Lexmark 2009 Annual Report Download - page 15

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Lexmark’s primary competitors in the inkjet product market are HP, Canon and Epson, who together
account for approximately 85% of worldwide inkjet product unit sales. The Company must compete with
these same vendors and other competitors, such as Brother and Kodak, for retail shelf space allocated to
printing products and their associated supplies. Lexmark sees other competitors and the potential for new
entrants into the market possibly having an impact on the Company’s growth and market share. The
entrance of a competitor that is also focused on printing solutions could have a material adverse impact on
the Company’s strategy and financial results.
Refill, remanufactured, clones, counterfeits and other compatible alternatives for some of Lexmark’s toner
and ink cartridges are available and compete with the Company’s supplies business. However, these
alternatives may result in inconsistent quality and reliability. As the installed base of laser and inkjet
products matures, the Company expects competitive supplies activity to increase. Historically, the
Company has not experienced significant supplies pricing pressure, but if supplies pricing were to
come under significant pressure, the Company’s financial results could be materially adversely affected.
Manufacturing
Lexmark operates manufacturing control centers in Lexington, Kentucky; Shenzhen, China; and Geneva,
Switzerland; and has manufacturing sites in Boulder, Colorado; Juarez, Mexico; and Lapu-Lapu City,
Philippines. The Company also has customization centers in each of the major geographies it serves.
Lexmark’s manufacturing strategy is to retain control over processes that are technologically complex,
proprietary in nature and central to the Company’s business model, such as the manufacture of toner and
photoconductors. The Company shares some of its technical expertise with certain manufacturing
partners, many of whom have facilities located in China, which collectively provide Lexmark with
substantially all of its printer production capacity. The Company continually reviews its manufacturing
capabilities and cost structure and makes adjustments as necessary.
Lexmark’s manufacturing operations for toner and photoconductor drums are located in Boulder, Colorado
and Juarez, Mexico. Laser printer cartridges are assembled by a combination of in-house and third-party
contract manufacturing. The manufacturing control center for laser printer supplies is located in Geneva,
Switzerland.
Lexmark’s manufacturing operations for inkjet printer supplies are located in Lapu-Lapu City, Philippines.
The manufacturing control center for inkjet supplies is located in Geneva, Switzerland.
Materials
Lexmark procures a wide variety of components used in the manufacturing process, including
semiconductors, electro-mechanical components and assemblies, as well as raw materials, such as
plastic resins. Although many of these components are standard off-the-shelf parts that are available from
multiple sources, the Company often utilizes preferred supplier relationships, and in certain cases sole
supplier relationships, to better ensure more consistent quality, cost and delivery. Typically, these preferred
suppliers maintain alternate processes and/or facilities to ensure continuity of supply. Lexmark
occasionally faces capacity constraints when there has been more demand for its products than
initially projected. From time to time, Lexmark may be required to use air shipment to expedite product
flow, which can adversely impact the Company’s operating results. Conversely, in difficult economic times,
the Company’s inventory can grow as market demand declines.
During 2009, the Company continued to execute supplier managed inventory (“SMI”) agreements with its
primary suppliers to improve the efficiency of the supply chain. Lexmark’s management believes these
SMI agreements improve Lexmark’s supply chain inventory pipeline and supply chain flexibility which
enhances responsiveness to our customers. In addition, the Company’s management believes these
agreements improve supplier visibility to product demand and therefore improve suppliers’ timeliness and
management of their inventory pipelines. As of December 31, 2009, a significant majority of printers were
purchased under SMI agreements. Any impact on future operations would depend upon factors such as
the Company’s ability to negotiate new SMI agreements and future market pricing and product costs.
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