Quotation, Management and Accounting of Long Term Product Maintenance Contracts

1. Quotation, Management and Accounting of Long Term Product Maintenance Contracts Evelynn Stirling Technical Director Bob Battin Financial Director Service Solutions

5. Service Solutions Team (SST) Development Cummins identified CpH contracts as a business opportunity No significant coordination of effort amongst the BU’s Concern that Distributor needs were not met

6. Organization The team is overseen by a cross-bu steering committee and interfaces with a variety of internal and distributor organizations to accomplish its mission.The team is overseen by a cross-bu steering committee and interfaces with a variety of internal and distributor organizations to accomplish its mission.

7. The core team is a small group of people with experience and expertise in the areas of finance, systems, applied statistics/analytics, technical service and business. They work with key personnel from the business units and distributors to establish direction for our work and to then execute that work.The core team is a small group of people with experience and expertise in the areas of finance, systems, applied statistics/analytics, technical service and business. They work with key personnel from the business units and distributors to establish direction for our work and to then execute that work.

8. What is a Long Term Product Maintenance Contract? A Long Term Product Maintenance Contract is “an agreement to perform certain agreed upon services (scheduled and unscheduled maintenance and repair activities) to maintain a product for a specified period of time.”

9. Different Forms of Long Term Product Maintenance Contracts The terms and conditions of a Long Term Product Maintenance Contracts may take different forms: CpH (Cost per Hour) Contracts CpKw (Cost per Kilowatt) Contracts Cost Cap Contracts Long Term Product Coverage Contracts Others still developing, Cost per Kilometer, Cost per Mile, Cost per Ton etc.

10. What is a CpH Contract? Provides a solution to a customer’s desire to stabilize cash flows and mitigate risk Defines a Cost per Hour (CpH) rate that a customer will pay for uptime Requires distributor to assume risk associated with all scheduled maintenance and unscheduled repair activities including parts and labor Allows distributor to retain any income if hourly costs are less than hourly rate, but requires distributor absorb risk if costs are greater than hourly rate May increases or decreases overall margins to distributor and/or company depending upon financial position of contract

11. What is history behind business? Mining customers began requesting CpH contracts in 80’s and preferred contracts on new products where reliability and service requirements were uncertain Some distributors began pursuing business in response to competition In early 90’s, Chile distributor went bankrupt because of pricing war with Cat distributor and inability to control for risk. Cat distributor sustained serious losses and was sold As new products such as QSK60 were launched, independently owned distributors were slow to offer contracts because of product uncertainty and financial exposure Company-owned distributors in Australia, Chile, and South Africa have pursued the business

12. What is a Cost Cap agreement? Requires distributor to guarantee that contract costs will not exceed an agreed upon amount, and customer pays for parts and labor up to the agreed upon maximum amount (cap) Requires distributor to assume risk associated with all scheduled and unscheduled maintenance and repair costs including parts and labor if costs are greater than agreed upon maximum Does not allow distributor to retain any income if costs are less than agreed upon amount since customer pays only for actual costs May decrease overall margins to distributor and/or company Should be avoided but if quoted, price should be at least 10-15% above normal CpH quote

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15. Risk Catagories Operational Fluids Quality – Oil, Coolant and Fuel Filtration End User Operation and Maintenance Practices Local Environmental conditions Financial Escalation compliance Load Factor, Exchange Rate, Annual Parts and Labour etc. Technical Product Quality and Reliability Repair Quality

17. 8 best ways to control risk Reduce early unplanned overhauls Implement improved maintenance practices Centralize data on failure types and rates to implement campaigns Standardize accounting procedures, financial analysis and reporting Develop pricing methodologies based on centralized data Implement standard contract requirements Develop and implement accrual methodologies for contracts Pool risk across different engine types and locations Contracts of a single engine (loader) – highest risk. Need to approach differentlyContracts of a single engine (loader) – highest risk. Need to approach differently

19. Web Based Tools GDC - Circuit http://circuit.cummins.com Integrated Service Solutions https://servicesolutions.cummins.com/

20. Read and understand thoroughly the customer Request for Quote. Identify all risks involved and price for them or mitigate them. Reference TQS Document: CORP-04-13-00-00 Service Contract Customer Quote Procedure Evaluate Customer Develop Marketing Message Obtain Key Contract Factors Plan, Forecast and Prepare Quote Involve Cummins Marketing and Service Solutions Obtain Approvals Submit to OEM/Customer/Project Company For one unit operations having a tech on site is not economical.For one unit operations having a tech on site is not economical.

21. If possible, share risk and profit with the end user. Additional overhauls closely reviewed. (next slide) Betterment clause in contract for any residual value. Contract templates imperative. Do not allow for grey areas One tech per shift for 10 machines onsite or no more than about one hour from site. Separate Man-on-Site agreements popular and preferred. Insist on good Operation & Maintenance practices by the end user. Penalty Clauses in Contract. Carry out technical Audits/Review. Ensure own Workshop and on-site operations and personnel meets all Cummins criteria For one unit operations having a tech on site is not economical.For one unit operations having a tech on site is not economical.

22. CpH FOR QSK45 IN KOMATSU HD1500 HAUL TRUCK60,000 HOURS IN 6,000 HOUR BUCKETS LOAD FACTOR 45% Engine Maintenance Schedule (15,000 Hour Engine Life)

23. CpH FOR QSK60 SS IN KOMATSU WA1200 Loader60,000 HOURS IN 6,000 HOUR BUCKETS LOAD FACTOR 60%Engine Maintenance Schedule (13,762 Hour Engine Life)

24. Sample Betterment Clause This proposal/quote/contract provides no commitment or guarantee to the engine condition or remaining engine life at the expiration of the contract term. In the latter stages of the contract the DISTRIBUTOR will discuss the repair options with the CUSTOMER where the repair options may increase the reasonable residual value of the engine. By a mutual agreed approach the best repair procedure will be determined. In any event, all repair options will allow the engine to operate at the agreed performance level without incurring abnormal maintenance requirements over the duration of the contract. . Extra engine overhauls required as a result of Customer caused damage will be the responsibility of the customer.

26. Managing Contracts Need a Senior-Level owner for contracts within the distributor Ensure a well written contract; time, effort and expense to get the agreement to be clear will pay back. Less is not always more. Provide a well organized and clear summary to ensure key points understood, back up with a solid legal document. Need a contract manager who is involved on a daily basis. Drives consistency and ensures continuity in what is charged to the contract. Ensures daily activities (billing, maintenance strategy, etc) are tended to. Maintain contract workbooks in an accurate and timely manner Supporting Service Manager needs to understand contracts and commitments. Ensures compliance of commitments. Knows the Maintenance Schedule for each engine/fleet. Maintains equipment log.

27. Managing Contracts Key Parameters to Monitor in creating and maintaining contract workbooks: Invoice #, Work Order # Hours – be consistent! Unit, Engine, Component. Parts cost Labour hours & cost Miscellaneous Account Coding – Customer, Warranty, Policy, Contract (Last!) Summary of Work - #2 and #8 Head Gasket etc. Scheduled/Unscheduled – C, Midlife, etc.

28. Managing Contracts Need an active approach to Maintenance Strategy; Contract Managers need to "know when to go," vs. “waiting to be called.” Change of culture from break/fix to prevent break is key to success. Emphasise proactive approach – give examples! Make the customer successful!Emphasise proactive approach – give examples! Make the customer successful!

29. Managing Contracts Performance of Scheduled Maintenance in a timely manner is essential and need to verify that recommended intervals are correct. Maintain good working relationship with Mine and OEM Maintenance Planning Manager Need to manage and monitor contract compliance - Do What You Say You Will Do. Examples: Escalation Factors, Availability, Customer Responsibilities and Compliance. Need a good paper trail using Contract Workbooks to track work completed to the cost of the individual interventions (planned and unplanned). Add sheets on best practises.Add sheets on best practises.

31. CASE STUDY Is there Gold in Ghana? Split into teams of 4/5 Discuss Case study and how to approach the quote? Share results If there are any questions please ask at any time.

33. Best Practises The maintenance program needs to offer flexibility in design to respond to changes in mining environment Design flexibility allows the Distributor the opportunity to design the contract to meet the specific needs of the customer and OEM. Chile offer programmes ranging from Technical Assistance to full MARC (Maintenance and Repair Contract). South Africa quote all contracts with and without rebuilds.

34. Best Practises Operating parameters for engine performance (fleet and individual engines) are monitored on a monthly basis All operating results outside acceptable parameters are investigated and corrective actions taken on a timely basis. Chile monitors Engine availability, truck availability, MTTR (Mean Time To Repair), MTBF (Mean Time Between Failure), % reliability of engines, % utilisation of truck, % downtime, load factor, fuel burn and oil consumption. Results help prioritize maintenance schedule. Analysis of data identifies opportunities for improvement

35. Best Practises Minimize time to respond to maintain efficiency of mine operations. Have technicians on site at all times, 24/7 Negotiate separate man-on-site arrangements outside of CpH quote. South Africa and Chile both use this as a standard approach. Encourages better OEM and Customer relationships

36. Best Practises All long term service contracts need to be monitored and controlled. A dedicated contracts manager oversees the everyday management, ensures contract compliance by maintaining contract workbooks in an accurate, efficient and timely manner and monthly reports on financials - actual and forecast. Cummins Western Canada (CWC), Cummins Rocky Mountain, South Africa, Australia, Chile, Columbia all have individuals in this role. South Africa performs Contract Compliance Audit on all their contracts.

37. Best Practises Maintain durability and uptime of fleet. Implement all product improvements on a proactive basis. Analysis of data will support this action if ‘fixes’ considered too costly. CWC very proactive with improvements – at midlife and rebuild, Unscheduled expense reduced as a result.

38. Best Practises Network with other Distributors. “There are no new problems, just new engineers”. Chances are that other distributors have already experienced issue/concern. CWC asking Australia for experience of Camshaft change-out rate at rebuild and relationship to load factor.

39. Questions?

40. Thank You