Innovation and Manufacturing in the US

1. Innovation and Manufacturing in the US (Importance of the connection to innovation and how you can ‘afford’ to produce in the US) Hans Peter Schaefer Retired VP of Product Supply P&G/Gillette

2. Introduction • German, Married, 2 Teenage Kids • Hobbies: driving fast cars fast (on the track!), family travel, ski and dinners • 31 years with Gillette/P&G in Germany, UK and US, mainly Supply Chain, Global Operations • Design and implementation of 3 tier manufacturing concept • Design, implementation and operation of single supply chain across 200 countries and 5 BU’s • Integration of the the Gillette Company’s Technical Organizations into the P&G structure

3. Key Message • Manufacturing is a key factor in every economy • There are ways to produce successfully in the US • Connection between manufacturing & innovation • Pack center concept • Lead factory concept • Reputation of manufacturing and education are as much a key ingredient as is cost

4. Importance of Manufacturing in the US • Every economy needs manufacturing since I believe that one has to either grow, mine or produce products to create a profit – redistributing the profits (money) alone is not sufficient. • Manufacturing jobs support a solid middle class in the US • Manufacturing jobs provide higher skilled service jobs like design, process engineering, accountants, lawyers, etc. • Each direct job in the car manufacturing industry provides 8.6 indirect jobs!!!! • The danger is that in order to keep the close link between manufacturing and higher level service jobs, these higher level jobs might eventually “follow” manufacturing to ??

5. Importance of Manufacturing in the US • Every economy needs manufacturing since I believe that one has to either grow, mine or produce products to create a profit – redistributing the profits (money) alone is not sufficient. • Manufacturing jobs support a solid middle class in the US • Manufacturing jobs provide higher skilled service jobs like design, process engineering, accountants, lawyers, etc. • Each direct job in the car manufacturing industry provides 8.6 indirect jobs!!!! • The danger is that in order to keep the close link between manufacturing and higher level service jobs, these higher level jobs might eventually “follow” manufacturing to ?? Concern

6. Gillette ExamplesConnection between Innovation & Manufacturing Connection of Manufacturing and Innovation

7. Importance of Connection between Innovation and Manufacturing at Gillette • The high tech products (e.g. Sensor, Mach3, Fusionand Fusion Pro Glide) could only be cost effectively produced (or produced at all) by designing our own manufacturing process and equipment • To support this, we had a single technical organization which included R&D, Procurement, Engineering, Manufacturing and Supply Chain • This was enabled by a Program Management Organization to “manage” the process across the functions

8. Example OnePack Center Concept (or Basic Operation Concept) Pack Center Concept Basic Operation Concept

9. Example One - Background • In the mid 90’s a new product was coming - (Mach3) • Due to the technical requirement, and the need to be close to the R&D and Engineering teams, the ideal startup location was Boston,…… however • Producing in Boston required the addition of space to the factory (more capital into an already high cost factory) • Salaries in Boston even for lower level tasks were high • Besides Cost and Capital, Flexibility was a concern – number of people fluctuating (some issue not different today, but will get to this with the second example)

10. Example One - Facts • Proprietary Technology and Innovation is in the product • Capital requirements for a new product were 95% product related • Product is identical around the world • Global product level forecast error was +/- 5% on an annual basis • Capital is only 5 % packaging related • Packaging is different in almost every Geography • SKU forecast error regionally, weekly +/- 50%

11. Basic Operation Concept MANUFACTURING (unpacked product) PACKAGING UT 95 - 100% UT Avg 60 - 70% FWIP Inventory Done in house (Boston) with highly skilled and (paid) labor Outsourced (Devens) to Packaging Company with lower skilled temp (low cost) labor

12. Basic Operation Concept MANUFACTURING (unpacked product) PACKAGING UT 95 - 100% FWIP Inventory UT Avg 60 - 70% • Major Benefits of B/O Concept: • Lower Costand Capital - High asset UT in B/O, • Lower Cost in packaging - outsourced • Better Customer Service - Built-in flexibility in Packaging/Buffer • Focus - different tasks on both sides • Better Innovation connection • Gillette R&D connected to product (manufacturing) • Packaging knowledge and innovation connected to packing operation

13. AS Raw Mat’l Inv FG Inv 3 Tier Production Concept LOCAL MARKET REGION GLOBAL Produce to Global Demand Pack to Configure to Replenishment Order and Ship WIP Inv WIP Inv FG Inv Very High Volume Very Few SKUs Few Locations Highly Automated High Volume Medium No. of SKUs Several Locations Partially Automated Low Volume High No. of SKUs Many Locations Manual BO MANUFACTURING PACKAGING ORDER FULFILLMENT Global Factory Regional Pack Center In Market DC

14. Example Two Lead (Startup) Factory

15. Example Two – Background • As mentioned before, our Factory is located in South Boston • High Labor Cost (compared to other locations/countries) • Land worth a LOT of money (bean counter interest high)

16. Example Two – Background • As mentioned before, our Factory is located in South Boston • High Labor Cost (compared to other locations/countries) • Land worth a LOT of money (bean counter interest high) • However • All R&D and Engineering staff, plus trained workers are in South Boston!!

17. Example Two – SolutionCreating a High Tech “LEAD” Factory • Assessed the size (output, number of employees) of the “smallest” viable factory • Designed the factory as a high tech lead factory • Lead means they start up the production of the latest technology products (currently Fusion Pro Glide, Fusion, some Mach 3) (Packaging of these products still in outsourced Pack Centers) • When the next generation of technology is ready for deployment Boston will again start up the new product, BUT as they ramp up, they also ramp down the older product, which includes training the receiving factory of the older versionand supports the transfer of the older version to the receiving factor.

18. Example Two – Result • Cost overall are down • R&D, Engineering and Manufacturing are integrated under one roof • Very interesting jobs even in the factory – new technology, training others, etc. • Huge portion of the land not needed anymore and can be sold

19. Reputation and Education • Education: • There is a lag of Engineers, quality and quantity • To offset the quality aspect, we created what we called the “Tech Op Program”. Three year formal and on the job training in technology, leadership and operations! • Very successful in terms of capability building, but also in terms retention.

20. Reputation and Education • Reputation: • We (Gillette) treated (level, pay, etc.) the MFG leaders like the engineering, supply chain and R&D leaders. • Result was that every young engineer’s dream was to run his/her factory some day- highly qualified plant managers. • P&G plant managers were mostly a level below a supply chain, engineering and R&D leader. • Result, it was tough to find a plant manager, let alone a top notch person, or one in ‘less desired’ locations.

21. Key Message • Manufacturing is a key factor in every economy • There are ways to produce in the US • Connection between manufacturing & innovation • Pack center concept • Lead factory concept • Reputation of manufacturing and education are as much a key ingredient as is cost • Different view of things deliver different solutions!!