Inventory Management & New Product Development

1. Inventory Management & New Product Development John Bingham July 28, 2008

2. Fact Even the best New Product that incorporates every conceivable design option will hugely disappoint if the Supply Chain Team cannot support the cost targets or meet customer delivery requirements. Emerson Confidential

3. The New Product Development Process Will Improve Inventory Performance Dual Sources Dual Sources can provide a better service level and as we all know enhance the competition among the suppliers: Price, Lead-time, DPO, Minimum Order Quantities, One-time Delivery Make it Policy • Liebert Policy: “A key component in our sourcing strategy is our 2nd and alternate source policy” - Peter Panfil, GM for Power Product • Sole sources need VP Eng and Procurement approval.  ECN Change Analysts will not allow a part to be entered without this approval. • This policy gives sole source components early visibility; identified as a deliverable in the phase gate approvals. If sole sources must be approved, Procurement has the chance to plan sourcing strategy. • The most recent Raptor 300kVA Phase 4 review reported only 5% sole sources on new parts and only 1% on the overall BOM. Emerson Confidential

4. Design for SourcingExample – Circuit Breakers The Challenge: Dual / Alternate Source Components that are not FFF Required Cross Functional Commitment to Mitigate Risk and Drive Tension • VP of Engineering Lead Initiative • PBL Stopped Program Twice • Six 10M Material Reviews • Involving Design and Procurement in all Locations Example: 1200A breakers from Siemens & SQD The Result: Siemens, SQD and ABB all qualified as alternate sources

5. The New Product Development Process Will Improve Inventory Performance eSourcing eSourcing can be set up to not only tension price but specify Lead-time requirements, Minimum order quantities, DPO, Order frequency etc. • “Make design for RA a priority” - Liebert’s Peter Panfil, GM for Power Product • We added dedicated component engineering resources • Their primary responsibility is to support component qualification on new and existing designs. • These resources scrub BOM's, work with Engineering to identify sources and help test samples. • The benefits are clear • We recently held the RA for NXL breakers.  We had not been able to RA breakers before on our S610 unit because we did not have alternate breakers qualified.  That RA resulted in a 30% cost reduction. • Procurement estimated we would not have been able to achieve these kinds of savings through negotiations alone. Emerson Confidential

6. Design for Sourcing Component Layout Liebert NXL 300kVA UPS “The real challenge was to change the way our designers think about sourcing and instill an attitude of market independence. Simply put, multi-sourcing has become the de facto standard in our designers’ way of thinking.” Troy Chatwin - Liebert Circuit Breakers To Alternate Source Components with Different Form Factors Requires • Dual Connections Sets • Dual sheet metal hole patterns • Dual BOMs • Enough Cabinet Space Emerson Confidential

7. The New Product Development Process Will Improve Inventory Performance Preferred Suppliers Preferred Suppliers provide “best value” for our money. Emerson drives mind share with Preferred and Marquee Suppliers. “All components must be from Emerson Preferred Suppliers and all components have 2nd or alternate sources. Drive to 100% compliance.” - Liebert’s Peter Panfil, GM for Power Product Design for Reactivity by Using Emerson Preferred Suppliers. Emerson Confidential

8. The New Product Development Process Will Improve Inventory Performance Part Re-Used Re-Use parts that are at an appropriate point in the Life Cycle curve and are not Single Sourced from a Non-Preferred Supplier. Re-Use is not a reason to sole source. Intent is to reduce the number of new parts added to support new designs where an existing, leveraged part can be used. Using an existing DSP that is “over Spec’d” may be better than identifying a new DSP. A New Product will Miss the Mark if the Design Requires Parts, Materials or Process that have Supply Chain Problems. Existing Parts have a Proven Supply Chain. Critical to not use End of Life Parts Emerson Confidential

9. Leverage Supply Chain ComplexityWe’re Still Not An Easy Customer # Suppliers Active Suppliers $k/Supplier Preferred Parts, Obsolescence, And Supplier Elimination Are Critical To Future Success Emerson Confidential

10. 10M Sourcing Metrics • Preferred Supplier • Team Managed Commodity – must be on published PSL • Division Managed Commodity – at division discretion • Preferred Component • Re-use of leveraged part if life cycle is appropriate for life of new product • 3 potential sources, globally accessible or leveraged across Emerson • Multi-Sourced • Second source is APPROVED – PO could be placed to alternate source today with no transition time • e-Sourced • Under contract from a previous event run extending into the production timeframe, included in upcoming event or planned to bid prior to production • Globally Sourced • One of the approved suppliers is an LCC source as defined in IM Emerson Confidential

11. The New Product Development Process Will Improve Inventory Performance • Make the 10M Sourcing Review more than: • % eSourcing, % Preferred Suppliers, % Re-Use • This is the time where Supply Chain needs to understand: • Long lead-time components, DPO with Suppliers, Transportation, Packaging A New Product will Be Thrown off Track if the Design Requires Materials, Process or Parts that Pose a Problem for the Supply Chain Emerson Confidential

12. Sourcing Review – Lead / Time AnalysisReactivity and Inventory – Function of Lead-time Items with LT Greater than 60 days are filtered and attached below Part # Description Supplier LT Mfg Part # Price Start Looking at Planning Parameters: Lead-Times, Minimum Order Quantities, Period of Supply…. Emerson Confidential

13. Sourcing Review Network Power ChinaList DPO < 5th 3rd & no DPO less than 45 days Working the New Product and Driving the Key Supply Chain Metrics will have a long term benefit to inventory performance Sourcing Review with Network Power China for their New Wind Power Project Emerson Confidential

14. Life Cycle Analysis - End of Life Do not design and release new product with components that are in a declining stage. How much inventory is on hand due to a required last time buy to support a product that is not end of life? UC2845, ST is not supplier focused for future – Recognized by CM during review Are your engineers still designing in 1206 or 0805? - SB 0603 or 0402 We use the GMDC to complete the Life Cycle Analysis. Emerson Confidential

15. Liebert Rules of Engagement- Developed by Peter Panfil, Liebert Engineering • Never discuss the Preferred Supplier List with ANY supplier. • Do not tell suppliers they are ON a list or NOT on a list. • If a supplier wants to discuss the preferred supplier list, be courteous and explain your role is to research and approve components, NOT suppliers. If they want to discuss commercial or business issues, refer them to contact Procurement. • Never use the list or preference of a supplier as leverage to expedite samples, quality, etc... • It is Engineering's responsibility to assess the technology; e.g., form, fit and function. • Engineering approves parts, not suppliers. • A supplier's part is either approved or NOT approved, this is an engineering function. • Do not discuss any contract or agreements that Emerson may or may not have. • Engineering needs to develop within the Preferred Suppliers. • Parts from non-preferred vendors should be avoided unless absolutely necessary. • If Engineering feels that the technical requirements are not covered, escalate to local Procurement at the supplier level (new supplier proposal) which will be submitted to the team. Do this BEFORE you specify the part for use in your design. • Procurement will work with that vendor to get cost, availability, lead-time, life cycle and quality information on the supplier. They will also determine if we should pursue this vendor for preferred status. • Do not communicate any of the following project information to the supplier: • Product Name, if necessary use the PROJECT name • Product costing, target production cost, component purchasing cost, project costs, etc... • Annual forecasts or projects of Production Units, stay focused on the EAU (Estimate Annual Usage) of the PART • Projected product introduction dates • Competitive information that we have obtained • Product Specifications or Requirements, such as KVA, KW, KA, or product family information • Do not share an alternative supplier’s information, costing, availability, problems, etc.... • Do not provide alternative supplier data sheets, nor internal drawings etc.... • Do not tell the supplier they are the sole source or single source supplier • You can ask them if they are aware of a second source for their part, and you can tell them that it is a Liebert requirement that all parts need a second source Emerson Confidential

16. New Products is our Chance to Re-Design the Supply Chain • Procurement must take Pro-Active Role to Own and Manage BOM development • Chance to Re-Engineer the Supply Chain to support ROTC Initiatives • Design For Sourcing Requires Commitment to the Process • Early engagement is critical to having a chance to optimize the supply chain • Staying engaged is required to make it a reality • Focused Resources Required to Drive Best Practices • Understand NPD tools & metrics • Coordinate inputs from resources back to team • Drive implementation of sourcing objectives “ Take 10M seriously - I am a firm proponent of the 10M process, when taken seriously it can be an effective management tool. It brings into focus approved supplier sourcing, 2nd and alternate sources, best cost country sourcing and design for RA strategy” - Peter Panfil Emerson Confidential

17. Design for SourcingSuccess Factors • Agree on Objectives Up Front.Common Goals between Engineering and Procurement. • Ask what the Cost is of Being Sole Sourced.Then you can win the battle for resources. • Make Responsibilities Clear. Who is responsible for what. Define Rules. Agree on them. • Consistently Review Progress. Follow 10M. Engineering and Procurement in the Same Meetings. • Have a ‘Can Do’ AttitudeIf it has never been done in the past, now is the time to try. • Dual Source First – Then eSource Credibility in the Process Drives Savings. Emerson Confidential

18. What factors do Legacy product and part proliferation play in making step function improvement ? • Legacy Product and Part Proliferation may be the single largest contributor to mediocre inventory performance. • Looking at product performance through the life cycle • End of Life Review • Potential change in manufacturing / selling strategy • From Build-to-Stock to Build-to-Order • From Buy to Forecast to Buy-to-Order • Disciplined use of the NPD process • Integration of Supply Chain in ALL New Products early in the process and even at Gate “0” • Two Options for Legacy Product – Quarterly Legacy Product Review • Raise the price and Build to order • Buy all parts to order – total supply chain Lead-time • Kill the Product Emerson Confidential

19. Stage Gate Process – Fully Address Discontinuance Product Lifecycle Management Extensions Emerson NPD 2.0 Gate 5 Gate 6 Gate 3 Gate 4 Gate 7 Gate 8 Gate 1 Gate 2 Concept Development & Project Planning Market Research Idea Generation Concept Feasibility Design & Development Launch Production & Startup Ramp Up Production Discontinuance Discontinuance Plan Update Discontinuance Plan Supply ChainDiscontinuance Strategy Product Discontinuance Strategy & Forecast Emerson Confidential

20. Product Discontinuance Plan Discontinued Products D-Series High Temp 6” D-Series Analog Rack & integral Transmitter Analog Net Oil Computer Replacement Products Gate 5 Gate 6 Gate 3 Gate 4 Gate 7 Gate 8 Gate 1 Gate 2 6” Elite Series Digital Net Oil Computer Digital Rack & Integral Transmitter F- High Temp Products Are Targeted For Obsolescence And Replacement Products Are Planned Emerson Confidential

22. Thanks! Competitiveness is the result of an ability to nurture and develop new products at a lower cost and faster pace – Is it a Relay Race or is it a Rugby match? Emerson Confidential