Philips 2013 Annual Report Download - page 98

6 Risk management 6.4 - 6.4
98 Annual Report 2013
If Philips is unable to ensure eective 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 on external
suppliers and providers. 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 eect 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 aect its financial condition
and operating results.
Diversity in information technology (IT) could result in
ineective or inefficient business management. IT
outsourcing and o-shoring strategies could result in
complexities in service delivery and contract
management.
Philips is engaged in a continuous drive to create a
more open, standardized and consequently, more
cost-eective IT landscape. This is leading to an
approach involving further outsourcing, o-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
oered by IT systems.
Philips observes a global increase in IT security threats
and higher levels of sophistication in computer crime,
posing a risk to the confidentiality, availability and
integrity of data and information.
The global increase in security threats and higher levels
of professionalism in computer crime have increased
the importance of eective 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 aect 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,
disruptions 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.