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Hearing: Global Corporations and Their Y2K Preparedness

Patrick M. Roberts
Senior Vice President, Business Information Services
Ahold USA, Inc.
A Subsidiary of Royal Ahold
Zandaam, The Netherlands

Chairman Bennett and Members of the Senate Special Committee on the Year 2000 Technology Problem, I am pleased to speak to you today regarding the issues facing global corporations with respect to foreign suppliers and operations related to their Y2K preparedness.

Royal Ahold is the rapidly expanding international parent company of retail supermarkets, health care stores, and hypermarkets in Europe, the USA, Asia and Latin America. We employ some 280,000 associates around the world in more than 3700 stores. Last year, our sales exceeded $31 billion USD and we serve more than 20 million customers weekly.

Ahold USA, a subsidiary of Royal Ahold, is headquartered in Atlanta, Georgia, and is the 4^th largest grocer in the US. The company has grown aggressively over the past 5 years through internal expansions and also by acquisition. Last year's USA sales of over $20 billion, came from the approximately 1000 stores operating under the brand names of Stop & Shop in New England, Giant-Landover in the Washington / Baltimore metropolitan area, Giant-Carlisle in Pennsylvania, Tops in northwestern New York, and BI-LO in the Carolinas. In March, Ahold announced its intention to acquire Pathmark stores in the New York metropolitan area.

My statements today address Ahold's Year 2000 initiatives and our preparedness as a subsidiary of Royal Ahold.

Ahold is taking the Year 2000 problem seriously and has aggressively addressed all identified technology and business issues. Total project spending will be in excess of $50 million. Ahold began its Year 2000 efforts in 1996 with a set of technology projects to consolidate and replace a majority of our legacy systems. In 1997 and 1998, our focus primarily was on technology. We formed an enterprise-wide project office to oversee the assessment, remediation, and re-deployment of our mission critical systems. We initiated contingency planning. This year, our focus is on Business Continuity Planning and Event Management planning. Up until The Event, we will continue to perform software testing both internally and, whenever possible, with critical external vendors. On those items over which we have direct control, we are confident that our early start and hard work will result in little to no impact in our operations.

Ahold supports an autonomous operating company model, both foreign and domestic. To support this model, we have established synergy groups which address our product supply chain and parts of our business that do not directly touch the customer; ie. the back office operations in the stores.

Our dependence on foreign companies is focused in our supply chain with re-sellable products. Overall, we have classified the risk of a disruption in our international supply chain as a low probability of occurring, a high potential impact if there was a disruption, and a moderate ability to proactively address. We are addressing this exposure through our Year 2000 Supply Chain methodology, as follows:

1. Inventory and Assessment of our Suppliers
2. Due Diligence regarding Supplier Readiness
3. Communication and Awareness and
4. Contingency Planning

We have prioritized our supply chain based on the potential impact to Ahold's business and the criticality of products they supply in the event of an emergency. Less than 5% of sales are from products we directly source from international companies. At the same time, however, we estimate that 25% of sales volume has some kind of international component. Categories of items with high levels of international sourcing include:

• Spices, sugar, rice, specialty grocery
• Produce; ie. bananas and soft fruits
• Coffee, tea
• General Merchandise, Promotional Products
• Pharmacy

Based on our research and in-depth discussions with almost 250 of our top-critical suppliers, our findings have led us to rate the potential for disruptions in our business from international sources as low:

• A great deal of international product has significant inventory in the US that provide us a buffer; ie. spices, sugar, rice and specialty grocery items. Our most critical suppliers are large corporations that, on the whole, are taking Year 2000 seriously and are applying the resources required to correct the problem within their companies, including in-depth interrogations of their international suppliers. Also, they are developing contingency plans to minimize exposure from failures in foreign operations.

• Through ongoing communications with one of our large suppliers in the produce category, we have determined that it:

1. owns its farms in foreign countries,
2. is complete with its critical technology correction projects,
3. owns a majority of the transportation chain,
4. has visited the primary ports to assess potential risks,
5. has met with US Customs to assess potential concerns, and
6. is using this information to actively create contingency plans.

• Coffee and tea are purchased through commodity futures. What this means to the consumer is that the inventory supply chain would last several months after The Event. Commodity suppliers usually have 90 . 180 days of inventory in the supply chain.

• General Merchandise and Promotional items have a natural window of several months duration. The majority of the seasonal and holiday merchandise, up to Valentines Day, is in the distribution centers several weeks prior to Christmas.

• Perhaps our largest area of vulnerability is with pharmaceuticals. From our research, more than 70% of drugs sold have some foreign component. For most, there is no good alternate supplier. Many of these products are necessary to the continued good health of our customers and our country's citizens. This is the area over which we have the least control, and potentially, the highest risk. Red Cross and FEMA recommendations that people prepare for Y2K as one would for a severe weather situation, appears to be an adequate preparation strategy.

Because these suppliers are third parties, and therefore, not in our direct control, Ahold never will be able to eliminate international exposure entirely. Based on our analysis of our top-critical suppliers, we have a "high" confidence rating in their Y2K preparedness. We will continue our dialogs with our major suppliers and refinement of our contingency plans through the end of the year.

In regards to merchandising products, New Year's 2000 has two meanings for Ahold.

1. Ensuring that we can provide customers with necessary products before, during and after the turn of the century.
2. Providing the food, products and services in response to preparing for the party of the century.

Specific to Year 2000, Ahold does anticipate increased demand for emergency types of items during the last four months of the year and is preparing to meet this demand. New Year's is traditionally a peak time in the grocery business. Ahold is anticipating demand for this New Year's to be much greater than we have seen before. We are not increasing inventories for re-sellable products as a Y2K contingency except in a few cases; however, we will closely monitor product usage and increase our orders if necessary.

We believe the greatest unknown in predicting demand is the media. If the media promotes sensible actions and reactions to events, we believe there will be no shortage of products. If the media negatively publicizes year 2000 disruptions, regardless of their severity, Ahold will likely encounter product shortages as a reaction to, not as a result of the Year 2000 disruption.

Ahold is actively developing contingency plans to address potential disruptions. We have broken our business into 24 classes, or areas, in which plans are being created. In addition, we have identified more than 100 processes that our individual business units are addressing at a local level. We are planning to conduct exercises to test these plans.

One contingency that has been explored relative to international suppliers is to utilize our parent company, Royal Ahold, with its global supply chain and local presence in most major markets to assist in restoring any disruption.

Another major initiative in this area is the creation of the Event Management plan. This addresses how we will prepare for, monitor and react to Year 2000 related disruptions. The plan will encompass not only the technology operations, but day-to-day operations of our stores, warehouses and administrative facilities.

Communications are critical to successfully reducing the potential risk of Year 2000 disruption. We have 5 primary audiences for which our Project Office has active Year 2000 communications plans:

• Ahold internal
• Food / Retail Industry
• Suppliers
• Local communities
• Customers

We have a sizable team that is dedicated to communicating with our suppliers. They assess each company's Year 2000 efforts; educate the supplier on areas in which we deem they need assistance; and follow-up with those that are given "low" and "moderate" confidence ratings.

The Food Marketing Institute has done an excellent job assisting us with Local community relations and facilitating cooperation across our industry. I applaud their efforts. A most encouraging part of our conversations with our major suppliers has been their openness and candor regarding their Y2K readiness programs, including their "deep dives" into their supply chains and the strategies they are pursuing in their business contingency plans. We have seen a significant increase in requests for participation in community events. Although we respond to most of these, the volume has kept us from attending all of them. Publications are being distributed to our customers to let them know we will be here on January 1^st and beyond.

Ahold anticipates minimal disruption caused by our direct and indirect dependence on foreign suppliers. We have expended significant effort in developing business continuity plans to minimize our risks. There has been and will continue to be open and frequent communications with our suppliers to address all new issues.

We believe there are real and tangible benefits to Ahold USA in being a subsidiary of a truly global company with strong business relationships with multiple major product suppliers in diverse locations.

At the same time, we would say that there is real risk of Year 2000 disruption within the grocery industry and across other industries relative to Year 2000 readiness. We do believe some foreign countries and companies have not sufficiently addressed the Year 2000. Our strategy is to find alternate product sources to minimize our dependence on these countries.

We are aware that Congress is working diligently to ensure our infrastructure will be ready for The Event. We would ask that Congress look at providing further assistance in areas that Ahold has identified that may have a potential impact to the health and safety of all US citizens, namely, responsible reporting by the media. Additionally, we request your support in ensuring the readiness of our federal programs administered at the state level; specifically the Electronic Benefits Transfer (EBT) program that affects our citizens who may not be able to plan ahead for any temporary business disruptions.

I am happy to answer any questions you may have.