Alcoa 1998 Annual Report Download - page 39

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outflows during 1996 and included the purchase of Alumix in Italy
and Alcan’s extrusion operations in Brazil.
In 1998, Alcoa received $55 from the sale of its specialty chemical,
Alcotec wire, Vernon cast plate and Australian gold operations.
Asset sales in 1997 generated $265 and included the Caradco, Arctek,
Alcoa Composites, Norcold, Dayton Technologies and Richmond,
Indiana facilities. Also included was the sale of a majority interest
in Alcoa’s Brazilian cable business.
Year 2000 Issue
Alcoa, like other businesses, is facing the Year 2000 issue. The Year
2000 issue arises from the past practice of utilizing two digits (as
opposed to four) to represent the year in some computer programs
and software. If uncorrected, this could result in computational
errors as dates are compared across the century boundary.
As a basic materials supplier, the vast majority of the products
produced and sold by Alcoa are unaffected by Year 2000 issues
in use or operation since they contain no microprocessors.
Alcoa is addressing the Year 2000 issue through a formal
program that reports to the company’s chief information officer.
Alcoa’s methodology encompasses four phases: Awareness/Inven-
tory; Assessment; Remediation and Compliance Testing. Ongoing
leadership is provided by a Global Program Office, which is directly
linked into Alcoa’s business units and resource units, including
the newly acquired Alumax facilities. The Global Program Office
provides processes and tools to the business units and monitors
progress through systematic reporting and on-site verification
reviews in cooperation with the company’s internal auditors.
Progress is reported regularly to the company’s senior executives
and to the Audit Committee of Alcoa’s board of directors.
Internally, computer- and microprocessor-based systems, such
as mainframe, minicomputer and personal computer systems and
the software they utilize, have been assessed. Operational support,
process control, facilities, infrastructure and mechanical systems
are being addressed as well. These systems assist in the control
of Alcoa’s operations by performing such functions as maintaining
manufacturing parameters, monitoring environmental conditions
and assisting with facilities management and security. Many of
these systems rely on software or contain embedded electronic
components that could be affected by Year 2000 compliance issues.
Since many of these systems are common across operating locations,
information sharing and efficiencies have been realized in the Year
2000 efforts. Priority for any required remediation efforts has
been assigned based on the criticality of the system or business
process affected.
As of December 31, 1998, the remediation phase has been
completed for 90% of Alcoa’s critical components with 86% of all
critical components having completed compliance testing. Individual
exceptions providing for completion during 1999 have been approved
by business unit and resource unit management and reviewed by
the Year 2000 Global Program Office and the chief information
officer. These, along with all other critical systems, will be specifi-
cally addressed within Alcoa’s contingency planning process.
Alcoa does not believe that this limited rescheduling will adversely
affect its overall Year 2000 readiness. It is presently expected that
compliance testing will be completed for 99% of critical systems
by the third quarter.
Alcoa relies on numerous third-party vendors and suppliers
for a wide variety of goods and services, including raw materials,
telecommunications and utilities such as water and electricity.
Many of the company’s operating locations would be adversely
affected if these supplies and services were curtailed as a result
of a supplier’s Year 2000 noncompliance. Alcoa has surveyed its
vendors and suppliers using questionnaires and, based on the
response and significance to the company’s operations, may initiate
follow-up meetings. If Alcoa concludes that a third-party trading
partner presents a substantial risk of a Year 2000 based business
disruption, an effort will be made to resolve the issue. If necessary,
a new provider of the affected goods or services will be qualified
and secured. Communication with suppliers and other third parties
regarding Year 2000 issues is a continuing process.
Alcoa and certain of its trading partners utilize electronic data
interchange
(EDI) to effect business communications. The company’s
EDI system software has been upgraded to support transactions
in a Year 2000 compliant format. Migration of
EDI transactions to
this new format will occur as existing
EDI transaction formats are
modified by Alcoa and its
EDI trading partners on a case-by-case
basis. Some Alcoa customers have indicated that they will not
modify
EDI transaction sets but will rely on other techniques to
achieve Year 2000 capability.
Alcoa’s Year 2000 program utilizes on-site verification of Year
2000 efforts at its various operating locations. Using audit-like
techniques, the Year 2000 Global Program Office and the company’s
internal auditors verify that business and resource units have
followed the prescribed processes and methodologies and also
sample local Year 2000 readiness. Each of Alcoa’s business units
will receive at least one verification audit during 1999 with more
than sixty reviews planned.
Based on current information, Alcoa believes that the most likely
worst case scenario to result from a Year 2000 failure by Alcoa,
its suppliers or customers would be a short-term reduction in
manufacturing capability at one or more of Alcoa’s operations and
a temporary limitation on Alcoa’s ability to deliver products to
customers. Based on internal efforts and formal communications
with third parties, Alcoa does not believe that Year 2000 issues are
likely to result in significant operational problems or have a material
adverse impact on its consolidated financial position, operations
or cash flow. Nonetheless, failures of suppliers, third-party vendors
or customers resulting from Year 2000 issues could result in a
short-term material adverse effect.
In 1998, Alcoa incurred $38 of direct costs in connection with
its Year 2000 program. These costs include external consulting
costs and the cost of hardware and software replaced as a result
of Year 2000 issues. Direct costs for 1999 are estimated to be
between $35 and $60.