RAISING THE BAR: ACHIEVING SUBCONTRACT EXCELLENCE March 2008

1. Lockheed Martin RAISING THE BAR: ACHIEVING SUBCONTRACT EXCELLENCE March 2008 Gary Bartmann, Vice President Subcontract Management & Procurement

2. Agenda • Lockheed Martin Space Systems Company Supply Chain Landscape • Lockheed Martin Space Systems Company Product Assurance/Mission Success Landscape • What is Big “Q”? • Remedy underlying causes of mishaps, near misses, escapements, process errors, etc., across the enterprise • Product Assurance/Supply Chain Partnership • Summary Lockheed Martin is “Raising the Bar”

3. Lockheed Martin Space Systems Company Supply Chain Landscape

4. Subcontract Impact • Typically 50-60% of Revenue • Brings technology and expertise to the team • Suppliers bring innovation, speed and agility to the table • Source of Competitive Advantage • “Supply Chain as strong as the Weakest Link” • Supply Chain is a “Valued Asset” • Strong supply chain critical to success Supplier Performance is Lockheed Martin Performance

5. Spend Profile 40% Commodities • Supplier Agreements • e-Business Enabled • Standardization IT Indirect 60% DirectCommodities Custom Products • Subcontracts • Program Driven • Early Involvement Key • Internal & external suppliers • Supply Chain strategies Diverse Portfolio of Supplier Participation

6. Procurement Process Government Acquisition Policies Business Unit Command Media Corporate Policy Statements LM Acquisition Procedures Buyers Federal State Laws • Checklist • Documentation Compliant Procurement Systems Sound Procurement Practices Corporate Officer LMAP Council LM Internal Audits • Peer Review Mgmt • Approvals • Program Audits • Compliance Training • Ethics Training Governance Compliance LM Internal Audits DCMA Review CPSRs Rigorous Acquisition Process

7. LMSSC (Prime Contractor) Supplier (2nd Tier) Supplier (3rd Tier) Supplier (1st Tier) Supply Execution & Risk Management The Warfighter Production Process Baseline (PPB): • Audits to baseline standards conducted • Command media procedures established • Validation of contract and technical requirements • Compliance and sub-tier flow down / verification • Production, test, and inspection instruction • Personnel training • Configuration control methods • Quality Management System effectiveness • Sub-tier supplier management controls • First article and source inspection

8. Lockheed Martin Space Systems Company Product Assurance/Mission Success Landscape

9. In Aerospace & Defense Quality Failure Could Mean: • 2nd / 3rd quality escapes discovered by our Prime customer at Integration Test • Launch failure • On-orbit failure • Missile fails to arm • Intelligence information not conveyed • War fighter in harm’s way We don’t get a second chance

10. The Quality Journey . . . 1940s 1950s 1960s 1970s 1980s 1990s 2000 2010 Beyond Decade ISO 9000 AS 9100 Mil-Std-1520 Mil-I-45208 Mil-Q-9858 Acquisition Reform TQM Faster, Better, Cheaper Concurrent Engineering Driving Force Sample Inspection Operational Excellence Lean Manufacturing Error-Free Environment Process Control Tools 100% Inspection 6 Sigma Peer Reviews High-Performance Work Teams Statistical Process Methods Big “Q” 100% Mission Success Focus Baldridge Award Taguchi Juran Ishikawa Deming Increasing System Complexity Continued Evolution From Little “q” to Big “Q”

11. What is Big “Q”? • A recognition that the quality of our procedures and products depends on the up-front (early life cycle) design processes being error-free • Achieving Big “Q” requires a holistic systems approach by each program and functional group to seek out problems, analyze causes and take effective corrective and preventive actions throughout the entire contract life cycle Forcing Retirement of Future Potential Problems in the Present

12. Bringing the past to the present Bringing the future to the present Today Past State Future State • 100% mission success • Mil-Q-9858A • Inspect to find defects • Sort good from the bad • Big “Q” focused • 100% mission success • Operational excellence • Process-centric • Error-free environment Creating a Big “Q” Environment Moving forward We cannot forget our past while we build the future

13. Big “Q” Spectrum of Opportunities Diagnosing cross-phase and multi-functional misalignment for quality Improvements Research IR&D Concept Refinement Systems Development & Demo Engineering Design & Release Production, Integration & Test System/ Mission Deployment Quality improvements throughout life cycle • Beyond the plant, a cross-phase and functional view • All functions participate continuously • Force “Up-Stream” Improvements • Converge on Big “Q” improvements via design team Technology evolution and increased complexity demand Big “Q” improvements

14. Impetus for Raising the Bar The driving needs for Operational Excellence? • Increasing need for an integrated, end-to-end set of improved processes for development and recurring work • Space Systems Company defect rate • 76% of mission failures attributed to engineering defects and escapements • SSC enterprise experience on recent programs • Latent engineering defects have significant negative impact on technical, schedule and cost performance • Being proactive to sustain 100% Mission Success Increasing system complexity and technology evolution requires change

15. Error Prevention For Each Mishap / Near Miss Multiple Things Go Wrong At The Same Time Multiple Defenses (Plates) Fail: Cert Product Eng (CPE), Resp Area Super (RAS) Supply Chain Product Assurance Test Discipline Infrastructure System Safety Supervision Employee Process / Equipment Etc. Risk Intended Deflection Incident

16. Operational Excellence Today's environment leaves little room for error… • Lockheed Martin’s Operational Excellence Program provides: • Roadmap, principles & tools to cut costs • Eliminates waste & enhance customer satisfaction • Operational Excellence Program Objectives: • Drive process capability • Delivers on customer value • Provides common focus for productivity End State Goal… Lean processes with Six Sigma capability throughout the enterprise and supply chain

17. Key Elements of Operational Excellence • Creating an error-free environment • Big “Q” focus • Peer reviews • Every process, product and paper . . . is perfect • Zero defects throughout product life cycle • One Company enterprise-wide processes • CMMI at all SSC locations • Partnerships: customer to prime and prime to supply chain • Communications • Relationships • Transparency • Forecasting cost, schedule and evolving technology • Program management Operational Excellence is an imperative toward ensuring 100% Mission Success

18. Engineering • Peer Reviews • SME/Fellows program • Software/systems integration 76% Escapes are due to… • Product reuse • End-to-end systems effec. Production • Talent Management • Manufacturing & Supply Chain Excellence • Common subcontract flowdown • MFG PA&SS • ATLO • Operational mishaps • Supplier councils/summits • N/C reduction initiatives • Linked CAB • Error prevention • I&T • Supplier Human Resources • Skill certifications • Knowledge management & transfer • Future labor force Finance & Operations • LM21 excellence • Suspended loads analysis Little “q” Big “Q” • Inspection of hardware • Sorting • Acceptance • Test • Engineering processes • Requirement definition • Functional and LOB partnerships • Process discipline, adequacy, integrity Operations Excellence: Error-Free Environment Throughout Program Life Cycle Big “Q” Operations Excellence & Program Execution 100% Mission Success

19. Lockheed Martin Space Systems Company Product Assurance/Supply Chain Partnership

20. LMSSC Supplier Expectations Supply Base Expectations Commitments Quality Delivery Cost Meet them all 100% in everything you do On time, every time Meet targets, deliver value Our customers expect and the war fighter relies on 100% mission success of “our” products and services 12

21. Sourcing is a “Team Sport” ‘Functional Silo’ Syndrome CONTRACTS DESIGN / Engineering MATERIALS PURCHASING QUALITY MANUFACT- URING Operational silos or “Over the transom” is no longer acceptable Build Effective Relationships

22. Risk Management – Subcontracts Every Program has risk. Identification and management facilitates success. Failure to manage or predict ensures failure. Requirements Best Practices Monitor • Corporate & Site Policies • Early Involvement • Identifying • Planning • Assessing • Handling (Mitigate, Transfer, Avoid, Assume) • Metrics • Reviews • Audits • Process Assessments • Personnel Training • Risk “Waterfall” • Lean LM21 Operating Excellence • Supplier Assessment • Customer Partnering Proactive, Collaborative Engagement is Key

23. Risk Management - Subcontracts Risk Based Subcontractor Assessment Tool • Excel based, point and click, results tallied and summarized

24. Subcontracts Operational Risk Predicting trends & performance Supplier “comparison” using configurable measurements Suppliers current information in online databases

25. Requirements Analysis “What could go wrong? … possible failure modes? … severity, P(o), P(c)?” Subcontractor Performance Based Specification Manage Risk KPP: “Spacecraft transmit/receive time” KPP: “Mux shall have <2dB insertion loss” KPP: “Filter shall have <1.5 dB insertion loss” KPP: “Waveguide shall have <0.5 dB insertion loss” Surface Risk - Prioritize - VOC Register Risk Lockheed Martin Supplier Risk Management

26. Materials Risk Management Trend Analysis Process SSC Lines Of Business Programs G, Y, R Ratings May 2005 0 118 2 Programs LOB 1 0 4 0 1 0 0 13 Programs LOB 2 Supplier Occurrences Trend States Programs LOB 3 Active Suppliers • • • • • • Programs LOB N Generate Causals

27. A Fishbone Approach to Big “Q” Production Engineering Mission Success Peer Review Senior Management Review Team Corrective Action Board Mission Success Bulletins Process Control Board Internal Operations Review Internal Operations Review Rapid Notification Integrated Process Group Mission Success IOR Corrective Action Board Responsible Area Supervisor Failure Review Boards LOB Reviews Program Management Lessons Learned Common Integrated Process System (CIPS) Approved Supplier Processes Doc Rockit Insight/ Oversight Process Early Warning Metrics Anomaly Engineering Review Board (AERB) Internal Audit Certified Principal Engineer Big “Q” Drives Disciplined Innovation & Operational Excellence GIDEP Certified Test Conductor Continuous Process Improvement PA&SS Corrective Action Board ERP FICO Finance & Business Operations SSC Corrective Action Board Corrective Action Board Operations Product Assurance Review Capital Equipment Mentoring Stock Sweep Financial Reviews LM21 Integration & Transformation Employee Skills Joint Insight Working Group Verification & Assessment Internal Operations Review Training Certification Board Error Prevention Council Internal Operations Review Certifications Foreign Object Elimination Suspended Loads Knowledge Transfer Qualifications Flash Notices Return To Green Meetings Environmental Safety & Health Future Work Force Management Council Operational Mishaps Full Spectrum Leadership Finance Human Resources Operations PA&SS Functional cause & effects analysis performed

28. Supplier Quality • Corporate Supply Quality Council established • LMSSC Supplier Quality Councils established • LMSSC Supplier Assessment/Rating System • Working with AIA / DCMA / Industry groups onlower-tier quality escapes • Critical performance and alert system established • Line-of-Business & Program quality program and focus

29. Product Assurance & System Safety Responsibilities Across the Product Life Cycle Develop & Acquire New Business Design & Development Acquisition Produce System Deploy & Operate System Quality Engineering System Safety Procurement Quality Operations Quality Software Quality • Verify System Ready for Deployment/ Shipment • Verify Post Deployment Activities in Compliance with Requirements • Assess Customer Requirements • Participate in IPT’s & other design teams • Assess Supplier Capability - Use LM Corporate System • Review Production Plans for Product Assurance & System Safety Requirements • Use PA Proposal Focused Training Module • Assess Design, Validation & Verification Inputs for Product Assurance/ System Safety Requirements • Determine Quality Flowdown Requirements • Develop Product Assurance & System Safety Proposal Inputs • Perform Process Assessments • Assess Supplier Performance Using Vendor Rating • Accept Supplier Products/Services • Perform Inspections & Tests • Accept Product • Coordinate Range Safety Requirements • Apply Error Prevention Techniques • Develop Budget Estimates • Identify Risks • Assess Hazard Analysis Requirements • Track Corrective Actions • Control Nonconforming Material • Apply Error Prevention Techniques • Test Like You Fly Validation • Mistake Proofing Product Assurance & System Safety Applies Preventive Measures, Oversight, System Safety, Control of Nonconformities, Error Prevention, and Corrective/Preventive Action Throughout the Product Life Cycle

30. Supplier Network • Successful Program Execution requires an integrated supply network with all suppliers focused on: • Quality Products & Services, on-time • Cost Reduction and Continuous Improvement • Service and Customer Satisfaction • Innovation & Creativity • Anticipating our Needs • Using e-technology • Actively using lean processes

31. Contractor Environment • Program Pressure • Flawless Execution • Cost Pressure • Real cost reduction & continuous improvement • Complex Systems Integration • Interdependent system elements • Cross-discipline execution • Greater reliance on Subcontract performance

32. Subcontract Excellence • More responsibility for technical development • Collaboration with LM • Early involvement • Risk management • EVM and schedule • Predictive Risk and Performance modeling Our role as a systems integrator increases subcontractor’s role and criticality We manage our subcontractors as an extension of our business

33. … Raising the Bar • Optimize Core Process & Efficiency • Share Knowledge Rapidly and Freely • Early involvement • Provide world-class tools to manage Suppliers • Enhance personnel skills and understanding • Speed and agility • Defining full life-cycle supply chains • Innovation End Game: Optimized Supply ChainSkilled Teams Armed with Information to Manage

34. Enterprise Big “Q” Focus Areas • Peer reviews • Subcontract management • Error prevention – near miss and mishap reporting • Non-conformance reduction initiatives • Manufacturing, engineering and suppliers • Product reuse analysis • End-to-end specialty engineering • Software and systems integration • Enhanced applications and procurement of EEE parts • Certified test conductor briefings

35. Supplier Expectations Supply Base Expectations Commitments Quality Delivery Cost Meet them all 100% in everything you do On time, every time Meet targets, deliver value Our customers expect - and the war fighter relies on - 100% mission success of “our“ products and services LMSIS West-Hatch-15Dec05 12

36. Summary • An SSC enterprise-wide plan; all sites, all programs • Strategic and systematic approach toward continuous improvement • Focus priority of all LOBs, programs and functional groups • Operational Excellence/Big “Q” improvements will eliminate: • Latent hardware anomalies and non-conformances • Latent process escapes, near misses and mishaps • Unacceptable schedule and cost performance • Will raise the bar with 100% Mission Success! Proactive plan to improve our performance!

37. What Can You Do? • Continue on the “Journey” • Continuous improvement in quality & cost • Flow the same principles and expectations to your supply base • Manage the ‘multi-tier’ • Take time to strategically plan to achieve competitive advantage in your supply chain Adopt “Big Q” Thinking