Raw Inventory Planning Meeting

1. Raw Inventory Planning Meeting Craig Doiron March 21, 2007

2. Agenda Wednesday – March 21, 2007

3. First Focus 13 Raw Inventory ReviewGoals & Expectations • Refocus Our Efforts on Inventory Improvement Targeting Raw Material • Use Lessons Learned From Focus 12 (14) Sessions to Improve Performance • Engage Operations, Planning and Procurement to Solve This Challenge • Identify Meaningful Action Plan and Quantitative Goals for Raw Inventory • Share Best Practices • Establish a Follow-up Process That Measures and Manages the Process A Tough Issue Facing Corporation

4. Raw Inventory Planning Meeting Ed Monser March 21, 2007

5. ITO Recent History

6. Total Forward Inventory Turnover

7. 2007 March POR vs. 2006 ActualTotal Inventory Turnover Change

8. EMERSON MOTOR CO. AIR COMFORT PRODUCTS ASCO VALVES CLOSETMAID EMERSON APPLIANCE CONTROLS THERM-O-DISC FUSITE WHITE RODGERS IN-SINK-ERATOR EMERSON POWER TRANSMISSION BRANSON ULTRASONICS EMERSON PROCESS MANAGEMENT KNAACK LEROY SOMER ASCO POWER TECHNOLOGIES EMERSON NETWORK POWER SYSTEMS FLOW CONTROLS EMERSON APPLIANCE MOTORS EUROPE CONTROL TECHNIQUES EGS ELECTRICAL GROUP EMERSON CLIMATE TECHNOLOGIES ASTEC POWER SYSTEMS RIDGE EMERSON TOOL COMPANY INTERMETRO WESTERN FORGE CONNECTIVITY SOLUTIONS HEATING PRODUCTS 2007 March POR vs. 2007 Financial ReviewTotal Inventory Turnover Change Major slip from Financial Review

9. Trade Working Capital % to Sales Trends –1/12 POR – Consolidated (Internal)

10. Trade Working Capital -- Dec 31 Actual – 1/12 POR NOTE: * Trade W/C / (Q1 Sales x 4) ** End of period data

11. Days in Cash Cycle -- Dec 31Actual – 1/12 POR NOTE: ** END OF PERIOD DATA

12. Days in Cash Cycle – Mar 31Expected – 1/12 POR NOTE: ** END OF PERIOD DATA

13. Inventory Days – 9/30 (7.7) Days v. 9/30/06 NOTE: * Inventory @ 9/30 / (Next 3 Mos COS x 4) ** End of period data

14. Inventory - Q2 Improvement & Beyond! We need to take out $139 million in inventory by March 31 and $371 million by September 30!

15. Finished Goods ... Better than Forecasted

16. Slow Improvements in WIP

17. Raw Inventory has been the Issue

18. Inventory Reduction Key MessageWe Must Enact Plans for Immediate Improvement • Emerson’s Working Capital Improvement Plan Is at Risk • Our Focus Needs to Shift to Raw Material Inventory • This Needs to Be a Collaborative Event With Operations, Planning, Procurement and Finance Working Together • There Are Clear Opportunities to Affect Short-term Improvement • ‘ABC’ Planning and Analysis • SOX Compliant VMI / Consignment Programs • Use of Our Master Supplier Agreement Counting On This Group to Affect Necessary Change

19. Raw Inventory Planning Meeting Craig Doiron March 21, 2007

20. Raw Inventory Attack Plan • ‘A’ Item Planning • Embrace ABC Process • Improve Planning Process / Resources • MIN / GMDC for Analytics • Supplier Programs / ‘A’ Items • Focus on Consistent Volumes • eKanban Opportunities • Engage Key Suppliers in Lean • Continue DPO Improvement Steering Team Monser, Keefe,Doiron, Eckardt • Financial Opportunities • Identify and Eliminate Slow Moving • Take Advantage of MSA Opportunities • ROTC Decision Tool • Raw Focus 13 • Refocus our Efforts • Share Best Practices • Integrate Operations, Planning, Procurement • Challenge Leaders to Deliver Need Plan For Dramatic Reduction Raw Inventory_CD 032107 # 20

21. Inventory Velocity Tool in MINAbility To Do The Following • Drill Down To Part-Level “Days-On-Hand” Reporting • Days On Hand Comparisons Available For • Business Group • Division • Mfg. Site • Commodity Team • Commodity Family • Analysis Can Be Done By World Regions • For Emerson Mfg. Sites • For Supplier’s Country • Parity Analysis Can Be Performed Data Source Is MIN Tool Is Only As Good As Data

22. Inventory Velocity ToolReports Quickly Isolate Problem Areas P Raw Inventory_CD 032107 # 22

23. Spend & Raw Inventory Analysis7% of Parts Make Up 80% Spend (‘A’ Parts) Opportunity To Improve Management of the ‘A’ Parts

24. Part Count & Spend Analysis * LSNA Data Only – LS-EU Did Not Submit

25. Emerson Division Supply AgreementConsignment Scope and Responsibilities 2. SCOPE: Seller shall deliver the Products to Buyer’s Storage Premises for the purpose of storage until subsequent sale to and use by Buyer (or return of Product to Seller). Upon receipt of the Products at the Storage Premises, Buyer will verify the correctness of the quantities. Buyer shall (i) store the Products at the Storage Premises, (ii) segregate the Products from like material, and (iii) clearly mark the Products as the property of Seller. This process of storage and segregation of the Products shall be referred to as “Inventory Storage.” Buyer will draw from the stored inventory as needed and, upon such withdrawal, Buyer shall be deemed to have purchased such Product pursuant to the terms hereof and the terms of the Supply Agreement. Buyer will use the Products delivered to the Storage Premises on a first in, first out basis where practical. Seller will be liable for any loss or damage to the Products while in Inventory Storage except to the extent such loss or damage is caused by the negligence of Buyer. Any Products, including but not limited to, nonconforming Products, delivered to the Storage Premises may be returned to Seller at Seller’s expense. * Division Supply Agreement, Schedule 2, Consignment Agreement, 2/07

26. Emerson Master Supply AgreementOpportunity to Improve International Shipments For all shipments (domestic or international), Seller will own the Products from its manufacturing facility to Buyer’s named place of delivery and title shall not pass and delivery shall not be deemed to occur until Buyer has received the Products at the final destination specified by Buyer. All risk of loss during carriage / transportation shall be the responsibility of Seller, and the Products will be considered delivered only upon receipt at Buyer’s facility in conformance with the terms and conditions of this Agreement. Buyer has no obligation to obtain insurance while the Product is in transit from Seller’s facility to Buyer’s named place of delivery. Seller will use Buyer’s preferred carrier for transporting the Products from Seller’s facility to Buyer’s named place of delivery. * Master Supply Agreement, Page 2, 2/07

27. Raw Inventory Velocity AnalysisFocus 13 Program

28. Raw Inventory Velocity Calculation – Example for Nov 2007 • From POR Total Inv = $2,286,279 and Total Inventory Turns = 5.59 • COGS = $2,286,279 X 5.59 = $12,780,300 • From Exhibit 245 Material Content for November = 57.0% • Material Cost = $12,780,300 X 0.57 = $7,284,771 • From POR Raw inventory = $870,378 • Turns =  $7,284,771  $870,378= 8.37 • DOH Raw Inventory = 360   8.37=  43.0

29. Raw Inventory Reduction Plans Raw Inventory_CD 032107 # 29

30. ABC Planning Process R. Keefe

31. Raw Velocity Calculations (Monthly from POR) • Determine Material Content % from most recent 245 submittal; (Material Content – Buy-outs) / COS • Current COS x % = Material Content • Velocity = 360 / (Material Content (annualized)/ Raw Inventory*) • Note: Current 245V does not include Raw In-transit * Including Raw In-Transit

32. A-B-C Analysis - Considerations We’ll start with Order Frequency (Key part of Kanban) ABC Lot sizing techniques Non stock parts or “D” type parts

33. Determining Order Frequency (OF) Before discussing how to determine Order Frequency, a few comments on lot sizing and inventory management…… • Order Frequency in the Kanban formula is essentially the lot size expressed in days of supply – i.e. when we setup this part, we run a 2 weeks of supply; or when we purchase this part, we buy a 4 week supply. Same concept holds for purchased lot sizes whether or not you use kanban. • OF or lot size is affected by many factors including SET-UP, availability of tooling, distance, handling, frequency of shipments from suppliers etc. • OF is calculated for both external (purchased) and internal (manufactured) parts • Techniques to manage and reduce the lot size (OF) include: • set-up time reduction • Increasing the frequency of shipments from our suppliers • ABC Analysis for both internal and external parts • Do NOT use EOQ’s (assumes “independent” part usage)

34. Determining Order Frequency A brief discussion on ABC… • ABC in its practical application as an analysis technique says that if we look at the impact of demand on most things we will find for example that the top: • 20% of our Customers provide 80% of our sales • 20% of the finished part numbers we sell account for 80% of our sales • 20% of a family of part numbers account for 80% of the usage • 20% of the employed pay 90% of the taxes • The implication of ABC- to apply the majority of our efforts to those things that will have the greatest impact • ABC can be used externally to manage the high annual $$$$ purchased inventories • ABC can be used internally to manage setup and component inventories

35. Determining Order Frequency What do you do about parts with high variation in demand • For A’s, B’s, & C’s, although demand may vary, demand is usually relatively predictable and repeatable with virtually no or very low risk of obsolescence • D Items • Engineered to Order type parts • Special parts where you may only see demand once or twice in a year • Or parts where demand is hit and miss and varies enough as to be unpredictable • D’s are generally not stocked • D’s are scheduled when demand is known and for the exact quantity • D’s should reside in Inventory for a very brief period – ideally no more than a few days • Based on your process data, set aside some capacity, including setups for D type demand

36. Flexible Capacity (Cannot assume 100% capacity usage) • Flexible Capacity – is a percentage of total available setup and run capacity that is reserved to allow for variation…unplanned downtime, Customer inserts / expedites etc. We suggest the following ROT’s: • Plan on 5-10% flex capacity for relatively stable processes…few parts, not a lot of inserts etc • Plan on 10-15% flex capacity for processes with many parts, more unpredictable demand, or more unexpected downtime etc Example: A process runs 2 - 8 ½ hour shifts. After subtracting lunch / breaks / etc, 840 minutes of available capacity remain. Allocating 10% flex capacity would reserve 84 minutes for any exceptions Same type of assumptions when setting Order Policies for Suppliers/Parts

37. Allocation of Setup Capacity • After allowing for Flex Capacity, determine the Setup Capacity or number of setups that can be done per day. • For “A” type parts, allocate approximately 50% of setup capacity • For “B” type parts, allocate approximately 25 - 30% • For “C” type parts, allocate approximately 20 - 25% • For “D” type parts, determine the average number of D”s run per week or month and plan for that amount of setup capacity….i.e. average 20 “D” type parts per year, 4 per month (parts could repeat more than once per year), plan for 1 setup per week

38. Following are examples of the ABC technique for application for both purchased and manufactured parts

39. ABC EXERCISES ABC & Procurement ABC based on Capacity in Manufacturing ABC based on Volume in Manufacturing

40. ABC EXERCISES ABC & Procurement ABC based on Capacity in Manufacturing ABC based on Volume in Manufacturing

41. ABC Analysis (Procurement) The implication is to increase the frequency of deliveries on A items

42. ABC Ordering Rule Inventory Impact Average inventory = ½ order quantity + safety stock

43. Average Material ITO = 14.1 !!!!!! ( $12,000,000 / $850,000 = 14.1 raw / purchased turns) ABC Ordering Rule Inventory Impact Average inventory = ½ order quantity + safety stock Category Average Monthly Usage $$$$ Order Quantity Safety Time Avg. Inv. $$$ ½ Order Quantity Safety Stock $$$$ Total avg. Inventory $$$$ Days on Hand (30 day mo.) A $800K 1 wk 1 wk $100K $200K $300K 11 days B 150K 8 wks 4 wks 150K 150K 300K 60 days C 50K 24 wks 8 wks 150K 100K 250K 150 days D Assume ordered as required Sum $1,000K $400K $450K $850K 25 days

44. Average Material ITO = 22.5 !!!!!! ( $12,000,000 / $525,000 = 22.5 raw / purchased turns) ABC Ordering Rule Inventory Impact Average inventory = ½ order quantity + safety stock Category Average Monthly Usage $$$$ Order Quantity Safety Time Avg. Inv. $$$ ½ Order Quantity Safety Stock $$$$ Total avg. Inventory $$$$ Days on Hand (30 day mo.) A $800K 1 wk 1 wk $100K $200K $300K 11 days B 150K 4 wks 2 wks 75K 75K 150K 30 days C 50K 8 wks 2 wks 50K 25K 75K 45 days D Assume ordered as required Sum $1,000K $225K $300K $525K 16 days

45. ABC Average Monthly Usage $$$$ Unit Cost Extended Cost Part Number Avg. Monthly Usage Extend the Unit Cost to determine average usage $$$$ / Mo.

46. ABC Average Monthly Usage $$$$ Extended Cost % Usage $$ Cum % Usage $$ Part Number Cum % Parts Avg. Month Usage Unit Cost Category Generally use average annual usage $$$$

47. Likely Division Profile (mixed Model, some “custom” configurations) • Assume $303,000,000 annual spend • Assume 10,000 line items purchased • A-B-C • “A” – 1,400 parts -$240,000,000 spend • “B” – 2,100 parts - $45,000,000 spend • “C” – 3,500 parts - $15,000,000 spend • “D” – 3,000 parts - $3,000,000 spend

48. Do Not Fear Kanban for C Items • Average Usage = 8 units per day • Based on Supplier Capacity – minimum Order Frequency is 30 days (6 weeks) – lot size in days • Supplier L.T. = 14 days (10 business days) • Transit Time = 14 days (10 business days) • Safety Time = assessed to be 30 days (100% upside during Replenishment Time + 1 week logistics delay) KB = DD x (OF + LT + TT + SS) = 8 x (30+10+10+30) / 3 Containers Cont Size* 3 Containers of 213 (will use 240) * With packaging flexibility, might have set number of kanbans

49. OR Using 240 Authorize 240 In Transit Avail Empty Ship 240 Steady State Using 240 Making 240 Avail In Process Max. 20 days Empty Average Inventory = ½ (240) + 160 = 280 = 49 days velocity

50. Do Not Fear Kanban for A Items from a Long Distance • Average Usage = 100 units per day • Based on Supplier Capability – Order Frequency can be set for weekly (5 days) • Supplier L.T. = 14 days (10 business days) • Transit Time = 28 days (20 business days) • Safety Time = assessed to be 10 days (25% upside during Replenishment Time + 1 week logistics delay) KB = DD x (OF + LT + TT + SS) = 100 x (5+10+20+10) / 500 Cont Size* 9 signals of 500 units each * Established to match logistics intent (weekly)