Philips 2012 Annual Report Download - page 90

7 Risk management 7.4 - 7.4
90 Annual Report 2012
If Philips is unable to ensure effective supply chain
management, e.g. facing an interruption of its supply chain,
including the inability of third parties to deliver parts,
components and services on time, and if it is subject to
rising raw material prices, it may be unable to sustain its
competitiveness in its markets.
Philips is continuing the process of creating a leaner supply
base with fewer suppliers, while maintaining dual sourcing
strategies where possible. This strategy very much
requires close cooperation with suppliers to enhance,
amongst other things, time to market and quality. In
addition, Philips is continuing its initiatives to reduce
assets through outsourcing. These processes may result
in increased dependency. Although Philips works closely
with its suppliers to avoid supply-related problems, there
can be no assurance that it will not encounter supply
problems in the future or that it will be able to replace a
supplier that is not able to meet its demand. Shortages or
delays could materially harm its business.
Most of Philips’ activities are conducted outside of the
Netherlands, and international operations bring
challenges. For example, production and procurement of
products and parts in Asian countries are increasing, and
this creates a risk that production and shipping of
products and parts could be interrupted by a natural
disaster, such as occurred in Japan in 2011. A general
shortage of materials, components or subcomponents as
a result of natural disasters also bears the risk of
unforeseeable fluctuations in prices and demand, which
could have a material adverse affect on its financial
condition and operating results.
Sectors purchase raw materials including so-called rare
earth metals, copper, steel, aluminum and oil, which
exposes them to fluctuations in energy and raw material
prices. In recent times, commodities have been subject to
volatile markets, and such volatility is expected to
continue. If we are not able to compensate for our
increased costs or pass them on to customers, price
increases could have a material adverse impact on Philips’
results. In contrast, in times of falling commodity prices,
Philips may not fully profit from such price decreases as
Philips attempts to reduce the risk of rising commodity
prices by several means, such as long-term contracting or
physical and financial hedging. In addition to the price
pressure that Philips may face from our customers
expecting to benefit from falling commodity prices or
adverse market conditions, this could also adversely affect
its financial condition and operating results.
Diversity in information technology (IT) could result in
ineffective or inefficient business management. IT
outsourcing and off-shoring strategies could result in
complexities in service delivery and contract
management. Furthermore, we observe a global increase
in IT security threats and higher levels of professionalism
in computer crime, posing a risk to the confidentiality,
availability and integrity of data and information.
Philips is engaged in a continuous drive to create a more
open, standardized and consequently, more cost-
effective IT landscape. This is leading to an approach
involving further outsourcing, off-shoring,
commoditization and ongoing reduction in the number of
IT systems. This could introduce additional risk with
regard to the delivery of IT services, the availability of IT
systems and the scope and nature of the functionality
offered by IT systems. The global increase in security
threats and higher levels of professionalism in computer
crime have increased the importance of effective IT
security measures, including proper identity management
processes to protect against unauthorized systems access.
Nevertheless, Philips’ systems, networks, products,
solutions and services remain potentially vulnerable to
attacks, which could potentially lead to the leakage of
confidential information, improper use of its systems and
networks or defective products, which could in turn
materially adversely affect Philips’ financial condition and
operating results. In recent years, the risks that we and
other companies face from cyber attacks have increased
significantly. The objectives of these cyber attacks vary
widely and may include, among things, disruption of
operations including provision of services to customers
or theft of intellectual property or other sensitive
information belonging to us or other business
partners. Successful cyber attacks may result in substantial
costs and other negative consequences, which may
include, but are not limited to, lost revenues, reputational
damage, remediation costs, and other liabilities to
customers and partners. Furthermore, enhanced
protection measures can involve significant costs.
Although we have experienced cyber attacks but to date
have not incurred any significant damage as a result, there
can be no assurance that in the future Philips will be as
successful in avoiding damages from cyber attacks.
Additionally, the integration of new companies and
successful outsourcing of business processes are highly
dependent on secure and well-controlled IT systems.