Spectral Response Supplier Conference

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Spectral Response Supplier Conference
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Senior Staff
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Program Management/Sales
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Purchasing Group
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What to Expect

• This is a not meeting to tell you what we need,
  or want, or demand you do!
• We are a supplier too
• We are in a time of Economic Darwinism
• This meeting is not about our past, but rather
  our future as a community of interrelated
  businesses
• We are not going to talk about the CM market,
  its growth etc.your suppliers have given you
  all that
• We are going to lay-out our business and our
  future focus, so we all can be prepared to
  compete
• We need to focus on our strengths and show you
  how we all can gain from a focused strategy

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Reason for the Meeting

• We as a community stand at the cross roads of our
  business
• Do we let our business go off shore?
• Do we allow our work to be discounted?
• Do we resign ourselves to the fact the market is
  going to continue to decline and eventually be
  too small to be viable?
• We probably can agree that business either is
  turning or going to turn, and if we are prepared
  Spectral will be uniquely qualified to service
  customer demand
• We believe the market is in a slow turn, and
  given our investments into the business we can be
  a strong competitor and great customer.

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Current Market and Spectral Focus
Purchasing, Systems and Practice
Strategy for Market Development
Rap-up, Questions
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Over all Business Review

• 5 Quarters of sequential growth
• Positive book to bill since January 2008
• Every quarter and every month year to date have
  exceeded last year
• Q4 of 2008 was the largest in every measure
• Q1 exceed Q1 08 by 20, Q2 likely 7

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Financial Update

• Stronger than expected financial results over the
  last 12 to 15 months
• Our current financing facilities are running less
  than 30 of full utilization
• Plenty of room to grow
• Very low debt, in a capital intensive business
• Positive cash flow even during our down turn
• On average we are getting paid by our customers
  in 51 days
• On average we are paying our suppliers in 44 days
• Spectral Response will soon be 100 employee
  owned, with a great opportunity to add whatever
  financial resources are needed to growth the
  business

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Current Customer Environment

• Our market segment is working exactly as it was
  designed
• Very dysfunctional
• Lead-times and channel inventory have absolutely
  no meaning to our customers
• When a customer receives an order.they take it,
  just like all of us
• Customers want it now!
• The cascading affect of just taking orders is
  becoming evident in delivery issues
• Fragmented supply-chain is creating a lot of
  customer issues
• Free
• Perfect
• Instant
• Delivery and quoting issues creating customer
  anxiety
• Customers are demanding 5 day turn around on
  quotes
• European customers have lagged the North American
  recovery but that is changing

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What is Spectral Response and who do we target

• We are an electronics manufacturing service
  provider focused on the logistical,
  manufacturing, operational, test and engineering
  needs of our customers
• Building boards is the easiest thing we do
• We are selling a solution not assemblies
• We target customers with large and/or hard to
  build assemblies with very demanding test
  requirements
• We dont walk away from high volume lower ASP
  business
• Our typical customer has a series of complex
  needs and expectations
• We focus on customers that direct their internal
  resources to design and demand creation

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Spectral Response transformation to service based
manufacturing

• Our business is becoming less and less about
  being a contract manufacturer
• Up to 2001 solely built printed circuit boards
• 2001 added test resources so we could build and
  test boards with our own designed processes and
  equipment
• 2002 added square footage to handle functional
  test and limited box build
• 2005 formalized engineering group specifically
  for customers front end needs
• 2006 added box build, fulfillment and
  distribution services
• 2008 added depot repair and logistics support
  (3PL)

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Typical Customer engagement

• Procurement
• Sourcing
• Supply-chain Management
• Product roadmap/life cycle management

• Burn-in
• Fulfillment
• Distribution
• 3PL
• Repair services/depot repair
• Customer software

• Design Review
• Supplier review
• Complete test/
• design services
• NPI
• DFM
• Weekly design
• reviews

• Complete board level testing
• Complete list of manufacturing registrations
• Process development/ refinement
• Box-build

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Process of Customer Development
Spectrals Differential Model
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This is the business we are trying to avoid
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Current Customer Make-up

• Spectral Response services primarily the
  corporate infrastructure business for the
  following segments
• Satellite
• RF
• Medical
• Military
• Video
• Geographic diversity is expanding, but mostly
  near shore customers
• Most products we build end up outside of North
  America
• A great deal of what we provide actually ends up
  in developing countries
• Typically high ASP, high complexity, rigorous
  test requirements
• Most of our current customer utilize some, if not
  all of our services

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New Capabilities

• General Upgrades
• Lean Manufacturing Principles throughout the
  factory
• Currently placing down to 0201
• Upgraded Automated Inspection
• Blackbelt David Shockley
• Military Market
• Until very recently, we only did business with
  the Military through value added resellers. Over
  the last year we have added
• ITAR certification
• J-standard Internal trainer and deployed to
  employees
• AS9100 Internal RAB Lead Auditor
• Working towards COMSEC Certification
• Medical Market
• We have historically done business with some
  medical customers from a distance
• We have added 13485 to our list of registrations
• Equipment Upgrades
• Recently added a third line (Siemens)
• Added several pieces of high reliability
  equipment needed for Military/government/Space
  business
• Moving into larger and more efficient facility
• New facility will be 60 larger than our current
  foot print

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New Market Development

• Focused strategy on developing customers in the
  EU
• Upside for our suppliers
• New POS dollars in the market
• Using Video Conferencing to accommodate design
  meetings and FAE support
• Most EU customers do not get good design support
  in their home country
• Largest customer uses
• Our engineering services
• Fulfillment/distribution/warehousing services
• We conduct weekly design reviews
• We cross and make suggestions to customers BOM
• We co-develop test and platform needs
• This customer is 20 minutes outside of London
• We have bridged the distance and time diversity
  to provide local service from another country
• Attractive because most European customers have
  highly complex needs
• Dollar should continue to under perform
• today 1.38 to 1

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New Market Development Continued

• We have the equipment and processes in place to
  fully service and penetrate the following
  markets
• Military
• Space
• Government
• Medical
• New facility will allow us to expand customers
  needs for complete logistical support
• Customer Example
• Highly complex boards with both new and old
  designs
• Complete business system access
• Deal with all NPI, BOM and component issues
• Report all quality and process issues
• Test development
• Deal with production related issues
  (manufacturing, test, obsolescence, vendor
  negotiations, update Boms)
• Deal with all failures both in and out of
  warranty
• Process order and repairs in their business
  system
• Warehousing, customer flavoring, distribution and
  fulfillment
• Depot repair and OEM product tracking
• End of life/maintenance
• Turned this customer from buying products to
  solution driven

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Threat from Low Cost Areas

• We see all the threats from low cost
  manufacturing sites
• Some business should go to low cost manufacturing
• The business we work on does not belong there
• We dont fight the need for lower costs we join
  the argument.
• Customer Example
• We developed a great deal of internal engineering
  resources
• We tell customers well develop test for themno
  charge
• Well refine the process and fix manufacturing
  issuesno charge
• We will sometimes develop test sets/equipmentno
  charge
• Guess what happens when price becomes the main
  topic of discussion
• Following this principle we have seen 4 pieces of
  business leave for low cost regions, with 3
  coming back.
• The fourth does not fit our model.
• The trick is to get customers to understand the
  difference between price and cost

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We do need to fight and be competitive

• The basis of our process working is remaining
  price competitive.
• 70 /- of all our cost is material
• Guess whats reviewed by our customers most
  closely
• Customers believe there is a substantial pricing
  difference between buying in the US vs. Asia
• We have repeatedly been able to compete
• Please dont hold out a price if you know we can
  get it.
• Pricing Example
• Customer out of territory quoted on a build
• Sent it out to all suppliers in the normal way
• Gave it to the customer, and after they reviewed
  our quote said we were high on a list of items.
• All these items came from a distributor
• We called and we got better pricing before we
  completed the sentence
• Why would you do that?
• We all loose, not just me, the individual
  supplier but also the rest of the folks on the
  BOM.
• We want you to make moneylets just be smart
  about it

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Business Proposition for you

• We have spent more on equipment and process
  upgrades over the last year than we have in the
  previous three years combined
• When the economy turnsand it will, we will be
  uniquely qualified to handle new business from a
  total solution stand point
• We have a strong balance sheet with very little
  debt
• At years end, we will be in a new facility
  capable of solving more customer business issues
  our capabilities, expanding or reach and
  producing more products
• All POS dollars are generated from this location
• We can help you get paid for your effort, not ½
  of it
• We live and die by our suppliers and the
  customers we work with together.
• This is not about the age old way of increasing
  your business by referring customers to us
• Think beyond that and see the impact of us
  working together
• We believe we are uniquely qualified to handle
  new customers and new markets given our strong
  financial position, current platform, and the
  expansion of our facilities

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Break-out of Purchasing Systems
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Purchasing Automation

• We have deployed EDI as our main purchasing
  logistics tool
• If you are not on EDI and want to be let us work
  with you to do that
• Today we issue 85 - 90 of all purchases and
  reschedules through EDI
• We are expanding our Supplier Portal and
  revamping our Web Page
• We are reevaluating our quote tools and system
• Customer are pressuring us for 5 day turn around
• This includes our activities
• We are evaluating how we use more history and
  stop quoting the same part over and over and over
  and over again
• We are evaluating uses of our Portal to do our
  quotes
• We will likely have another meeting to help us
  refine our systems for speed
• We are struggling to get pricing the first time
  we ask rather than keep asking
• The goal is to have a business system to business
  system quoting and purchasing tools for routine
  parts
• We all want to focus on the expensive parts

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Yearly Quote

• We look to quote out our AVL once a year and then
  put the parts in the vault
• We want to preserve the integrity of the
  rep/distributor that has done the work
• Once the quote is completed the parts are awarded
  for the year
• Quoting/awarding once per year may give up some
  margin for us, but it gives the supplier
  consistency and the ability to perhaps make up
  margin over time
• When do we requote?
• When a supplier causes us to revisit the awarded
  device
• When a customer respins a board or otherwise
  points us to that part
• If a customer demands a requote on a board
• We ask for your best price and dont come back
• There is no Turkish Bizarre affect in our quoting

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What we do with your prices

• We take your costs and match them against
  everyone that quotes a particular device, and
  award based on price
• Why is this necessary?
• We need to roll-up a BOM cost and in every
  instance share our material cost with our
  customer
• Terms do matter
• Because we pay on time we take advantage of terms
• We dont have the luxury of giving one price and
  buying at another

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Focused Suppliers

• We dont buy from just anyone
• We have a limited number of distributors
  partnership engagements
• Our over riding goal is to place business with
  our partners and not just a distributor
• We stay within franchise agreements
• You will not see us buy from suppliers out of
  territory or out the country
• We use independents on an as needed basis
• They are key suppliers for us
• We only use 2 primary independents
• I got that call on Friday afternoon
• You can trust your business within the 4 walls of
  Spectral Response

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Thank You!