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Steve Case Supplier Relations and Productivity Expert October 2006

Six Sigma and the Supply Chain. Steve Case Supplier Relations and Productivity Expert October 2006. Export control review number TDR 06-9001. Agenda. Introduction Raytheon overview Why talk about the Supply Chain? Clock-speed Raytheon Six Sigma What is it?

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Steve Case Supplier Relations and Productivity Expert October 2006

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  1. Six Sigma and the Supply Chain Steve Case Supplier Relations and Productivity Expert October 2006 Export control review number TDR 06-9001

  2. Agenda • Introduction • Raytheon overview • Why talk about the Supply Chain? • Clock-speed • Raytheon Six Sigma • What is it? • Involving suppliers in Six Sigma • Applying a structured methodology • Impact of insertion points

  3. Company Background Raytheon at a glance The data presented represents the entireRaytheon Company • Early years • Radio tubes, WW II radar technology • Today • $21.9 Billion in Sales in 2005 • 76,400 employees, 20+ countries • 27,000+ suppliers • >$7 Billion Annual Spend • 72% of spend is Direct . . . 28% of spend is Indirect • Core business focus • Government and defense electronics, business aviation

  4. Why Talk Supply Chain

  5. Direct Material is Often the Largest Single Product Cost Element… • To meet our cost and Six Sigma goals, we must manage supply as a core process, same as product development and project management, etc 50% 30% 15% 5% Material OH Labor Engr Product Cost Elements

  6. Select standard parts from approved suppliers • Tools: Preferred parts list, approved suppliers • Track: % standard parts, # suppliers, OTD 30% Low $ Commodities Medium $ Key Parts High $ Critical Parts/ Subassemblies 20% 50% • Partner with best in class suppliers of key technologies • Include supplier on IPT • Tools: Six Sigma With Suppliers • Track part cost and predicted performance Material Type Drives The Strategy

  7. Material Costs Must be Addressed Early in the Design Cycle . . .

  8. Selecting Core Competencies • Where should we invest our limited resources to develop capabilities that will become our core competencies in the future? • Ask yourself: • Which subcomponents will have the highest barriers to entry in the future? • Which will demand the highest profit margins in the future? • Which subcomponents will drive customer purchasing behavior in the future? • Which subcomponents are we good at producing today?

  9. Raytheon Six SigmaTM Visualize Achieve Commit Improve Prioritize Characterize Raytheon Six SigmaTM is a knowledge based process we will use to transform our culture, maximize customer value and enable business growth.

  10. Raytheon 6 Sigma™ Approach Motorola 6 Sigma Approach Raytheon Six Sigma™ versus Traditional Six Sigma • The traditional Six Sigma approach, utilized by Motorola, has its underpinnings in hardware design and manufacturing • The Raytheon Six SigmaTM approach was based on benchmarking with Allied Signal and General Electric and is more broad in scope: • Includes all processes and functions • Integrates proven philosophies and a number of continuous improvement techniques and tools (statistical & lean tools) • Supported by a full time Six Sigma Expert network • Leads to a culture change

  11. Profit G&A/Overhead Scrap/Rework Testing Eng Labor Mfg Labor Material Traditional Approaches What are the elements of part purchase price? What SCM tools are available to reduce price? • Pricing targets • Multiple rounds of bidding • Leverage • Negotiation Which element of cost do these tools address?

  12. Raytheon Six SigmaTM with Suppliers

  13. Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supply Base Optimization (SBO) Supplier Selection Process Supplier Supplier Supplier Supplier Supplier Supplier Supplier 1.Supplier Y/N Candidate Evaluator 2.Supplier Candidate Evaluator 1.05 3.Supplier 4.Supplier Down Selection Process for Supplier engagements

  14. Outstanding Performers Financial Risks Local Houses Niche Providers Technology Leaders Poor Performers Commodity Providers Sole Sources Potential Partners Low Cost Providers Redundant Capabilities Directed Sources Acceptable Performers Optimization Process Approved Suppliers Preferred Strategic Restricted • Approved • Eligible to do business with NCS programs based upon merit of evaluation thru optimization process • Preferred • Targeted for business based upon • Delivery • Quality • Cost • Technical • (performance driven decisions) • Approved (w/restrictions) • Eligible to do business with specific legacy programs due to programmatic issues (customer direction, re-qual costs, etc.) • Risk Mitigation plans required for each • Transition plans to ASL required for each • Strategic • Provides technological and strategic advantage • Willing to form partnerships / alliances • Shares risk and opportunities including investments …Enterprise-wide, Standard Definitions Supply Base Optimization

  15. SBO Background Info What is Supply Base Optimization ? • A data led,systematic approach to identifying a cross-functionally endorsed list of suppliers within a given commodity family • Stratification within a specific commodity family that identifies (1) approved suppliers, (2) preferred suppliers and (3) strategic suppliers • A dynamic commodity strategy for each commodity family which forces continuous optimization of the supply base, through the utilization of cross-functional subject matter experts (Eng, Quality, SCM, PL, etc.) • A Disciplined Governance process for list maintenance and standardized use of the SBO outputs

  16. Supplier Rating System Lean Assessment Tool Supplier Total Assessment Tool SBO Process Radar Charts Y/N Evaluator Candidate Evaluator 1.5 General Raytheon Tools R6s w/Supplier Tools Supplier SelectionDecision Tools

  17. R6s with Suppliers • R6s with Suppliers is a targeted effort examining total cost of ownership for a part or service focussed on maximizing cost reduction while minimizing investment. • Features: • Widely proven methodology • Uses a gated flow making investment incremental • Leverages upon the large pool of R6s tool or technical expert resources as appropriate • Standard templates drive consistency

  18. Process Steps: Step 1: Visualize Step 2: Commit Step 3: Prioritize Step 4: Characterize Step 5: Improve Step 6: Achieve The Six Sigma With Suppliers Process Analyze the BOM and determine the key suppliers and parts Get supplier commitment, set objectives and prepare for workshop by analyzing unit costs and quality Conduct assessment workshop with supplier to identify improvement projects Begin improvement projects by analyzing current conditions Continue improvement projects by implementing needed changes Measure results and determine impact on performance and cost

  19. $ Operation’s Responsibility COPQ Incurred by Raytheon Unit Strip-out Costs Field Failure Impact Unit Rebuild Costs Field/Sched. Intangibles Schedule Impact Raytheon Part- associated Costs Incoming Testing Integration Testing Processing Costs Integration Costs Raytheon Costs Raytheon Total Cost of Ownership for a Supplied Part Current Price Supplier Profit Profit Prod. Scrap Prod. Rework Customer Return Failure Analysis Cust. Rtn Replacement Cust Rtn Rework Raytheon Neg. Price Supplier COPQ Supplier Cost Material Overhead Engineering Manufacturing Testing Marketing Sales Supplier Costs Purchasing’s Responsibility Prework: Developing the Total Cost of Ownership Focus on Total Cost of Ownership

  20. Example from Actual Prework

  21. Y/N Screening Evaluator • Purpose: Recommended for initial general evaluation of potential suppliers. It provides a quick look at the viability of a candidate or it allows the comparison and prioritization of multiple candidates • Minimal product and supplier knowledge is required • Normally filled out by SCM personnel (MPM, Buyers), or interested IPT members • Output is radar chart • that provide a graphical representation of supplier candidacy • Identifies risk areas to R6sS success • Numerical score to be used as a comparative

  22. The Y/N Evaluator

  23. The Y/N Evaluators Output

  24. Is a tool toestimatethe highest potential savings/improvement For Raytheon, the supplier, and the customer • Provides a way to rank order suppliers in the order of the highest potential payback • Provides an estimate of where the savings are coming from and where they are going • Provides a consistent methodology for ranking suppliers forsupplier engagements • Requires detailed knowledge including time-phased procurement plans and contract information, Raytheon program, product and supplier background • Used by trained SCM personnel or IPT The Candidate Evaluator 1.05

  25. The Candidate Evaluator 1.05 Results

  26. R6s with Suppliers Tools • DTC/CAIV— Design to Cost / Cost as An Independent Variable Set and achieve product cost goals. • PBS—Performance-Based SpecificationsSet specifications that clearly state what we need, not how to build it. • DFMA—Design for Manufacturability and AssemblyIdentify alternative design solutions to eliminate non-essential elements of the design and non-essential steps in the manufacturing process. • DFSS— Design for Six SigmaAnalysis of uncertainty during the requirements definition and design process. • PSP— Part Selection ProcessIdentify opportunities to lower commodity cost, improve part standardization, reduce part count, and identify problem suppliers and parts. • PFMEA — Process Failure Modes and Effects AnalysisImprove process flow and identify high-risk process elements. • DOE —Design of ExperimentsOptimize product designs or manufacturing processes by using experimentation that links variables to performance outputs. • Lean —Lean Manufacturing TechniquesImprove total production process from planning through shipping. Achieve consistent operational performance through improved product and information flow. • Blitz —Blitz WorkshopsEliminate waste and non-value-added activities in manufacturing and administrative processes. • STAATS —Statistical Analysis and Acceptance Test SoftwareAnalyze supplier acceptance test data. Identify test reduction opportunities and parameters that drive yield.

  27. DOE Improvement Tools have Time Phased Benefits EarlyInvolvement DTC 30X PBS DFSS DFMA Payback TransitionEffort PSP PFMEA Lean /Kaizen Blitz/PI ProductionEffort Test reduction 5X Concept Eval Dem-Val EMD LRIP FRP Typical Program Life Cycle

  28. Linking Product Costs to Applicable Tools Product Cost Structure Step 1: Cost Components GS&A Labor Material Factory O/H Buildings Support costs Inventory Automation level Schedule mgmt Non-std parts Mil parts Tech. decisions Make/buy policies Buying leverage Supplier costs Inspection rqmts Admin support Corporate expenses Marketing Purchase volume Future business outlook Non-std processes Test rqmts Rework/repair Oversight Labor efficiency Setup times Step 2: Cost Drivers PBS DFMA PSP (std, comm) Volume pricing Sub-tier cost reduction Sub-tier source selection Leveraged buys DFMA STAATS DOE Automation studies Lean PFMEA Process Improvement Lean Consolidated buys Supplier partnering Process Improvement Lean Standardized test sets Step 3: Applicable Tools

  29. Assessment Workshop Typical Agenda • Day 1 • Introductions • R6s overview • Tool detail • Supplier introduction • Part cost drivers • Process tour • Brainstorming • Day 2 • Continue brainstorming • Prioritize ideas • Conduct feasibility studies • on ideas generated • Debrief • Rank opportunities • Develop roadmap

  30. Example of Baseline Results Candidate Projects Summary Implementation Cost $600K Possible Savings $13,000K Payback 20X

  31. Process Steps: Step 1: Visualize Step 2: Define objectives together Supplier Commitment Step 2: Commit Supplier Collects Pre-work Data Package Cost Breakout Step 3: Prioritize Overhead Labor 10% Burden 20% Review Data Package 10% Step 4: Characterize Support 10% Material 50% Material Cost Drivers Step 5: Improve Identify Workshop Team Misc Housing 5% Electronics 15% 20% Step 6: Achieve Motors Sensors 30% 30% Preparation is theSecret to Success

  32. Process Steps: Step 1: Visualize Step 2: Commit Step 3: Prioritize Step 4: Characterize Step 5: Improve Step 6: Achieve The Supplier Workshop: The Keystone Step 3: Prioritize - Supplier Workshop Assess design and process Learn tools to mitigate cost Identify cost drivers and tool opportunities Evaluate effect of tools Create action plan

  33. IPDS: The Way We Do Business Network Centric Systems Defines the way we plan, capture and execute programs Provides an environment for continuous process improvement Raytheon Six SigmaTM Provides “One Company” language and tools to enable program capture and successful execution Provides tools and processes that enable Integrated Product Teams to perform their tasks EVMS, IMP/IMS, CAIV Building a Process Culture - Requires Discipline!

  34. Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Gate 10 Gate 11 TransitionandClosure ProductionReadiness Test/Ship Readiness CriticalDesign PreliminaryDesign SystemFunctionalReview Start-upReview ProposalReview OpportunityReview Pre- ProposalReadiness Win Strategy • Tech Roadmaps • IR&D • Capital Investments • NBI • Strategic Sourcing • (linked to roadmaps) • Early Supplier Involvement • Proposal Development • Make vs. Buy • Standard Parts • Preferred Suppliers • Risk Mitigation • Material Program Plans • Manufacturing Plans • BD • Contracts • Engineering • Finance • Production • Program Management • Quality • Supply Chain Management • Design Rules/Standardization • Strategic Make vs. Buy • DFSS (Performance Scorecards) • Identify Key Supplier Characteristics • Integrated Business Planning • Risk Identification/Reduction • Early Supplier Involvement • Teaming and Partnering + Customers +Strategic Suppliers Integrated Product Development System (IPDS) Gates

  35. Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Gate 10 Gate 11 TransitionandClosure ProductionReadiness Test/Ship Readiness CriticalDesign PreliminaryDesign SystemFunctionalReview Start-upReview ProposalReview OpportunityReview Pre- ProposalReadiness Win Strategy • Situation: • 45% of products fail in system or field • Expensive part, slow deliveries • Supplier unhappy with profitability Critical Component in US Vehicles • Supplier Benefits: • Rework of specs and testing plan • Reduced process steps by 15% • Redesign to reduce matl cost • Raytheon Benefits: • Decreased material shortages • Redesigns reduce handling damage and factory rework • Factory yields increased to >85% Payback Ratio: 15:1 Payback Ratio: 16:1 Example 1: Targeting Viewer

  36. Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Gate 10 Gate 11 TransitionandClosure ProductionReadiness Test/Ship Readiness CriticalDesign PreliminaryDesign SystemFunctionalReview Start-upReview ProposalReview OpportunityReview Pre- ProposalReadiness Win Strategy • Situation: • Prototypes produced • Need to cut cost and make more producible • New factory being designed • Results: • Factory designed with Lean principles • Significant cycle time reductions JSOW JSOW Part - Payload Dispenser Example 2: Payload Delivery System

  37. Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Gate 10 Gate 11 TransitionandClosure ProductionReadiness Test/Ship Readiness CriticalDesign PreliminaryDesign SystemFunctionalReview Start-upReview ProposalReview OpportunityReview Pre- ProposalReadiness Win Strategy ERGM • Situation: • Initial design completed • Need to reduce price by 50% • Aggressive structural requirements • Results: • Redesign of major components • Decreased manufacturing complexity • Increased structural integrity ERGM: Precision guided projectile for Naval 5-inch gun. Also applicable to U.S. Army and Marine Corps 155mm artillery programs Example 3: Guided Projectile

  38. Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Gate 10 Gate 11 TransitionandClosure ProductionReadiness Test/Ship Readiness CriticalDesign PreliminaryDesign SystemFunctionalReview Start-upReview ProposalReview OpportunityReview Pre- ProposalReadiness Win Strategy • Results: • Redesign of tri-mount frame • Decreased manufacturing complexity Example 4: Guidance Component • Situation: • Next generation guidance system needed • Reduce the price by 40% • Meet performance profiles of multiple programs Payback Ratio: 65:1

  39. The Right EngagementYield Handsome Returns • ROI is total impact of the project, and is expressed in multiples of investment • Total impact includes gap closure, cost avoidance and cost savings

  40. Success Factors • Carefully select company core competencies • Identify and manage critical supplier relationships • Select strategic suppliers for engagements • Spend time up front to collect the essential data that no one person has • Target both immediate and long-term results • Use gated process that spends investment money incrementally • Ensure customer involvement • Gain top executive support for process and pull for results

  41. Back-up • Supplier Relationships and Supplier Performance back-up materials

  42. Success Factors • Dollarize potential impact before engaging management • Align multiple departments - both functional and product related • Communicate clear, structured methodology and roadmap during initial kickoff and revisit often • Spend time up front to collect the essential data that no one has • Offer up data to the supplier, don’t just demand it of them • Target both immediate and long-term results • Use gated process that spends investment money incrementally • Ensure customer is involved • Gain top executive support for process and pull for results

  43. Top Reasons for Failure • Tried to engage supplier during price negotiations • Product managers kicked off workshop by listing constraints • Price is far less than supplier costs • Supplier is a competitor • Supplier can’t dollarize their own costs • Supplier cost model entries are far higher than actual costs • Engineers are unwilling to consider modifications • Prework data collected is incomplete • Distrust between supplier and OEM

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