis of Management Performances 3.2 Analysis of Cost Competitiveness 3.3 Analysis of Management Positioning

3.1 Analysis of Management Performances
Issues 2006 2007 2008 Average (in RMB) Revenue (RMB) 1,294,247 18,389,638 22,335,098 14,006,328 Creates no profit during 2006 through 2008 due to high cost exceeding 90% of revenue. Overall performance is improving. Costs 119.2% 94.2% 91.9% 93.7% Material 269.5% 69.3% 62.2% 71.7% Labor 10.9% 3.8% 3.6% 3.9% Other Expenses 80.4% 21.0% 20.2% 22.4% Gross Margin Ratio -19.2% 5.8% 8.1% 6.3% SG&A 50.9% 14.7% 12.7% 14.7% Operating Profit to Revenue -70.1% -8.9% -4.5% -8.5% Ordinary Profit to Revenue -73.3% -9.9% -6.1% -9.8% Improvement Points Ordinary Profit to Asset -2.9% -5.5% -4.2% -4.2% Ordinary Profit to Net Worth -3.1% -6.1% -4.8% -4.8% Turnover of Net worth days 650.6 days 531.3 days 845.6 days Reaching BEP revenue and creating profit through breakthrough cost reduction - BEP Revenue : Y 23,863,035 - Internal cost reduction points are pervasive BEP revenue can be lowered through labor reduction and other cost reduction Turnover Period of Receivables 22.2 days 15.2 days 17.2 days 19.0 days Turnover Period of Inventory 946.1 days 75.0 days 67.1 days 100.4 days Turnover Period of Payables 559.3 days 35.5 days 18.1 days 36.5 days Turnover Period of Fixed Assets days 507.9 days 392.9 days 646.6 days Contribution Margin Ratio -28.3% 18.4% 19.5% 17.6% Debt ratio 6.1% 16.1% 14.4% 12.1% BEP Ratio -143.2% 130.0% 106.7% 129.8% ROIC -2.81% -4.91% -3.20% -3.6% WACC #DIV/0! 33.91% 38.54% #DIV/0! EVA Ratio #DIV/0! -38.81% -41.74% #DIV/0!

Operating Profit to Revenue Ordinary Profit to Revenue
3.1 Analysis of Management Performances (cont’d) Revenue is gradually increasing but not contributes to profit since it is lower than the BEP. Profit Ratio Revenue Operating Profit to Revenue Ordinary Profit to Revenue Revenue(RMB) Breakeven Point Activity Ratios 10000days 8000days 6000days 4000days 2000days 0day Turnover of Net worth Turnover of Receivables Turnover of Inventory Turnover of Payables Turnover of Fixed Assets days days days days days days BEP ratio day day day Variable Cost days days days Fixed Cost days days days

3.2 Analysis of Cost Competitiveness
Cost Analysis ISSUES (unit: 1,000 RMB, day, %) ‘06 ‘07 ‘08 Average Revenue 1,294 18,390 22,335 14,007 Cost Ratio 119.2 94.2 91.9 93.7 Material 269.5 69.3 62.2 71.7 Labor 10.9 3.8 3.6 3.9 Expenses 81.4 21.0 20.2 22.4 SG&A 50.9 14.7 12.7 Operating Profit Ratio -70.1 -8.9 -4.5 -8.5 Ordinary Profit Ratio -73.3 -9.9 -6.1 -9.8 Material cost stands for the majority of total cost. Revenue is lower than BEP. Product / Production Competitiveness Operation Competitiveness Business Competitiveness Improvement POINT Profit creation through sales growth and cost restructuring - diversification of material source - reduction of fixed and variable costs - Price competitiveness through cost reduction * Sources: Balance sheets, Income statement, Statement of production cost (’06 – ’08)

3.3 Analysis of Management Positioning
Business Positioning ISSUES 2006 2007 2008 Fixed Cost Ratio 40.5% 24.0% 20.8% BEP Ratio -143.2% 130.0% 106.7% Contribution of fixed cost is decreasing since 2006. BEP ratio exceeds 100% since the company marked deficit in Sales is smaller than cost. 100% Expansion type Bankruptcy type C A 50% Fixed Cost Ratio Improvement POINT ‘07 ‘08 Profit growth type Hidden deficit type Diversify material source Seek new ways for sales expansion Reduce cost by reducing waste D B 10% 60% 90% 150% Break-even Ratio * Sources: Balance sheets, Income statement, Statement of production cost (’06 – ’08)

Analysis Criteria of Management Positioning
Types Structure Meaning Improvement Points Massive restructuring required - downsizing, disposal of idle fixed asset, strengthening of sales, temporary hold on interest payment High FC High BEP model Bankruptcy type Lower operation triggers more loss. FC: around 50% BEP: around 90% A Variable cost reduction required Less number of products, discontinuation of low profit products - Size reduction required Low FC High BEP model Hidden deficit type Signs of anemia or decrepitude FC: around 10% BEP: over 90% B High FC Low BEP model FC: around 50% BEP: around 60% Expansion type -No worrying factors C Aggressive actions for sales growth Low FC Low BEP model Sound management Only with low profit ratio Mechanization/automation of production process, VA management for material/parts FC: around 10% BEP: around 60% D * FC : Fixed Cost, BEP : Break-Even Point

4. Core Competence Diagnosis
4.2 Result of Core Competence Diagnosis 4.3 Improvement Tasks by Function 4.4 Improvement Task for Specialization

4.1 Core Competence Diagnosis
MODULE BLOCK UNIT Evaluation A B C D E Scores Strategic Management 1.Management Strategy 1. Managerial Leadership and management objective 2. Environment analysis and response 4 7 3 2. Product / Service Strategy 1. Product specialization strategy 6 3. Performance Management 1. Performance assessment and its application 2. Cost management Internal Process & Technology Innovation 4. Marketing / Sales 1. Marketing strategy 2. Product / pricing policy 3. Distribution market management 4. Promotion activities 5. Research / Development 1. Development of tech-product 6. Production 1. Equipment maintenance 2. Process improvement 2 5 7. Procurement / Delivery 1. Appropriate procurement 2. Compliance on delivery 8. Quality Management 1. Quality management Capability Enhancement 9. Organizational Capability and Human Resource Management 1. Organizational function 2. Human resource management 3. Wage management 4. Integrity 5.5 10. Information Usage 1. Information usage ※ Scores : A-5points, B-4points, C-3points, D-2points, E-1point Total : Pts

4.2 Results of Core Competence Diagnosis
ISSUES Management Strategy Based on offshore production system, the company does not run regular production activities and is poor at facility maintenance and process improvement activities. Organization capability of production personnel is weak. The company is running under heavier system suitable for big business; organization efficiency is poor. Information Usage Product / Service Strategy Performance Mgmt Org. Capability / HR Mgmt Quality Mgmt Improvement POINT Marketing / Sales Enhance the capability of production and support manpower through versatility. - Reduce the support organization. Reduce the lead time for procurement - Set up procurement network for source materials. Procurement / Delivery Research / Development Production

4.3 Improvement Task by Function
Current Level Improvement Points Procurement/ Inventory Not caring much about inventory management of source threads and other materials Set up standard for suitable and safety inventory level Visible Control - Fixed quantity, Fixed position Production Frequent change of production schedule Relaxed atmosphere Goods in process are stored at production site Systemize the business routine; order  production  delivery Reallocate manpower through work efficiency analysis Store goods in process at differentiated area (mark with lines) QA/QC High level of quality control compared to industry average Reposition quality control criteria Lengthen the control period Management Objective of management strategy is not well shared. Share the objective using bulletin board, parallel to cockpit module for drivers.

Further Control Points
4.4. Improvement Task for Specialization □ Performance Management System Performance Management System for Profit Enhancement Global Competitiveness (Cost, Quality, Delivery) Improve Work Habit ( A/S ⇒B/S) ( Versatility ) Reduce 7 Major Waste (Overproduction, Inventory, Conveyance, Defective, Processing, Action, Waiting) 3Tei 5S (Fixed Thing, Fixed Quantity, Fixed Position) Efficiency Enhancement (Productivity, Shorter Delivery) Reducing Waste (More than 30%) Visible Control Further Control Points

4.4. Improvement Task for Specialization
□ Set up Production-Sales Plan Cone Threads Comments Production vs. plan 82.2% 40.0% Jan. – Oct. (average) Customer Sales Dept Sales Plan Material Inventory Production Development / Design Source Material Procurement Prod. Mgmt. Production Plan Product Outsourcing Order Development Order Delivery Input Delivery Quotation Plan Change Defective Shortage Waiting for work order Delayed Delivery ※ Frequent change in production plan harms productivity and increases production cost.

□ Product Inventory Management Inventory Change # of cones ※ Inventory is decreasing, but minimum inventory control system is needed Month A : Contributes more than 80% of total sales and heavily affects productivity, etc. Classified control through PQ analysis Sales B : Retains certain level and sustains business C : New customer or Samples; contributes little to total sales Setting Up Standard and Control for Fair inventory level Product Type or Customer

Reallocate Manpower through Work Efficiency Analysis
4.4. Improvement Task for Specialization □ Production Efficiency Management Line of Balance Efficiency Working time Process # Redundant time Overload Time Line of Balance (Optimized work condition) Working time Process # <Waiting between process> Reallocate Manpower through Work Efficiency Analysis ※Process formation efficiency (LOB efficiency) means the ratio of allocated standard time per person to that of bottleneck process, taking the longest time and causing the longest waiting. If LOB efficiency is 70%, it means the wasting of the manpower is 30% of the best and there might be waiting for process over the processes.

□ Production Efficiency Management Production Efficiency Process Capa. (Kg/month) Produced (Kg/month) Production Efficiency (%) Preparation 38,016 16,068 42.3 Processing 48,650 15,595 32.1 Completion (# of cones) 165,546 99,699 60.2 Production Efficiency is very poor ※ Produced quantity is based on monthly average during Jan 2009 through Oct 2009 Process Yield Process　 Preparation Processing Completion Comments Production (Kg) 176,751 171,545 139,495 Jan 2009 thru Nov 2009 Process Yield (%) - 97.1 81.3 Overall Yield (%) 78.9

□ Cost Reduction Example of Achievement Analysis ● On cost pushing condition, activities are required for reduction of variable and fixed costs. ● Especially, stock of source material is excessive. Items Action Items Department Comments Tech Sales Prod Adm Increase Profit on M/S ↑ on current customers ● Bad orders Bad delivery Short delivery Easy price-cut Price Advance New Product New Customer Recovery of bad debts Reduce Variable Cost Material Cost Price Cutting Reducing Defective Out-of-Use Stock Reducing production loss Blockwise Management Quality Management Maintenance Facility trouble Supplies Expense Customer claim Other controllable expenses Fixed Labor / Depreciation Automation Shortage Defective Process time cutting Financing Cost Inventory (material/ work in process/ product) Inventory control Safety Stock Level Fair Stock Level

Key process for cost reduction A lot of Cost Reduction Points
4.4. Improvement Task for Specialization □ Cost Reduction Production Cost by Step (source data : Jan ’09 – Oct ‘09) Preparation Processing Completion(cone) Completion(R/T) Subtotal Weight1(%) Weight2(%) Labor 143444 114867 186954 27410 472675 11.0% 16.7% Electric Power 32894 271995 39026 7817 351732 8.2% 12.4% Depreciation 156574 231011 34778 34.0% Submaterials 11268 93300 14000 1719 120287 2.8% 4.2% Other expenses 66812 73881 125288 16877 282858 6.6% 10.0% Secondary materials 448417 9304 457721 10.7% 16.1% Processing materials 532440 532440 12.4% 18.8% Water and Sewerage 126827 126827 3.0% 4.5% Fuel 491248 491248 11.4% 17.3% 410992 97905 100% 100% *Weight2 is calculated disregarding depreciation Key process for cost reduction A lot of Cost Reduction Points

□ Cost Reduction Utility Use Correlated with Production Quantity Not correlated with Production Quantity Production Enhancement Cost Reduction

Ways for Cost Reduction
4.4. Improvement Task for Specialization □ Cost Reduction Ways for Cost Reduction Diversify material source and develop low-cost material Reallocate manpower through work efficiency analysis (production, administration) - 4 at laboratory and 2 (per group) at dyeing ⇒ 3 for laboratory and dyeing - Physical test: 1 (also manages field data) → basically allocate 1 person on testing - Supportive manpower to direct manpower (4 at factory support ⇒ 1 at electricity, 1 at machinery) - Change waging for factory supportive workers: regular wage ⇒ Incentive wage (pay per work) - Workers on preparation step can support other jobs. (use Doffing timer) Change production system : continuity-oriented system (2 groups  3 groups) Standardize waiting time of processed threads and give more time for natural drying to unburden high frequency heat dryer Lower TPM of ballistic threads and Use longer source thread to reduce doffing, thereby reducing cost.

□ Material Control Material control that shows real status at real site with real stuff (3R) is needed that anybody can understand at a glance the kind, position, quantity of material. Material Control Poor Quantity control To Prohibit Overstock

□ Material Control INCREASING Volume (Kg)

□ Material Control Material Control Process for Productivity Enhancement ABC Analysis To analyze annual sales Fair Stock Analysis To analyze fair stock level of product, work in process, source material Safety Stock Analysis To analyze safety stock level of product, work in process, source material Improvement of Storage To improve method of material storage Visible Control To mark for identification of fair stock level and safety stock level for stock control

□ Reduce Waste 7 Major Waste in TPS Waiting Action HUMAN Waste of Overproduction Waste of Inventory MACHINE Waste of Conveyance Processing Defective Overproduction Conveyance PRODUCT Waste of Waiting Warehouse Waste of Action Inventory Inventory Waste of Defective Repair Waste of Processing Waste of inventory conceals the problem ● Plan change, quality fail, changing preparation, facility malfunction, absence ● Material shortage, misinformation, etc.

□ Reduce Waste Waste Reduction + Cost Reduction = Competitiveness ! Material Total Cost Reduction (Competitiveness) Material Waste of Material Reduced Material Cost Labor Waste of Labor Labor Waste of Expense Reduced Labor Cost Expense Expense Reduced Expense

Wastes in Manufacturing Cost
Control cost, financial cost, and opportunity cost due to overstocking source material, deterioration or obsolescence due to long period of stocking, loss during conveyance, distribution or control, defect or abrasion on manufacturing, unreasonable design or process Waste of Material Cost Input of excessive labor, unnecessary or unproductive activity, waiting due to imbalanced line, process stop due to unstable work process (causing defect, shortage, facility malfunction, etc) Waste of Labor Cost Increase in repair cost due to facility malfunction, overuse of energy (electricity, water, etc), lack of attention to consumable, jig and fixture, unnecessary telecommunication Waste of Expense

4. Productivity & Facility Operation Ratio Analysis
□ Work Efficiency Working Duration Fair worker experience structure Worker versatility available ⇒ Reallocation etc.

Versatility Chart (example)
VRM3 ass’y echo2 ass’y Mosaic ass’y AST ass’y Aligning Inspection Packaging Name Abe Brown Charlie 6/5 5/25 David 5/31 inexperienced Can work with guidance Can work alone Can handle troubles Can teach others Development plan

Reallocate Manpower through Work Efficiency Analysis
Admin. 13 30% 16 24.6% Production 30 70% 49 75.4% Total 43 100% 65 100.0% Ansan China How much of the work time contributes to value creation? Reallocate Manpower through Work Efficiency Analysis 73.2% of total work Process Control Delivery Control Material Control Quality Control Stock Control Manpower Control Machine Maintenance Outsourcing Problem Improvement Methods 1. Low work load as a process manager 1) process control:52.8% 2) quality control: 7.8% 2. High work load on delivery, material, stock control 1) Simple control is not appropriate 1. More work on quality control 1) Share of quality control work to 20% 2) Outsourcing control to 10% 2. Transfer material control work 1) Transfer to inventory manager 2) Monitor inventory manager daily 3. Transfer delivery control to adm. Team 1. Change work allocation –process control, quality control, outsourcing control- for production control and objective accomplishment  More work on main job to strengthen planning and control work  Strengthening of quality control for process quality and product quality achievement

□ Visible Control ● Indices relating to business performance are not shown on bulletin board. ● Progress control data are not shown on bulletin board. Bulletin Board

Product (Waiting for Export)
4.4. Improvement Task for Specialization □ Layout Control for Process Flow Control ● 4P control required (Material Position, Working Position, Reject Position, Product Position) Dyeing Facility Ballistic threads (waiting) Ballistic Threads Winding M/C Cone Winding Machine Hank Dyeing Facility Dyeing Facility Plastic boxes Prep. Threads (waiting) bobbin Wrap peeler Waiting for Packaging Packaging M/C Waiting for Dyeing Packaged Goods Waiting for Dyeing Dehydrator Paper Boxes Waiting for Drying (Drying) Waiting for Dyeing Paper Boxes Waiting after Drying Dryer Waiting after Drying Waiting for Drying Empty boxes Product (Waiting for Export) Product Inventory Inventory for Source Materials Laboratory others Waiting after Drying

□ Others

5. Road Map & Action Plan Short-term Tasks Long-term Tasks
Strategic Goal To improve profitability for business stability To upgrade capability to be a stand-alone entity Action Plan Improve productivity through 2nd grade production - Use low-TPM, partial thread Improve production efficiency and reduce cost - lengthen ballistic thread (5Kg/Ch⇒6~7Kg/Ch) Remove waste thru material control and site control (avoid overstocking) Target and control productivity indices and management performance Set up visible control system Improve work efficiency - Job reallocation - Welfare activity (keeping birthday, etc.) Running factory for plaited thread and ballistic thread (as an in-house subsidiary) Consider Qingdao factory as a full supplier of viscous rayon embroidery thread Improve factory layout

Comments after Diagnosis
Manage-ment Business performance is improving through activities on sales expansion and cost reduction. However, it is not enough to create profit due to the depreciation following initial investment. Local sales contributes only 24% of the total. Therefore, the company is highly dependent on parent company in Korea. The dependency must be cleared as soon as possible since it can loosen the tension required for a small company. The company needs further effort for sales expansion to enhance operation ratio to reach BEP. - Recommended are development of 2nd grade product market and disposal of out-of-date stocks. Techno-logy The company holds good production technology of Dongil Industrial Co., parent company in Korea. However, the dependency has also caused bureaucracy, not suitable for a small business. Technology side should play a more active role as a marketing tool, for example, quality, price, delivery, short lead time, differentiated items, etc. Lack of 4P control caused unsmooth process flow and visible control is required. - Even if the site has a lot of troubles (waste, cost reduction points), it is concealed by overtime production and only low productivity is revealed. Diagnosed by; Choong-Hwan Park, Technology & Business Evaluation Center SBC

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