New Metrics, New Opportunities - Measuring what matters

Measuring what matters: New challenges and new opportunities for Semiconductor companies

Michael D’heur, Founder & Managing Director, shared.value.chainSSIA Supply Chain Management Forum, Singapore, 21. July 2016

Page 1 Measuring what matters | SSIA SCM FORUM 2016 | 21 July 2016

Hello, my name is Michael D’heur

«16+ years of experience in Management-, Process- and IT-Consulting»

«Helping international clients to improve global value chains (products & supply chains)»

«Thought Leader, Author and Researcher on Global Value Chains»

«14 different Industries, 25+ international projects around the globe»

«Operating Model Architect»


@SharedxValue

#ssiascmforum#scm, #metrics#svcm

Today’s paradigm: GDP growth is good by definition. ..

In the current economic paradigm, growth is good ‘by definition’....


GrowthGDP in China, Japan and South Korea continues to grow 6-8% p.a

More disposable incomeGrowing middle class in Asia (2030: ~3,2 bn people)

Tech savvyLeading in the use of digital technologies

Attractive marketAttractive for global companies, both from customer as well as production perspective

...and the growth story continues in Asia


ConsolidationNew customers

Digitalisation Legislation


To capture growth most companies have linear business models

Business Model

Operating Model

Capability Model

Society

Environment

Society

Environment

“RESOURCES” “PROFIT” “CUSTOMERS”

TAKE MAKE DISPOSE


Volatility in the Market

Global Value Chains

Ecological Crisis (Storms, Draughts, ...)

Profit versus Purpose?

Constrained ResourcesFinancial Crisis(Lehmann, Euro, ...)

Technology

“How do we manage to create value?”

Supply Chain ‘Scandals’ & Trust Issues

What is the right Value Creation Strategy?


...and we don’t mind the critics


Waste

Inequality Overshoot

Social Unrest


Pollution

Climate change

The world is changing at a rate at which the systems, structures and cultures built over the past century

can no longer keep up.


The outlook is not very promising...


Deforestation for Palm Oil

Most global businesses run supply chains that destr oy societal and environmental value, in the pursuit of profit

Tom

Aninda

Siswee

Percy

My defining moment in Borneo, Indonesia (2010)



I have decided to work to find better ways of doing it...


...to help companies deliver the ‘Triple Bottom Lin e’

ECONOMIC

SOCIETALENVIRONMENTAL


«SustainableValue Creation

as Foundation ofBusiness!»

Cost Efficient

Competitive

Innovative

Trusted

VersatileCreating

TripleValue

Collaborative

Transparent

„8 TO BE GREAT“

ATTRIBUTES OF SUSTAINABLE BUSINESSES WE HELP TO BUILD CAPABILITIES

We are a mission-driven advisory and implementation firm, that helps companies to achieve sustainably better performance

Companies can achieve better results in an environment of constant change, fast transitions and unplanned disruptions

Companies benefit through application of sustainable practices in their core business, considering economic, ecologic and societal opportunities

We help businesses achieve sustainably better performance


A more realistic perspective – SYSTEMIC VIEW

Business Model

Operating Model

Capability Model

Society

Environment


2nd tier Suppliers

1st tier Suppliers

1st tier Customers

2nd tier Customers

SOURCE MAKE DELIVER

PLAN

RETURN

Value Creation Strategy(Product, Value Chain, Communication)

Enterprise Architecture(Organisation, Reporting,

Systems)

Stakeholder Collaboration

Sustainable Business Planning

Supplier & Partner Networks

Sustainable Cost Reduction

© shared.value.chain

HR / Talent Development

PhilantrophicEngagement

Financial Controlling

Community Development

Cradle-to-CradleCo-Creation

Sustainable Operations

Sustainable Products

A Companies Strategy Is Manifested in the Value Cha in It is the Biggest Lever for Sustainable Value


Hotspots in the Semiconductor Value Chain


Smelter FE: Wafer production

BE: Assy & Test, Package

Logistics

EMS / ODM Planning & Fulfilment

ChannelsCustomer UseProduct Disposal / Return

1

3 5 1 5 6

2

1 5 5

1 755 8

4 6 6 7

AB B

B

C C

CD

E E E E

EEE

F F

F

F

F

G

G G

G

GG

H H H

H

H

A

Product Development

Supply Chain

Idea SpecificationProduct Design &Optimization Component Selection Testing Product Launch

1 32 2 3 7 3 7

1

1 5 7

GED

Capital Equipment

Capital Equipment

Capital Equipment

Key MetricsHot Spots

Quickly changing customer preferences : Observe and track quickly changing customer preferences in order to remain a competitor in the market, while increasing output to fulfill rising demand from a growing middle class.

Necessity for Innovation : Continually innovate products in order to create products that are competitive and will generate the highest possible profit.

Scarce Resources : Carefully plan use of limited raw materials, including precious metals, to ensure a stable supply of material and to avoid environmental degradation and sourcing scandals (RoHS &REACH).

Sustainable sourcing : Ensure health and safety of workers, avoidance of controversial sourcing, ...

Energy Consumption, Efficiency and Emissions : Limit and measure use of energy produced from fossil fuels and utilize latest technologies to reduce GHG emissions and their consequent contribution to climate change.

Production of E-waste : Adopt an e-waste collection, recycling, and re-use plan for products at end-of-life to reduce amount of waste going to landfills, while following relevant legislation like the WEEE Directive.

Turnover

Delivery Performance

Inventory Turns

Governance: Sourcing

Human Capital

Emissions

Energy, Waste, Water

F

1

2

3

4

5

6

A

B

C

G

E

D

A

4 4Raw Material Mining

3 4

A GD

How do we get started and measure

performance?


There are many ‘most sustainable companies’ – the question is what is said and what is done (and meas ured)


Source: svc Research

Industry group leader (Dow Jones Sustainability Index, 2015)

Among the 400 global most sustainable companies (Newsweek Green Ranking, 2015)

Among the 500 most sustainable large companies in the world (Newsweek, 2016)

Among the most sustainable companies (Dow Jones Sustainability Index, 2015)

Among the 500 most sustainable large companies in the world (Corporate Knights, 2015)

Sustainability is an integral partof our history, present and future (Company CSR Report, 2015)


Only a few Semiconductor companies clearly report o n material sustainability issues

Measuring performance should consider all dimension sof value creation in the core business?


Source: shared.value.chain

SustainableValue

Creation

� Profitability� Forecast Accuracy� Delivery Performance� Total Supply Chain Cost� Working Capital� Product Lifecycle

Management� Intellectual Property

management� ...

� Greenhouse Gas Emissions / Carbon Footprint� Energy Management in Manufacturing� Water & Waste management in manufacturing� ...

� Sustainable Sourcing� Human Capital Development� Employee Health & Safety� Corporate Philanthrophy� Shared Value� Slavery / Human Trafficking� Board independence� Diversity� ...

• Expectations of Shareholders• Expectations of Board Members10,000 Mtr.

• Expectations of Management Teams• Business- and Sustainability Strategy• Business-, Operations-, Capability Model

5,000 Mtr.

• Functional / Business Unit Targets• Operations Strategy• Operations Scorecard

1,000 Mtr.

• Day to day business performance (Yields, Wafer starts, ...)

0 Mtr.

• Continuous Improvement & Benchmarking• Improvement Projects500 Mtr.

Determining what matters, depends how high you fly

100,000Mtr.

• Expectations of Stakeholders (Society, Regulators, Legislators, NGOs, Public Institutions, ...)


To make expectations measurable we translate theminto performance standards

Abstraction Level

External “Standards”

Internal “Standards”

100,000 Mtr. SOCIETY• SDG• UNGC• ILO

• Code of Ethics

10,000 Mtr. INDUSTRY

• DJSI, SASB, CDP• EICC• Integrated

Reporting

• Code of Conduct

5,000 Mtr. COMPANY• Industry

associations

• 3-5 year Strategy• Balanced scorecard• Materiality approach

1,000 Mtr PROCESS• Quality: ISO, ...• Process: SCOR• Accounting: SASB

• Operational strategy and SC Scorecard

• Budget / Annual Operating Plan

500 Mtr PROJECT• LEAN, SixSigma• Kaizen

• Project metrics

0 Mtr TASK • OEE• Work Control

Procedures


Business Model

Operating Model

Capability Model

SUSTAINABLE VALUE SCORECARD

PROCESS STANDARDIndustry best practices and performance

INVESTMENT STANDARD

REPORTING STANDARD

ACCOUNTINGSTANDARDIndustry level

material issues

Measurement should consider different perspectives


Economic

Societal

Ecological Efficiency

Governance

Measuring material issues in Semiconductor

Environ-mental

Revenue

Cost

Strategy & Roadmap

Emissions

Shared value

Human capital

Service

BUSINESS MODEL AND INNOVATION

LEADERSHIP AND GOVERNANCE

ENVIRONMENTAL IMPACT OF VALUE CREATION

Greenhouse Gas Emissions & Chemicals

Energy Management in ManufacturingWaste & Water Management in Manufacturing

Managing a global skilled workforceRecruting and developing talent

Employee Health & SafetySustainable sourcingLabour practices & human rigths

Intellectual Property ProtectionProduct Portfolio & Lifecyle ManagementInnovation Management

Product QualityWorking CapitalSupply Chain Cost

Perfect Order FulfilmentDelivery Performance, Flexibility

Community engagementBuilding of strong local clusters

Climate strategy


Source: shared.value.chain, APICS SCC, SASB

COGSMarketShare CapEx

Cost of Capital

Source: shared.value.chain (based on SCOR Model, SA SB, DSJI and other metrics)

Current KPI Future KPI / Opportunities

Company Performance

Performance Elements

Drivers: ...Driver:

Market / Competition

Driver: Sustainability /

Legislation

Driver: Digitalisation

Economic

Revenue

Service

Cost

Societal

Governance

Human Capital

Shared Value

Environmental

Strategy / Roadmap

Emissions

Ecological efficiency

Sample Structure of a Sustainable Value Scorecard


Example AVNET: Evaluation of performance at Company level (APICS SCOR + Mixed Items)


PERFORMANCE

• Economic: – Cost– Assets

• Services: – Reliability– Responsiveness – Risk Mitigation

• Ecologic: – Environmental – Social

Source: AVNET, 2013

Page 30

When building a sustainable value scorecard it is a lso important to consider key industry drivers

Measuring what matters | SSIA SCM FORUM 2016 | 21 July 2016

Market & Competition

• High volatility, high risk• Low demand visibility• Capital demand• Market consolidation• Massive Chinese

Investment Program• ...

Digitalization

• Internet of Things• Wearables• Omnichannel• Industry 4.0 - Man-

Machine Integration• ...

Sustainability

• Sustainable Development Goals

• COP21 – Climate Action Plan / Carbon Regulation

• Circular Economy• Global workforce &

migration• Customer concerns.

Increased demand across industries drives concerns about resource scarcity, climate change, impact of pollution, environmentla/societal externalities

• ...

Economic

Societal


Governance

Risks and opportunities for Semiconductor companies

Environ-mental

Revenue

Cost

Strategy & Roadmap

Emissions

Shared value

Human capital

Service

(-) Loss in evaluation, if not managed well(-) Loss in brand reputation(-) Loss in profts, assets, liabilities and cost of capital• ...• ...


OPPORTUNITIES

RISKS

(+) Brand reputation(+) Increased sales of sustainable products(+) Increased financial valuation(+) Secured license to operate(+) Cost reduction(+) Government incentives to become industry cluster of choice

The right approach to managing and measuring material issues will determine risk & opportunities

Economic, ecological and societal value

Economic value

Ecological value

Societalvalue

Revenue growth

Reduced costs

Reduced use of primary materials

Improved societal value of the product

Reduced impact of products on the environment

Reduced negative social impact of value creation

• Reduced working capital• Fewer fixed assets• Improved use of capital• Reliable supplier base

• Sustainable innovation• Improved brand image• Premium prices via segmented

customer offerings

• New business models for solving social problems

• Improved localisation and income opportunities

• Avoidance of child labour• Alleviation of poverty

• Substitution and simplification of materials

• Reduced environmental impact and costs

• Closed material cycles• Internalisation of environmental

costs• Habitat regeneration• Preservation of biodiversity

Source: Sustainable Value Chain Management (D’heur et al., Springer, 2015)

Thriving for sustainable value creation, is deliver ing several economic, ecologic and societal benefits


Clean TechHuman CapitalSourcing Water Stress


Source: MSCI, 2016Source: MSCI, 2016

Source: MSCI, 2016 Source: MSCI, 2016Investment research takes a close look at the risks and opportunities

for Semiconductor companies

Middle management is the catalyst to translate theambition of sustainable value creation into reality


3 major reasons for failure 3 ways of making it work

Connect sustainable value expectations to corporate strategy

Link expected outcomes to incentives and metrics

See it as a journey, with interim milestones

No clear link to corporate strategy

Death by middle management

Premature declare of vistory

Thank you! Please join the conversation


Adams-Lehmann-Straße 56 80797 MünchenTel. +49 89 461 331 868Mobil +49 170 768 58 [email protected]

http://bit.ly/1G1vpcm

We help companies to achieve sustainably better performance

Diplom-KaufmannMichael D‘heurFounder & Managing Director

Springer Gabler; Deutsch; Published Oktober2013. More Information:http://bit.ly/1fTcrWg

Springer International; Englisch; Published April 2015.More Information: http://bit.ly/1fTcrWg

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@SharedxValue

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8 Steps to get started towards sustainable value cr eation


Get buy-in from managementDetermine the importance of sustainable valuecreation, based on your company, industry,culture and ambition.See the opportunities!

Assess value creation approachAssess the current impact of your company'svalue creation approach. Review risks andopportunities of sustainable value metrics foryour company.

Determine the material issuesConsider multi-stakeholder inputs tounderstand what matters. Determine what canbe influenced by your company.

Set ambitious targets

Set ambitious, but realistic targets. Tie metrics toincentives and the performance managementsystem. This will make it standard practice.

1

2

3

4

Agree measurement standardWhat and how you measure, will drive behaviour.Process, data collection, weightings and a good mixof quantitative and qualitative metrics are key.

Build a blended scorecardReview where the industry is converging onmetrics.Start with the metrics you have and append new metrics step by step

Always demonstrate the valueUnderstand the hard and soft benefits of using asustainable value scorecard. Make othersunderstand the tangible and intangible value as well

Communicate progress, build trust!Engage in peer reviews and benchmarking.Communicate achievements consciously internallyand externally. At all times: no greenwashing!

5

6

7

8

Main metrics Other metrics

Intellectual property protection; % revenuefrom products with sustainability attributes; % of portfolio with circular product designs, ...

Perfect order fulfilment, On time delivery against request, On time delivery to commit, Order fulfilment cycle time / lead time, SC flexibility up/down, ..

Line item on time in full, Supply continuity (line down), Material liability, excess, obsolete, scrap, Value at risk

Inventory turns / Working capital, Asset turns, Total SC management cost, Cash-to-cash cycle time, ...

Cost of goods sold, Purchase Price Variance, SG&A expenses, Return on assets, Return on working capital, ...

Employee Health & Safety, % of 3TG conflict free materials, ...

% of materials with critical materials, Legal/Regulatory fines related to EHS issues, ...

Recruting/managing global skilled workforce, ...

% of foreign nationals, diversity, locations, ...

% of revenue with products that solve societal challenges, ...

% of products with declarable susbstances

Greenhouse Gas Emissions, ... Global Scope 1 emissions, Total PFC emissions

In production: Energy/Water(Waste managementAt system level: Processor energy efficiency

Total energy consumed, % grid electricity; % renewable electricity, Water withdrawn, water recycled, % in regions with high water stressAmount of hazardous waste, recycled waste, % going to landfillPage 38 Measuring what matters | SSIA SCM FORUM 2016 | 21 July 2016

Economic

Societal


Governance

Environ-mental

Revenue

Cost

Strategy & Roadmap

Emissions

Shared value

Human capital

Service