Philips 2006 Annual Report Download - page 84

Philips Annual Report 200684 Philips Annual Report 200684
Extracting the power of One Philips
Leveraging the company’s spend and resources in key
areas and negotiating as One Philips improves time-to-
market, reduces total cost of ownership and increases
quality. Strategic priorities are:
NPR spend: Philips has shifted from decentralized cost
centers to global centralized services. Approximately
70% of Philips’ addressable spend is channeled through
three transactional shared service centers located in
low-cost countries.
Cross-divisional BOM opportunities: ownership
of some EUR 3 billion cross-divisional spend
is concentrated centrally. Centralized ‘One Philips’
leveraging of this spend with fewer, more strategic
suppliers has resulted in signifi cant value creation.
Cross-divisional teams led by divisional CPOs are
active in eleven commodity areas, including metals
and electronic components.
Outsourcing strategy and guidance: this initiative
supports industrial strategy decision-making, addressing
the shift in resources required to manage the change
to an outsourcing relationship. Philips’ total EMS,
ODM and OEM outsourcing spend has grown from
EUR 2 billion in past years to over EUR 6 billion in
2006. To ensure the development of more strategic
relationships, the number of preferred EMS (Electronic
Manufacturing Services) suppliers has been reduced
from 61 in 2004 to 8 in 2006.
Product creation process (PCP): more than 50% of
total product costs are defi ned in the early development
stages. Therefore, early supplier/supply management
involvement (ESI) in PCP is essential in realizing
time- and cost-saving initiatives. Philips launched
an Early Supplier/Supply Management Involvement
program in 2006.
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Transforming towards strategic supply management
Developing into a value creation role requires strategic
relationships with suppliers.
Philips can realize more value by working closely with
a strong network of strategic suppliers. The ‘Partners
for Growth’ strategic supplier relationship management
program brings Philips together with its top 30 suppliers
to identify and exploit concrete business opportunities.
Philips’ business with ‘Partners for Growth’ suppliers
has increased by 26% since 2004.
The transformation toward strategic supply management
is supported by a dedicated HRM program and cutting-
edge processes, tools and systems, including sourcing
and eAuctioning. Philips eAuctioned EUR 1.9 billion
spend in 2006 − nearly 10% of total spend, compared
to less than 2% in 2005.
In 2007, Philips intends to continue to create value
through the supply management function, and will
continue with the comprehensive supply management
transformation process initiated in 2003.
2006 fi nancial performance
The reported EBIT fell from a profi t of EUR 121 million
in 2005 to a loss of EUR 257 million in 2006. The decline
was primarily attributable to a charge of EUR 256 million
recorded for asbestos-related product liabilities, net of
insurance recoveries. For further information on asbestos-
related product liabilities, please refer to note 27 to the
fi nancial statements in this Annual Report. EBIT in 2006
was positively impacted by the result of the Real Estate
Service Unit, with various gains on real estate transactions
amounting to EUR 54 million. In 2005, the sale of the Philips
Pension Competence
Center resulted in a gain of EUR 42
million; real estate transactions accounted for a profi t of
EUR 122 million in 2005.
6 Financial highlights 8 Message from the President 14 Our leadership 20 The Philips Group