Breakout Session # 512 Dr. David N. Burt, Ph.D. Program Director, SCMI, U. of San Diego

1. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

2. A Case Study of the Raytheon Six Sigma (R6s) with Suppliers Project Breakout Session # 512 Dr. David N. Burt, Ph.D. Program Director, SCMI, U. of San Diego James Reeds, CPCM, CPM Project Director, SCMI, U. of San Diego Date: April 28th, 2004 Time: 3:00pm – 4:00pm NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

3. Session 512 Presenters Kelly A. O’Dell, Senior SCM Systems Manager Raytheon, Space and Airborne Systems, El Segundo, California Dawn C. Garrett, Director of Supply Chain Raytheon, Space and Airborne Systems, El Segundo, California Linda G. Keenan, Senior Supply Chain Manager Raytheon, Space and Airborne Systems, El Segundo, California Karen E. Gant, Senior Supply Chain Manager Raytheon, Space and Airborne Systems, El Segundo, California NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

4. Agenda • Problem Statement • Vision Statement • What is Raytheon Six Sigma (R6s) • What is R6s with Suppliers • Goals and Expectations • Team Journey to Success • Research • Accomplishments • Value Proposition • Overcoming Barriers • Lessons Learned • Closing the Gap NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

5. Raytheon at a Glance • Early years: 1922 - Cambridge,MA. • Radio tubes, W W II radar technology • Microwave Oven (Radar-Range) • Today • $16.9 Billion in Sales • 77,500 employees, 20+ countries • 40,000+ suppliers • $7.1 Billion Supply Chain Annual Spend • 72% of spend is Direct…28% Indirect • Core Business Focus • Commercial and defense electronics, business aviation, special mission aircraft NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

6. Problem Statement • Increased competition in the Aerospace & Defense (A&D) marketplace: • Growing percentage of total product cost resides in external supply chain • Gap exists between available program funds and supplier actual costs • Pressure on SCM to manage total cost of ownership (TCO) at key suppliers • Insufficient infrastructure to support growing Supplier Development needs NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

7. Vision Statement 6 σ R Visualize Achieve Commit Improve Prioritize Raytheon Six Sigma Characterize • Develop and execute a Raytheon Enterprise approach for engaging suppliers in R6s NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

8. What is R6s • The traditional Six Sigma approach, utilized by Motorola, has its underpinnings in hardware design and manufacturing • The Raytheon Six Sigma approach is 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 • Leads to a culture change NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

9. What is R6s with Suppliers 6 σ R Visualize Select Candidates Achieve Project Follow-Up Commit Raytheon/Supplier Raytheon Six Sigma with Suppliers Improve Execute Projects Prioritize Assessment Workshop Characterize Characterize Projects • Share experience, capabilities & resources • Program designed to share R6s methodologies with our suppliers NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

10. Goals and Expectations • Achieve significant program cost savings • Implement a common process throughout Raytheon • Create a knowledge hub for the enterprise • Establish corporate and site infrastructure NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

11. Raytheon Team Journey to Success Strategic Leadership Forum Enterprise Team El Segundo Team R6S Community USD Core Team SCM Council University of San Diego NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

12. Research Findings • Internal Raytheon Benchmarking: • Redundant execution development efforts • Need for various levels of engagement • Need ability to estimate ROI early in the process • Lack of training materials • Inconsistent deployment at suppliers • Raytheon Six Sigma Expert community didn’t understand need for unique supplier approach NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

13. Research Findings (Cont.) • External Benchmarking: • Working with suppliers is different than working internal improvement activities • Process requires highly trained professionals • One standard process owned by SCM • Importance of collecting, documenting, quantifying and marketing success stories • Successful companies rationalize supply base as part of process NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

14. Accomplishments R6s with Suppliers Enterprise R6s with Suppliers USD Project and Process Improvement • Standard Process Across Raytheon • Knowledge Hub • Execution Tools/Templates • Standard Training and Deployment • Corporate and Site Infrastructure • to Manage Process • Enterprise Supplier Engagements • where Applicable • Unique Site Implementations • Lack of Awareness • Across the Enterprise • No Detailed Execution • Tools and Templates • Limited Training and • Deployment NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

15. R6s with Suppliers - Top Level Flow Visualize Commit Prioritize Characterize Improve Achieve • ID sponsor and supplier • Collect data and describe burning platform • Develop business case • Contact supplier and get concurrence • Assess supplier culture • Plan assessment • ID assessment team • Validate Raytheon sponsor commitment • Validate scope • Contract for participation • Conduct assessment • ID project scope • Use ROI to prioritize • List projects • Assemble and train team • Determine as-is condition and metrics • Develop improvement plan • Design and implement new process and control systems • Manage project execution • Capture and communicate results and lessons learned • Celebrate success Contract For RaytheonSupport Plan approval Plan next steps Contract for Change Effective Results Contract For Supplier Support NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

16. Process - Characteristics R6s Raytheon Six Sigma with Suppliers Enterprise Product Blitz • Flexible engagements • Type and Size • Gated process • Continuous feedback • Suppliers • Customers • Includes ROI NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

17. Engagement Types NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

18. Knowledge Management • Project Library • a key R6s web tool used to share knowledge and communicate lessons learned and best practices across business, corporate and national boundaries NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

19. Standard Tools and Templates • Supplier Selection Evaluator • Supplier Template Letters • Business Case Templates • Support Cost Model • Supplier Pre-work Packages • Contract for Change Templates NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

20. Annual Plan • Raytheon sites develop an Annual Plan: • Resource requirements • Goals • Supplier candidates • Raytheon Enterprise level: • Site plans are rolled up • Resources allocated • Enterprise supplier candidates selected • SCM executive reviews • Quarterly process reviews NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

21. Value Proposition • Two types of savings identified based on actual data gathered • Workshop • Standard Process • Raytheon investment requirements identified • Calculated range of savings opportunities • Value proposition is based on conservative approach NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

22. Value Proposition (Cont.) Over 6 to 1 payback ratio! NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

23. Results (rough estimates from workshop): • Potential cost impact* for supplier, Raytheon, and customer totaling $9.5M • 14.6% cost reduction from baseline • Savings increase for potential foreign sales R6s with SuppliersMajor Electro-optical Device • Goals: • Meet very aggressive cost reduction target • Support stringent Navy requirements • Program Lifecycle: LRIP • Approach:Raytheon Six Sigma with Suppliers • Approach highlighted material and labor costs • Opportunities included Process improvements, automation enhancements, technical redesigns to reduce material costs, and leveraging customer pricing • Tools included DFMA, FMEA, LEAN/AGILE, and DTC • (Est. Implementation Cost: $1M) Multi-Platform Electro-optical Device Payback Ratio: 9:1 NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

24. R6s with SuppliersCable Integration Supplier • Results (rough estimates from workshop): • Cost impact* for supplier, Raytheon, and customer totaling $1.4M • $8.8K savings per part • Goals: • Reduce Cost and Cycle time • Support stringent Airframe Requirements • Program Lifecycle: Pre-Production • Approach: • Product engagement at the Box level • Opportunities include technical redesigns, material agreements, potentially changing fiber material and leveraging pricing • Tools included FMEA, PBS, and DTC, • STAATS (Est. Implementation Cost: $67K) Note: Some ideas carry considerable risk but, if feasible, could double or even triple these results. Payback Ratio = 22:1 NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

25. Overcoming Barriers • Resolution • May executive leadership forum • Developed ROI tools • Established staffing and training plan • Created an alliance with community • Merged into cross-company team • Barrier • One company sponsorship • Program funding • Skilled resources • R6s community support • Local pride of ownership NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

26. Lessons Learned • Obtain enterprise sponsorship earlier in process • Professional benchmarking is invaluable but takes a lot of preparation • A good idea is not enough - also need networks for implementation • If you don’t measure it - you can’t sell it NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

27. Closing the Gap The Progression to World Class Supply Management SM Stage 4 World Class Supply Management a Core Competence Strategic Sourcing Monitor Supply Environment Develop and Implement Commodity Strategies Commodity Teams Develop and Manage Alliances and Networks Time Based Competition Virtually Defect-free Materials and Services Leverage Supplier Technology Integrated Supply Strategy Manage Risk Emphasis: Total Cost Relationships: Transactional, Collaborative and Alliance Bottom Line Impact: Increase Shareholder Value Reporting: Member, Executive Group Data: Facilitates Strategic Planning Understands Key Supplier Industries e-Commerce II Stage 3 Proactive Coordinate Procurement System Develop Suppliers Long Term Contracts Involved in Development of Requirements Plan for Recurring Requirements Procurement Adds Value Active in Source Selection Near Defect-free Materials and Services Emphasis: Cost, Quality, Timeliness Relationships Transactional & Collaborative Bottom Line Impact: Profit Contributor Reporting Upper Management Data: Facilitates Sourcing & Pricing Fulfill Social Responsibilities e-Commerce Stage 2 Mechanical Transactional Focus React to Requisitions Not Involved in Key Source Selections Emphasis: Purchase Price Relationships: Transactional/ Adversarial Bottom Line Impact: Revenue Neutral Reporting: Low Level Data: Used to Expedite Computers Process Paperwork Stage 1 Clerical Process Paperwork Confirm Actions of Others Emphasis: Convenience Relationships: Personal Bottom Line Impact: Overhead Reporting: Very Low Level Data: Not Available 1 2 3 4 5 6 7 8 9 10 Our project moves us closer to WCSM NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

28. Questions NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”