Building a Foundation for Growth: Operational Improvement

John Haydon EVP Global Operations and Supply Chain

Global Operations and Supply Chain:

A Competitive Advantage for Philips Healthcare
# of equipment shipments 1.4M/yr. q p p y # of service parts shipped 1M/yr. p pp y # of countries shipped to 170+ pp

Global Operations Business Excellence Information Technology Purchasing Quality & Regulatory transPHorm

Supply / Customer Value Chain

Commercial Supply Chain

//////////////////////////////////// Customer

Industrial Supply Chain

Service Parts Supply Chain

We remain focused on three areas

Focus Areas Accelerate Growth Initiatives 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 1. 2. Increase presence in emerging markets Expand mid / low-end product offering Increase sales to home healthcare Drive growth in healthcare informatics Leverage patient/care provider brand Expand low cost country sourcing Improve product reliability costs Increase service productivity / effectiveness Optimize market approach Improve quote to cash Deliver value from existing acquisitions Pursue new acquisitions in strategic areas q g

Increase Margins

Capitalize on q Acquisitions

transPHorm is a significant contributor to margin improvement

cross boundary Enterprise wide program increasing cross-boundary collaboration and driving change management
Focus Areas Accelerate Growth Initiatives 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 1. 2. Increase presence in emerging markets Expand mid / low-end product offering Increase sales to home healthcare Drive growth in healthcare informatics Leverage patient/care provider brand transPHorm Expand low cost country sourcing (SBO) Improve product reliability costs (ICS) Increase service productivity / effectiveness (ICS) Optimize market approach (OMA) Improve quote to cash (Q2C) Deliver value from existing acquisitions Pursue new acquisitions in strategic areas q g
(PMI)

Increase Margins

Capitalize on q Acquisitions

transPHorm 2010 accomplishments and progress

Quote to Cash Ahead of Plan

Supply Base Optimization

Work In Progress

Simplifying and standardizing business processes Rationalizing commercial business centers

Consolidating industrial footprint & systems (ERP) Improving Bill of Material savings Nego & LCC

Optimize Market Approach Creating value-based price competency Decreasing margin leakage via Price Lab

On Plan

Integrated Customer Services

On Plan

Realizing service parts material cost-savings Driving delivery of standard processes and tools

Post Merger Integration

Work In Progress

Managing all acquisitions to RFA commitments Establishing best practice sharing among acquisitions

Customer Satisfaction
Make it easy for our customers to do business with us

Increase Margins
g Driving Shareholder Value

Employee Engagement
Enhance the capabilities p and careers of employees

g y y y Presented during Analysts day May 2009

Supply Base Optimization key contributor to margin expansion

Increase Margins SBO: Establish a highly flexible supply chain with an optimal industrial footprint.
Industrial consolidation Divestment nonDi estment of non key components Outsourcing of noncore assembly Final assembly and test sites are being consolidated Vertically integrated non-key components are b i t d k t being V ti ll i t divested All non core product assembly activities are either being outsourced or transferred to low-cost countries Expansion of Imaging Systems Manufacturing Centers in China, Brazil and India to serve the local and the global market Consolidation of key-market back-offices

Low-cost country 4 manufacturing and sourcing

5

Commercial back office consolidation

Supply Base Optimization Manufacturing Strategy

Philips Strategic Components

Transducers, X-Ray Tubes, Detectors, Magnets, Adaptive facemask technologies

Suppliers

Electronics Manufacturing Services

PCB assemblies, general sub-assemblies & peripherals

Primary Final Assembly & Test - FA&T

OEM / ODM Component Manufacturers

Power supplies, displays & custom devices

13 Primary FA&T sites Globally distributed Multi product Focused on product quality, delivery agility, & regulatory compliance

Leg gend

Philips External supplier

Pick To Order

Build To Order

Configure To Order

Manufacturing strategy tailored to individual customer requirements

7

Customer rs

Philips Centers of Manufacturing Excellence

y g ) Primary Centers of Manufacturing Excellence ( (CME)

North America
Bothell

North America
Cleveland Andover Pittsburg

EMEA
Best

EMEA
Bblingen
Strategic Alliance

Washington

Ohio

Massachusetts

Pennsylvania

Netherlands

Germany

Russia

Establishing a highly flexible supply chain

with an optimal industrial footprint

Manaus

Lagoa Santa

Maharashtra

Shenzhen

Suzhou

Shenyang
Joint Venture

Brazil

Brazil

India

China

China

China

Latin America

Asia Pacific
8

pp y p p Supply base simplification and optimization

Centers of Manufacturing Excellence Primary Final Assembly and Test
Strategic priorities Improving MOH * Consolidation footprint to 13 Primary CMEs Expanding mfg. volumes in emerging markets IT Simplification Further F th EMS outsourcing t i Continuing investment in Lean / Six Sigma
* Manufacturing Overhead

Driving IT simplification aligning due to M&A

30 25 20 15 10 5 0 2009 2010 2011 2012 ERP system 80% reduction

Implementing Lean Manufacturing 13 CMEs

Locations with Lean Programs Locations without Lean programs

Improving productivity
Manufacturing costs as % of BOM costs

100% 75% 50% 25% 0%

2009 2010 2011 2012 2009 2010 2011 2012
9

Mfg. cost improvement 20+%

pp y p Supply base optimization

Purchasing Excellence Bill of Material (BOM) improvements
Strategic Priorities Driving Cost Improvement Strategic Supplier Consolidation Enhancing Innovation From Suppliers Increasing LCC Sourcing and Staffing Enhancing Negotiation Skills & Processes Value Engineering / Cost Engineering
0 2009 2010 2011 2012

Driving supplier consolidation

# Suppliers representing 80% of purchasing spend
300 286 200 100 260 250 230

Increasing low cost country sourcing

% BOM spend in low cost countries
50% 40% 30% 20% % 10% 0% 2009 2010 2011 2012 38% 42% 45% 50%

Increasing cost reduction

% of BOM Savings

2009

2010

2011

2012 10

y y Key takeaways
Delivering margin improvements through transPHorm programs I Improve manufacturing overhead b f t i h d by 20% over 4 years through the creation of CMEs Drive BOM savings in 2010 through purchasing excellence

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Q&A
John Haydon J h H d