Cost of Quality Reporting Protocol

1. Cost of QualityReporting Protocol Prepared by the Emerson Corporate Quality Council COQ Subcommittee December 22, 2007

2. Is the COQ metric a relevant business measure? Does it capture the significant costs of poor quality? “If you aren’t measuring it…….. …….you aren’t keeping score.” “If there is nothing broken, there is nothing to fix.” Emerson Confidential

3. Historic COQ Issues • Inconsistent interpretation across Corporation • Definitions too general, hard to find • Inconsistent application within Division • Accounting Dept vs QA Dept • Confusing Objective-Mix of costs • Non-conformance Cost need to go down to zero (reactive) • Conformance Costs may never go to zero and could go up (preventative) • Focused on manufacturing/operations • Not much of a management tool! Emerson Confidential

4. COQ Metric Update Objectives • Better define the cost elements • Focus on significantwaste • Costs of waste that the customer does not value • Costs that can be avoided/eliminated • Costs that impact the P&L • Goal is easy……..it is zero! • Link to Emerson financial exhibits or standard practices, where possible Emerson Confidential

5. Scrap Prior Fiscal Years: The total cost (material, labor and overhead) of defective product or service that is disposed of because it cannot be reworked to conform to requirements. FY’08: The total cost of material, labor and overhead of non-conforming product or service that is disposed of because it cannot be reworked or resold. • Includes: • Obsolete or unsaleable material that is scrapped due to company error • Credit for sale of salvaged material to scrap dealer • Excludes: • Standard processing loss of raw materials associated with a fabrication process (e.g., coil edge trims, bar ends, shavings, sprue & runners, etc.) • Labor to perform salvage and scrap reclamation – See Rework Emerson Confidential

6. Rework Prior Fiscal Years : The total cost (material, labor, and overhead) of reworking or repairing defective components and products. FY’08 : The total cost of material, labor and overhead of reworking, repairing and/or retesting non-conforming components, products or services. • Includes: • All official, unofficial, permanent or temporary operations for conducting rework. • Actions to rework or salvage rejected material • Correction of non-conforming services (e.g., fixing engineering software errors) • Excludes: • Rework conducted for supplier or customer at their expense. • Scrap resulting from rework – See Scrap Emerson Confidential

7. Warranty Prior Fiscal Years : Warranty: The total cost of claims paid to the customers or users after acceptance to cover expenses, including material, labor, and freight costs to repair non-conforming, or failed products during the warranty period. and, Returned Goods: The total cost of evaluating and repairing or replacing returned goods not meeting acceptance by the customer or user due to quality problems. FY’08 : The total cost of material, labor, overhead, freight costs incurred and claims paid to customers for evaluating, repairing, replacing (at standard cost), repackaging of material or services failing to meet customer acceptance. • Includes: • Cost of replacement of product or services at no or reduced charge. • Warranty paid to customers by non-production sites (e.g., sales offices, repair or service centers, etc.) • Excludes: • Goodwill & Product Liability Settlements • Returns due to customer overstocking • Financial accruals, profit and sales commissions Emerson Confidential

8. Premium Freight Prior Fiscal Years : Incoming and/or outgoing freight costs incurred in excess of normal, planned or expected. Exhibit 168: Air Freight.  Other premium freight such as courier services, under utilized FCL Ocean, or Truck Load Ground are optional if they can be accurately measured. FY’08 : Removed from COQ Emerson Confidential

9. Test Prior Fiscal Years : All labor costs including fringe for final product testing. FY’08 : All labor costs including fringe for 100% testing to separate non-conforming from conforming material, product & services. • Includes: • All official, unofficial, permanent or temporary testing operations where the objective is to find and remove non-conformances. • Excludes: • Standard operations mandated by test agencies or the customer. (e.g., 100% Dielectric Testing required by test agency standard or 100% functional testing required by the customer.) • Sorting as a disposition of rejected or returned material – See Rework or Warranty Emerson Confidential

10. Inspection Prior Fiscal Years : All labor costs including fringe for personnel classified as "inspector". FY’08 : All labor costs including fringe for activities classified as “inspection.” • Includes: • All quality assessments of incoming, in process or final product for the purpose of accepting or rejecting material or services. • Indirect or contract labor and related fringe costs, if employed for inspection. • 100% inspection performed by inspection personnel • Excludes: • Quality analyses, SPC, process audits (versus inspection of material, product or service), continuous improvement projects or any other activities that would be preventative and proactive. Emerson Confidential

11. Exhibit 135 (For FY’08) Emerson Confidential

12. Exhibit 135 Instructions (For FY’08) Detail the significant costs of poor quality. They represent the costs of reacting to quality problems as compared to the costs to prevent quality problems. They are the costs that the customer does not value, can be avoided and should be eliminated. • Sales: Net Sales • Scrap: The total cost of material, labor and overhead of non-conforming product or service that is disposed of because it cannot be reworked or resold • Includes: • Obsolete or unsaleable material that is scrapped due to company error • Credit for sale of salvaged material to scrap dealer • Excludes: • Standard processing loss of raw materials associated with a fabrication process (e.g., coil edge trims, bar ends, shavings, sprue & runners, etc.) • Labor to perform salvage and scrap reclamation – See Rework • Rework: The total cost of material, labor and overhead of reworking, repairing and/or retesting non-conforming components, products or services. • Includes: • All official, unofficial, permanent or temporary operations for conducting rework • Actions to rework or salvage rejected material • Correction of non-conforming services (e.g., fixing engineering software errors) • Excludes: • Rework conducted for supplier or customer at their expense. • Scrap resulting from rework – See Scrap -Continued- Emerson Confidential

13. Exhibit 135 Instructions (For FY’08) • Warranty: – The total cost of material, labor, overhead, freight costs incurred and claims paid to customers for evaluating, repairing, replacing (at standard cost), repackaging of material or services failing to meet customer acceptance. • Includes: • Cost of replacement of product or services at no or reduced charge. • Warranty paid to customers by non-production sites (e.g., sales offices, repair or service centers, etc.) • Excludes: • Goodwill & product liability settlements • Returns due to customer overstocking • Financial accruals, profit and sales commissions • Test: All labor costs including fringe for 100% testing to separate non-conforming from conforming material, product & services. • Includes: • All official, unofficial, permanent or temporary testing operations where the objective is to find and remove non-conformances. • Excludes: • Standard operations mandated by test agencies or the customer. (e.g., 100% Dielectric Testing required by test agency standard or 100% functional testing required by the customer.) • Sorting as a disposition of rejected or returned material – See Rework or Warranty • Inspection: All labor costs including fringe for activities classified as “inspection.” • Includes: • All quality assessments of incoming, in process or final product for the purpose of accepting or rejecting material or services. • Indirect or contract labor and related fringe costs, if employed for inspection. • 100% inspection performed by inspection personnel • Excludes: • Quality analyses, SPC, process audits (versus inspection of material, product or service), continuous improvement projects or any other activities that would be preventative and proactive. Emerson Confidential

14. FAQ - Scrap • Q: Does "obsolete or unsalable material" include the cost of buying back inventory? For example, returned material was allowed from retail stores because a new product line did not sell as expected. (The stores will not hold inventory that doesn't sell.) Most of the units were returned in good shape and can be re-packaged and re-sold later. However, some of the units were damaged and could not be reworked/salvaged. Should this be reported as Scrap? • A: No. Buying back inventory for reasons other than non-conformance to specification is a commercial accommodation, not a Cost of Quality. The fact that some of the returned material is not salvageable is a cost charged to the commercial accommodation and not the Cost of Quality. Emerson Confidential

15. FAQ - Scrap • Q: We follow Emerson guidelines so the process loss items are built into the Standard cost of the product and not accounted for as Scrap. Scrap materials/parts are sorted out and paid for by material type (steel, aluminum, mixed, etc.) We get a check each month from the scrap dealer. No way to tell how much of the total sales is from parts/materials that were reported as Scrap. Can we credit our COQ Scrap by the entire sales of scrap? • A: No. You may apply only the portion of the scrap dealer check for material that was charged to the Scrap line. There should be an incentive to get the most out of non-standard scrap. Emerson Confidential

16. FAQ - Rework • Q: Returns due to customer overstocking may require re-test. Would it be Rework? • A: No. If you accept material back due to customer overstocking (i.e., you did nothing wrong), it ends up being a commercial accommodation and not charged to Warranty.  If you have to retest the material in order to allow it back into stock, absorbing that cost is also part of the commercial accommodation.   Note: It would be appropriate for Sales to charge a restocking fee that would cover the cost of re-testing the material as well as other reasonable costs incurred to accept material back. Emerson Confidential

17. FAQ - Warranty • Q: Depending on how you read it one might think that the evaluation, repair, replacement, repackaging of material/services would be included in Warranty ONLY IF they were "claims paid to the customer". Is that what was meant? • A: No. There are two phrases in the definition that are connected by an “and”, not an “ONLY IF”. Emerson Confidential

18. FAQ - Inspection • Q: In our company, we have line workers place labels on the our products and also perform 100% inspection for visual defects. They are clearly inspecting for the "purpose of accepting or rejecting ...“ but are not classified as "inspection personnel.“ Should all of their cost, some portion of their cost or none of their cost be accounted for as Inspection cost? • A: It depends on the primary purpose of the operation.  If it is to attach a label and, in the process look for visual non-conformances, it should not be included.  But, let’s say you mechanize the process of attaching the label one day.  If you still have people inspecting for paint non-conformances, that inspection cost should be included. Emerson Confidential

19. FAQ – Inspection • Q: Is metrology (i.e., determining measurement error, calibration of instruments, etc) a cost of inspection? • A: No. These are preventative costs, not "waste" and therefore not part of the COQ metric. Emerson Confidential

20. FAQ – Inspection • Q: We are spending a lot on preventative, proactive quality efforts. Where can they be shown? • A: They should not be included in the COQ metric. However, there is nothing that prevents a division from tracking and reporting preventative costs separate from COQ to make some point. Emerson Confidential

21. FAQ - Test • Q: Why wouldn’t agency or customer mandated testing be excluded? They are usually safety related tests performed on products to determine conformance. • A: We do not include these costs because they typically cannot be eliminated (for the very reason that they are often safety related.) The COQ metric is a cost of waste. These tests are not a "waste." Emerson Confidential

22. FAQ – Test • Q: How can it be determined which 100% testing meets the criterion of being agency or customer mandated? • A: By default, all testing operations should be charged to the COQ and only excluded it if it can be demonstrated that the test would be required even if very few rejects would be found. Emerson Confidential