Discussion Document

Driving the Next Generation

Purchasing Model

Morristown, New Jersey

October 12th, 2006
Executives are looking for the next generation sourcing model

 Companies are not satisfied with the performance of their supply base and with the
relationships that they have with their key suppliers
 This is supported by our recent interviews with CPOs of major companies across the globe
– The role of the purchasing function will become more strategic (make vs. buy, large
strategic partners, innovation etc.)
– Developing relationships with strategic suppliers is key
– The necessary capabilities are not in place
– The performance is not where it needs to be of key suppliers and how the OEMs /
customers manage them
 Quotes from interviews
– “Need to better leverage suppliers for innovation“, “Increased collaboration in Development“,
“Increased need to cooperate, work together in R&D; need to be able to commit to suppliers”
– “Have the right intentions or the same goals on both sides”, “Clear strategic intent in regards
to dependencies from both sides”, “Have skilled people to manage the relationship”, “Have a
clear approach for how to manage a relationship“

2
Many suppliers mention Toyota and Honda’s cost-based approach
as a superior and fundamentally different method of sourcing
 Better understanding of supplier needs and economics
– “Toyota uses its cost tables to make sure the suppliers don’t hide margin or exploit design changes”
– “Toyota focuses on processes not piece price…their cost models are built on processes that actually drive
costs such as the number of stamping press hits”
– “Honda cost estimators can tell you your own cost to within 1% accuracy”

 More enduring relationships with fewer suppliers

– “Toyota is very close to a partnership … they want the supplier to be successful”
– “Toyota expects suppliers to make money”
– “Suppliers are willing to go to extraordinary lengths to maintain that trust”

 More design and program stability—set realistic program volume, price and cost targets before
establishing specifications and costs for suppliers
– “Big 3 make 8 to 10 design changes for each program; Toyota makes maybe 3”
– “Toyota always meets or exceeds its volume commitments”

 More reuse—components, architectures, platforms and technologies

– “Toyota is creative about reuse, it knows when to customize, how much to customize and most
importantly when not to customize (develop new design)”
– “Honda leverages re-use to an extreme”

 Results in higher value—better speed, quality, and cost

– “Toyota may even pay the same, but they get better value and reliability”
– “The potential cost reductions with their approach are huge”
3
Toyota and Honda’s model is advantaged across multiple
dimensions
 The benefits of Toyota’s model go beyond cost
– Toyota consistently outperforms the Big 3 on JD Power’s quality metrics—20-30% fewer problems per hundred
– Brand position is based on advantaged QRD
– In the mass market a strong brand results in superior purchase consideration
– Focuses on value to customers – functionality and quality
– …and typically realizes higher prices for comparable vehicles
– Higher retained value and lower operating costs more than account for Toyota’s price premium

 Dealer interviews qualitatively confirm Toyota’s price premium

– “Although Big 3 MSRPs may be higher, after incentives, owners pay significantly less for vehicles in the same
segment”
– “Buyers are willing to pay more for the Toyota brand across all segments”
– “Across the board, Toyota is simply regarded as a better vehicle: better initial quality, less service visits, more
longevity, better fuel economy in most categories”
– “On average Toyota customers are better educated and earn more. They realize that over the long run, more
money spent at the POS will be paid back in the realms of consumer confidence, reliability, and efficiency, not
to mention the economics of a vehicle more in-demand come trade-in time”

 Toyota has a significant cost advantage over the Big 3 in supplier costs in life cycle costs and in
engineering

4
Two different philosophies have been used to manage suppliers –
price based and cost / performance based sourcing
Supply Base Philosophies

Price Based Cost/Performance Based

Tries to exploit the supply base as a Uses the supply base network as a key
market competitive advantage
Price based Constant continuous improvement to
Looking for ways to get leverage on eliminate waste in the entire supply chain
suppliers to improve their negotiating Integrated relationships
position Cooperative / knowledge sharing
Attempt to gain incremental improvement Sets and meets targeted / required cost
by switching suppliers with supply partners
Arm’s length relationship Cost based
Quickly switch suppliers for slightly lower Ensures supplier is at an advantage over
price market
Constantly market test pricing / quality Encourages and promotes competition for
Low trust between OEM and supplier technology, quality and cost through dual
Combative sourcing in the category

HONDA

5
The new purchasing operating model is based on three key pillars

New Purchasing Operating Model

 Strategic long-term partnership suppliers – strategic suppliers are a critical part of the extended
enterprise and the customer’s success is interdependent on the suppliers success
 Cost-based (not priced based) collaboration across supply chain to eliminate waste
 “Get it right the first time” – Collaboration with suppliers on product design to jointly reduce
waste and promote efficiencies & innovation
 Focus on continuous improvement in pursuit of ideal performance

Commitment to People Commitment to understanding Commitment to Suppliers &

Development ideal performance and Expectations from Suppliers
eliminate waste
 Respect to all people  Ideal cost  To mutually agree as to what
is ideal performance
 Shift perspective/culture to  Zero defects
support new operating model  To mutually develop path to
 On-time delivery everytime ideal performance
 Train people to see what is
possible  Valuing innovation  To drive continuous
improvement based on
 Set incentives to encourage  Awareness that ideal is not a physical realities
appropriate behavior standard, but a moving target
based on physical realities  Build trust and long-term
relationship with suppliers
focused on performance
6
The ideal performance based model creates the “right” supplier
behaviors and a continuous learning cycle from product to product

Aligned Behaviors
A Learning Cycle From
Program to Program  Establishes cost standards for major processes based on
physical realities (e.g., injection molding cycle times) and
Supplier for all elements of a component or system
Quote
 Defines an ideal performance / cost to compare with the
supplier cost
Ideal  Creates a dialog around cost improvement ideas based on
Performance the supplier quote versus an ideal performance view
 Drives to an agreement of real ideas that are developed
Agreed-to into a full improvement plan
Update
Cost Cost  Updates cost standards based on reality changes and best
Standards Model costs
 Uses sourcing as an opportunity to learn
– Understand costs in relation to realities (machines,
people, processes, logistics, etc.)
Supplier – Improve standards toward global best / ideal
Improvement performance
Program  Learnings carried over to the next program – learning cycle

7
Cost standards are integral to the approach and are a powerful way
of managing supplier target costs, year on year improvements and
engineering changes
EXAMPLE COST ARCHITECTURE
Cost Standards
 There is a cost standard for each element in the
Total pyramid
System Purchased – The standards add up to the total cost / price
Part Cost much like a BOM
– This explicitly separates SG&A, markup and
tooling
SG&A / Base Tooling Markup and  The inputs for each standard come from a
Markups Tooling Mods Tooling combination of cost models / understanding,
Costs industry accepted costs / prices and observed
prices. There are a number of different ways to
Conversion develop a cost standard.
Assembly Costs
– Process and material based cost models
sses
Proce p 2

Comp Injection – Price tables

Structure
Ad
Com

Processes Molding
Assembly – Parametric feature based formulae
diti

Processes
Com

ona

Input  The standard for an input to the purchased

lP
pon

Structure Costs product should be the same for any end product
ent

roc

Processes
ents

Injection
Mat p 2
ls
als
pon

in which that input is used – for example,

ess
Ma mp

eria

Molding
Com
teri

s
Co

stampings, injection molding tooling, etc.

es
Com

Structure Materials
Materials

8
 Cost standards are built up from the physical “reality” of what is
possible

Cost Model: Required Input

Cost Standards are built from:

Cost Model Type: Calculated Value
Model Revision Level: Red Text Looked Up Value

Part Information
Part Number:
Part Description:
Part Information
Program Life:
Delphi Plant Location:
Year 1 Volume:
Year 2 Volume:
Revision Level: Payment Terms: Year 3 Volume:
Supplier:
Supplier Mfg. Location:
Units (Metric/English):
Required Capacity:
Year 4 Volume:
Lifetime Volume: Supplier cost breakdown sheets
Raw Material Cost A B
Unreclaim. Reclaim. Unreclaim. Reclaim.

Material Costs
Part Unit Scrap Unit Scrap Unit Price/ Part Scrap Scrap Total Matl.

Component Part Description

Component 1
Comments/Information
Optimum mat'l t o meet spec
Material
Description
UOM
Unit Of M eas ure
or Mass
a
or Mass
b
or Mass
c
UOM
d
Cost
a xd

-
Cost
b xd

-
Cost/UOM
e
Cost/Unit
[(a + b ) x d] + (c x e )

-
Supplier discussions
Component 3 Optimum mat'l t o meet spec - - -
Subtotal A: -

Labor Cost C
# of People
Per Operation
Loaded Labor
Cost/Hr
Part
Cycle Time (Hr)
Total Direct
Labor Cost/Part ($) Industry data
Operation Description Comments/Info
Optimum labor/machine mix
Optimum labor/machine mix
Labor Costs
Labor Classification a b c a xb xc

-
-
Subtotal C: -

Machines/Buildings/Facilities/Tooling Cost
MBF
D
Part MBF Total Lifetime Tooling Total
Benchmarks
Cost/ Cycle Cost/ Tooling Part Cost/ MBFT
Hr Time (Hr) Part Cost Volume Part Cost

Capital Costs
Operation Description Comments/Information Machine Size & Type a b c Tooling Type d e f=d/e c +f
Optimum for part size/volume - - -
Optimum for part size/volume -
Subtotal D:
- -
- Competitive analysis
Markups/Design Engineering Cost
Sales, General, and Administrative
Total SG&A/
Sales, General, and Administrative Comments/Information Part ($)

Design Engineering
SG&A (%) Commensurate w/global best industry levels, but also consider level of service provided

Overhead Costs The cost standards are continuously updated

Design/Development Type Comments/Information
Total Design/
Development Hrs
a
Design/Development
Cost/Hr
b
Lifetime
Volume
c
Total Design Eng./
Part ($)
(a x b) / c
based on new levels of performance
Commensurate w/design service level -
Subtotal E1: -

Profit

Profit
Profit (%)
Profits Comments/Information
Commensurate w/global best industry levels, but more is acceptable if competitive overall
Total Profit/
Part ($) Cost standards are consistent in approach and
Subtotal E:
format, and use common cost data

9
 One way to build ideal costs is from process based cost standards
that capture best-in-class costs and help estimate component cost

AM PLLE
MP
E
N T
T E
EXXA
EN
CLLIIE
C

10
Knowledge is captured on an on-going basis across the global
organization to provide deep insight into material costs and
conversion costs ...
Example: Material Cost Targets Example: Process Cost Targets
Cost Target Cost Target
Material Description Roll Width Cost Process Description Unit Cost
mm (/m2)
Vinyl 315 Expanded w/knit 10mm lamination Piece
w/non woven 1000
5mm lamination Piece
Hannah 3mm Lamination 1500 Cutting Fabric
3mm lamination Piece
2mm Lamination 1500
non lamination Piece
non Lamination 1500
Cutting Duon Piece
Duon 4.1oz 1500
2.7oz 1500 Cutting Vinyl Piece
Tyler 3mm Lamination 1500 Cutting Carpet Piece
non Lamination 1500 Cutting Pad Piece
New Low Cost Fab non Lamination 1500 Sew Listing pocket M

Hampton 2mm Lamination 1500 Sewing Fabric Join Sew M

(thread included)
non Lamination 1500 Top Sew M
W/P Sew M
Tack Down M
Example: Material Yield Ratio Targets
Sewing Leather Join Sew M
Component Target Yield % (thread included)
Top Sew M
FSB 94.00%
W/P Sew M
FSC 97.00%
Tack Down M
RSB (split) 94.00%
Fabric Utilization %
RSB (bench) 94.00%
RSC (split) 97.00%
RSC (bench) 97.00%
Pour in Place 90.00%
Headrest 94.00%
Armrest 97.00%

11
… as well as applicable SG&A, base tooling, tooling modifications
and acceptable mark-ups
Mark Ups - Seat Tooling Modification Cost Targets – Injection Molding
Item Description Target Type of Contents of Part Change Size of Modification
Modification Change Cost
Tier 1 SGA&P, Direct Supply, In-bound Freight,
Inter-Company & V-V New Adoption ~30mm
Add Pin or Boss
CSP & Self Procurement Location Change ~30mm
RDDP Volume <100k Units Annually New Adoption
Drilling Hole
Volume 100k to 249k Units Annually Location Change
Volume >250k Units Annually New Adoption ~30mm
Clip Base
Tier 2 Now included in the Cost Standards Location Change ~30mm
Clip Post Shape Change ~10mm
Transfer Die Cost Targets – Base Tooling >200mm
Blank Size Cost Target – by Process New or Heighten (burn) and
Abolish (weld) 100-200mm
Feeder Blank Bend Draw
<100mm
10,000 Rib Change
>200mm
20,000
Shorten (weld & burn) 100-200mm
30,000
<100mm
45,000
>200mm
60,000
Extending or Reducing 100-200mm
80,000
<100mm
110,000
>200mm
140,000 Edge Shape
Change Thickness 100-200mm
180,000
<100mm
230,000
>100m
Addition of Radius 50-100mm
Standard price of Cam
<50mm
Type W<150mm 150 - 500
Single
Double

12
The same cost table approach is used to manage engineering
changes and to avoid cost walk-ups by the supplier

EXA
MPL
PRODUCT COST EVOLUTION BY PLANT E

Actual material costs

Status
$ / Batch at SOP

7%

Revised
Target
13 %
Target costs
Original
Target
SOP

Time

13
The ultimate goal of understanding ideal performance is to
engender a continually learning organization

 Ideal performance is a constantly moving target

– Innovations, new processes, materials, new designs are constantly improving performance
– Cost management is a constant quest to understand ideal
– New process choices or improvements must always exceed the performance of their
predecessors – and this will be reflected in costs that can only get better

 Forces engineers, purchasing and suppliers to learn and understand underlying drivers of costs
– Allows for what if scenarios
– Places focus on major cost drivers
– Enables engineering teams to make value / cost trade-offs
– … and improve product design during engineering

 Enables productive dialogue between the supplier and the customer to jointly reduce waste /
cost

14
Annual development plans are used to foster mutually beneficial
long term supplier relationships that result in an advantaged
supply base
 Focus is on longer term, trusting, supportive relationships where customer and suppliers are
both committed to helping each other succeed (i.e., everybody profits)

 Data and fact driven expectations set annually, rather than negotiations or LTAs with simple
year-over-year improvements written into the contract
– Price tables and cost models to truly understand drivers of supplier’s product/process costs
– Target prices based on price tables and cost modeling
– Productivity and VA/VE cost improvements addressed separately
– Comprehensive explanations of how price, delivery, and quality targets were derived
– Assistance from customer to help suppliers achieve targets and tackle tough issues
– Supplier receives reasonable margin and customer receives reasonable price
– Supplier and customer share in investments and benefits from supplier’s breakthrough
improvement ideas

 The customer dedicates sufficient resources to gain a deep knowledge of their suppliers’
industries, including production processes and technologies

15
 The cost methodology helps to establish an open dialog with
suppliers, resulting in more effective improvement plans at both
the product and supplier enterprise levels

IMPROVEMENT PLAN
T-1
T-1 Performance
Performance Year
Year TT Target
Target

 Document the ideal cost for each cost Target

Target Result
Result Goal
Goal Stretch
Stretch
element Defects/
Defects/ 30
30 158
158 50
50 <30
<30
Million
Million
 Determine each supplier’s gap to the ideal QUALITY
QUALITY
Critical
Critical Field
Field 00 00 00 00
Problems
Problems
 Identify enablers to reduce suppliers gaps
YYY
YYY On
On Time
Time 100%
100% 100%
100% 100%
100% 100%
100%
Performance
Performance
 Building creative improvement plan for Parts
Parts DELIVERY
DELIVERY
enablers Mixed
Mixed Kanbans
Kanbans 00 00 00 00
Supplier
Annual Plan Material
Material 2%
2% 2%
2% 4%
4% 4%
4%
Program COST
COST
Based Manufacturing
Manufacturing 4% 4% 3% 4%
Improvement 4% 4% 3% 4%
Improvement

QUALITY
QUALITY N/A
N/A N/A
N/A N/A
N/A N/A
N/A N/A
N/A
Cost Element Ideal CostSupplier Quote
Gap to Ideal
Enablers to Lower Cost (Reality Changes) XXX
XXX
Parts
Parts Performance
Performance
Raw Materials $ 2.00 $ 2.50 $ 0.50Reduce Scrap, Leverage Material Buy DELIVERY
DELIVERY 100%
100% 100%
100% 100%
100% 100%
100%
Ratio
Ratio
Purchased Parts 0.75 1.00 0.25Leverage Material Buy, Redesign, Reduce Scrap
QUALITY
QUALITY PPIR
PPIR N/A
N/A N/A
N/A N/A
N/A N/A
N/A
Labor 1.50 2.00 0.50
Increase Labor Utilization, Automate, Low Cost Ctry Prototype
Prototype
Machines 2.00 2.50 0.50
Increase Machine Efficiency, Tooling Optimization Parts
Parts Performance
Performance
DELIVERY
DELIVERY N/A
N/A N/A
N/A N/A
N/A N/A
N/A
Ratio
Ratio
SG&A 1.00 1.25 0.25Reasonable Level / Management Efficiency
Profit 1.00 1.00 - Reasonable Level for Industry / Services Provided
Develop
Develop CYCLE
CYCLE
Total Cost $ 8.25 $ 10.25 $ 2.00 Months
Months 20
20 22
22 20
20 18
18
Product
Product TIME
TIME

16
 Individual supplier expectations for the year include corporate-,
plant- and part- level targets
Examples of Supplier Targets at Corporate, Plant, and Part Level
Client Name
IVE
E
R
RAT INDIVIDUAL SUPPLIER EXPECTATIONS
T
US T Parts & Components
ILL

Corporate-Level Targets Plant-Level Targets Part-Level Targets

Supplier Name Supplier Name Supplier Name
Supplier Code: XXXX Supplier Code: XXXX Supplier Code: XXXX
2004
2004 Customer
Customer Value
Value Improvement
Improvement Target
Target Quality
Quality Part
Part Target
Target (Piece
(Piece
Number
Number Project
Project Price
Price ++ Tooling)
Tooling)
Plant
Plant OE
OE Service
Service Prototype
Prototype
Text
Text Box
Box for
for Value
Value Improvement
Improvement Target
Target (VE/VA)
(VE/VA) XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
Code
Code Commodity
Commodity Target
Target Target
Target Target
Target Delivery
Delivery
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
100%
100% On-time
On-time XXXXX XXXX $XX.XX
Tier
Tier IIII Minority
Minority Sourcing
Sourcing Target
Target XXXXX XXXX $XX.XX
XXX-X
XXX-X XYZ
XYZ XX
XX XX
XX O
O PPIR
PPIR Delivery/Zero
Delivery/Zero
Mixed
Mixed Kanbans
Kanbans
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
5%
5% XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
(Measurement
(Measurement of
of Total
Total Purchases
Purchases for
for Customer)
Customer) 100%
100% On-time
On-time XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXX-X
XXX-X XYZ
XYZ XX
XX XX
XX O
O PPIR
PPIR Delivery/Zero
Delivery/Zero
2004
2004 Customer
Customer Warranty
Warranty Target
Target Mixed
Mixed Kanbans
Kanbans
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
100%
100% On-time
On-time
X
X PPM
PPM XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXX-X
XXX-X XYZ
XYZ XX
XX XX
XX O
O PPIR
PPIR Delivery/Zero
Delivery/Zero
Mixed
Mixed Kanbans
Kanbans
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
Supplier
Supplier Environmental
Environmental Program
Program Requirements
Requirements 100%
100% On-time
On-time XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXX-X
XXX-X XYZ
XYZ XX
XX XX
XX O
O PPIR
PPIR Delivery/Zero
Delivery/Zero
Mixed
Mixed Kanbans
Kanbans
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
ISO
ISO 14001
14001 Certification
Certification by
by 12/31/05
12/31/05 XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
100%
100% On-time
On-time XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXX-X
XXX-X XYZ
XYZ XX
XX XX
XX O
O PPIR
PPIR Delivery/Zero
Delivery/Zero
Individual
Individual Expected
Expected Tasks
Tasks (IETs)
(IETs) Mixed
Mixed Kanbans
Kanbans
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
100%
100% On-time
On-time XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXX-X
XXX-X XYZ
XYZ XX
XX XX
XX O
O PPIR
PPIR Delivery/Zero
Delivery/Zero
Mixed
Mixed Kanbans
Kanbans
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
100%
100% On-time
On-time XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX
XXX-X
XXX-X XYZ
XYZ XX
XX XX
XX O
O PPIR
PPIR Delivery/Zero
Delivery/Zero
Mixed
Mixed Kanbans
Kanbans
XXXXX
XXXXX XXXX
XXXX $XX.XX
$XX.XX

17
Another important aspect of the supplier development process is
supplier feedback on what the customer should do differently
Deterioration in a Customer Program Economics Drivers of “Churn” by Development Stage
from Award to Launch Due to Design Churn
Tooling
ve
i$14 ($MM)
straat $13 Design
Illu $12
+ 30% Concept Detailed Verification &
$10 Development Design Prototype
$10
Testing
$8

$6
 Sets unrealistic  Decisions made  Continue to
$4 expectations for by strong make changes
vehicle price point, functional late in the
$2 feature content, chimneys create process to
cost and margins infeasible accommodate
$0
that must be solutions that have unforeseen or
Award SOP
reconciled during to be undone unresolved
detailed design engineering
$300
Piece Part Cost ($)  Although each issues
function acts
$250 $240
+ 20% rationally, the  Additional
$200 result is a “random revisions to the
$200 walk” of product drive
requirements on incremental
$150 the supplier ER&D costs

$100

$50

$0
Award SOP

18
For each category, the ideal supply chain structure will also be
defined
Right Plant Right Network
Structural:  Suppliers aligned by segment – more than 1
supplier per segment to ensure competitive
 30-50 presses to achieve operating efficiency
tension
 85% utilization
 Distributed geographical network to support
 $60 – 80 million sales
Midwest, South East US and Mexican demand
 We are 30% of each plant’s business
 Tight integration of design, molding and tooling
 Participate in cooperative resin purchasing
 Focus on design to cost as opposed to annual  >80% of sales to auto industry
productivity improvements  Suppliers extremely capable at a few process
Operating: technologies but each plant is focused
 Operational focus => single process, low number  Design engineering and testing capabilities –
molds, resins, end products design experimental technical facility
 Lean operations and pull system  Mold and process capability
 Latest cavity sensors
 Common presses and secondary equipment
 Latest process controls across plants
 Common presses and secondary equipment
 Robust capacity planning capabilities
IT:
 Own some tooling capability, strategic alignment
 Systems capable of efficient interface
with tooling manufacturers

19
The first step is to evaluate how the supplier’s present
manufacturing footprint affects their competitive position and
assess the gap to ideal
EXAM
Scale Factor Costs PPLE
(Avg. Capacity by Plant) (Avg. Labor Costs w/ 100% = Germany)

Supplier 0 270 Supplier 0 85%

Supplier 1 305 Supplier 1 89%

Supplier 2 340 Supplier 2 65% Too few low cost sites

Too many sites Supplier 3 315 Supplier 3 76%

Supplier 4 295 Supplier 4 82%

220 270 320 370 60% 70% 80% 90%

Complexity Flexibility
(Weighted Plant Avg. Produced Units / Model) (Weighted Plant Avg. of Models per Line)
Supplier 0 77 Supplier 0 1.67

Supplier 1 105 Supplier 1 2.55

No clear focus of Supplier 2 98 Supplier 2 2.05 No flex-technology for

sites Supplier 3 102 Supplier 3 2.35
optimized utilization
Supplier 4 110 Supplier 4 2.45

70 80 90 100 110 120 1.5 2 2.5 3

20
You then build an ideal supply network footprint by segment – and
understand how the suppliers fit with this
Precision Molding
PLLE
XAM
EX Rationale
 Total spend: 123M
 Ideal plant scale: $70M
1.0  Our share: 50%
 Each plant is $35M spend
0.0
0.3 5.9

6.0
15.0
10.2
Ideal Supply Network for Precision
 Number of Plants:3 - 4
 Footprint:
– MI (2 plants)
4.3
1.0
– IN (1 plant)
0.0
– Mexico (potentially 1 plant if justified by
2.2
increasing volume)
0.0

0.5

0.1

0.0

21
This approach achieves significant performance improvements
Sources of Injection Molding Savings Compared to Current Supply Base
Mold change
technology, IL skills Engineering
and simple flows are capability at
100% key enablers supplier

(1%) 4-9%
(1%)
3%
(2-5%) 19%
(1%)
10%
(2-4%)
(5%)
(1%)
30-50 presses
(4%)

Short Term Medium Term

nt al
e er
y e t io d n p ng an
t
re al an at ea t io ra ni l
r Sc liv Sc Pl R rh a Sc n P
Cu g De y s IL ve il i z a
ea
l
s in lk ci
lit ocu to O Ut M
I d
ha Bu F a F DL
rc
Pu

22
 Supplier and customer improvement opportunities are combined to
establish a joint agenda to deliver results
Joint Improvement Roadmap

Improvement Levers & Diagnostics Process Effectiveness

1 2 5 10 14 15
Engineering Joint Boeing Supplier
Rates Suppliers Maturity
Concept Advantaged Sourcing
Technology
Technology Competency Service Parts
Definition Network Leverage
Assessment Attributes Ratings
R&D:
:
6 11 16
Shares IRAD project lists with 1 2 3
Global
Early Supplier Involvement
Footprint
Dealer Delivery Prime for rating

Engages in joint technology 1 2 3

3 7
review sessions
Opportunity Area

Performance Metrics
Early Stage Design-Driven Cost Reduction and
Effectiveness Reduction of Functional Test Reports IRAD funding that is 1 2 3
and Efficiency Requirements applicable to Boeing programs

4 8 12 Resets IRAD priorities based on 1 2 3

Engineering
joint technology
Supplier sessions
Design
Trades
Capability
Maturity
Part Ordering and Delivery Supplier Metrics/
Metrics/ Targets
Targets
Benchmarks (Need
(Need to
to be
be confirmed
confirmed with with Suppliers)
Suppliers)
Bid and Proposal
9 13
R&D
R&D applicable
applicable to
to Customer (%
(% of
of revenue)
Identifies
Customer opportunities to
revenue) 1 2 3
Engineering Transaction 2005 Targets
leverage and support
2005 joint
Targets
Integration Efficiency
marketing
Joint Improvement Roadmap 3%
3%
Routinely responds to support 1 2 3
customer’s timing requirements
Area Party Description Timing Owner Status
Development
Development -- %
% on
on time:
time:
100%
100%
Supports common T&Cs 1 2 3
 Recent pricing / quotes have been systematically high compared to the cost
tables, resulting in lost business — define plan for reaching competitive cost John Sourcing
Sourcing –– Ave
Ave Material
Material cost
cost reduction
reduction (2003
(2003 vs.
vs. 2002):
2002):
ESI Supplier A levels Smith 5-10%
5-10%
 Demonstrate tangible changes to impact cost levels
Manufacturing
Manufacturing
Supplier
Supplier Inventory
Inventory Turns:
Turns: 6-10
6-10
 Engage Supplier A in electronics study
Bill Average
Average supplier
supplier lead
lead time:
time: 33 Months
Months
OEM  Respond to part redesign proposal
Williams
 Engage site XYZ. in bid for interface units Annual
Annual Lead
Lead time
time improvement:
improvement: 15%
15%
Eng Annual
Annual Value
Value Added
Added Productivity
Productivity Improvement:3-5%
Improvement:3-5%

 John
Supplier A Use May 5th meeting to submit design driven cost reduction ideas
Smith
Service
Service -- Average
Average Repair
Repair turn-around
turn-around (lead)
(lead) time:
time:
30
30 Days
Days

 Develop timeline for conducting lean assessment at DEF, HIJ, KLM & ABC
 Fix XYZ SPMS data (currently shows red – issue is customer service not XYZ
OEM
manufacturing)
 Move subassembly to China by year end

Mfg

 Create plan to execute lean assessments for all facilities (present status at May
5th meeting)
John
Supplier A  Work to bring resolution to ABC and XYZ technical, quality, and business issues
Smith
 Complete make / buy and consolidation analyses for machining and board
stuffing (all plants) operations

Bill
Service Supplier A  Improve dealer shipment cycle times
Williams

23
Involving suppliers early in development is key to leverage the total
cost structure and suppliers’ innovation capabilities

Product Cost structure

Potential Activities

Purchasing alone
Margin 0%-5%
0%-5%
 Commercial negotiations can
only attack the tip of the iceberg
Purchasing supported by Engineering
Purchased
40%
 Improved cost of product
40%
Cost
 Improved functionality
of
D esign uct
Supplier rointegrated
d with a cost and
the p
Manufacturing 20%
20% revenue perspective

Engineering 5%
5%
 Bring new technology
 Accelerate product to market
Overhead
Others 30%-35%
30%-35%  Share customer understanding

Typical Cost
Breakdown

24
Involving suppliers in innovation will allow the organization to
access a larger pool of opportunities in achieving target product
costs
Breakdown of Savings by Source
(Client experience)
Price
Negotiation

16%

Design
Re-Sourcing 45%
17%

22%

Technology
Improvements/
Advancements

25
Toyota’s commitment to understanding product costs at a process
level started as a way to support early product development
cost/value trade-offs
Cost Engineering

Cost Engineering

 Engineering owns cost target and drives achievement together with Purchasing
 Functional requirements instead of over-engineering
 Cost management (Value analysis, trade-off management etc.)

COST TARGET
VEHICLE
Development Process PROFIT
Value: High in market
Product
Product Technical
Technical Business
Business
Cost: Minimize
Go Development
Development  No over-specifications
Definition
Definition Concept
Concept Case
Case
Go
Ahead
Ahead
Decision
Decision

Launch
Launch  No cost increase after
Brand,
Design,
Engineering Finance,
Purchasing,
Engineering contract signing
Marketing Chief engineer  Product cost target
achieved at launch
 Benchmarking of requirements, options & features
 Cost reduction ideas & implementation support
 Concept competition during sourcing process from preferred
suppliers

Supplier Involvement

26
We see a number of levers that take the supplier early involvement
process to the next level

 Establishment of joint technology roadmaps

– Done for the top tier of high performance, high innovation suppliers
– Review and influence the supplier’s product development / innovation plan
– Co-ordinated with the customer’s product plan so that innovations are available to plug and
play
– Innovations may be exclusive to the customer for a period of time, say six months
 Driving early innovation competitions with 2-3 suppliers on design intensive systems, subsystems
and components to access the best supply base thinking before locking in the design and cost
 Tapping into the suppliers’ insights into end customer preferences on key areas to create end
consumer value
– Many suppliers have extensive consumer knowledge built up across customers
– Represents an opportunity to optimize the consumer value / cost curve
 Use of cost tables to work true design specification / cost trade-offs and not just design
specification / price trade-offs as is done today
 Leverage the supplier’s product architecture intelligently to reuse existing product that the
supplier has or design in high volume, cross-customer part standards

27
One client recently reviewed the innovation plans of three
important suppliers, producing significant benefit in terms of
supplier focus and program alignment
Programs Rated Supplier R&D on Importance and Overlap
RR
PLIIE
UP PLLE
SU E
EX AM
E Tech Composite
R&D Project Name A1 View A2 View A3 View A4
A4 View
View A1 Overlap A2 Overlap A3 Overlap A4
A4 Overlap
Overlap
Maturity Ranking
Ranking

Technology Focus
Area 1
Project
Project 11 9 High
High Medium Medium Medium High
High Medium Medium
Project
Project 22 9 High
High Medium Medium Medium High
High High Medium Medium

Project
Project 33 Low 9 High
High Medium Medium Medium High
High High Medium Medium
Project
Project 44 Medium 7 No Rating Medium High Medium Medium

Project
Project 55 7 High
High Medium No
No Rating
Rating Medium High
High High Medium Medium
Project
Project 66 High 5 No Rating Medium Medium Low High

Project
Project 77 High 4 No Rating Medium No
No Rating
Rating Medium Medium
Project
Project 88 High 4 No Rating Medium No
No Rating
Rating Medium High Medium

Project
Project 99 High 3 No Rating Low No
No Rating
Rating Medium Medium
Project
Project 10
10 2 No Rating Low No
No Rating
Rating Low

Project
Project 11
11 Low 2 No Rating Low No
No Rating
Rating Low
Project
Project 12
12 2 No Rating Low No
No Rating
Rating Low
Project
Project 13
13 High 2 No Rating Low No
No Rating
Rating Low

28
 Surfacing alternative design concepts from suppliers is a major
lever– funding the design activity separately from production can
have merit
Development
ALTERNATE ESI / RFP PROCESSES Phase

Suppliers OEM
Typical Respond to Evaluates
OEM Drafts Contract Component Spec
RFI RFP
RFI Responses RFP Award

BTP
Architecture
Contract
Pick Key Round Single RFP
Type 1 RFI Award
Suppliers table BTP
Round Component Spec
table

Down-select Functional
Custom Requirements
Type 2 Supplier Bid BTP RFP
List RFI Contract
Developed Award
Custom
BTP
RFP
Component Spec

Success
New Contract
Award
Type 3 Identify System Review
to be Redesigned Component Spec
Select Second
Source
Failure

29
“Intelligent architecture” is the process of working with suppliers
to leverage cross-customer scale

Cross-OEM Cost Savings Potential:

Re-Use Within And Across Customers Component XX2004
$9 Cost with a
$8.35
$7.91 cross-VM
$8 approach
VM
VM #3
#3 $7.06
$6.86
Seat B.O.M. Small $7
Small Car
Car Large Car
$5.99
Frame
Frame Part #15 Part #2.v2 $6
VM #2
Mechanism
Mechanism Part #16 Part
Part #17
#17 $5
Seat B.O.M. Small Car Large
Large Car
Car
Trim
Trim Part #18 Part
Part #19
#19
Frame
Frame Part #8 Part
Part #2
#2 Unit Cost $4
VM #1 Foam
Foam Part #20 Part
Part #21
#21
Mechanism
Mechanism Part #9 Part #10 $3
Seat B.O.M. Small
Small Car
Car Large Car
Trim
Trim Part #11 Part #12
Frame
Frame Part #1 Part #2 $2
Foam
Foam Part #13 Part #14
Mechanism
Mechanism Part #3 Part #4 $1
Trim
Trim Part #5 Part #6 $0
Foam
Foam Part #7 Part #7 A B C D All
Suppliers can
leverage both
within AND Programs 5 4 1 1 11
across VMs Component 1 1 1 1 1
Volume 730,000 600,000 375,000 300,000 2,015,000

30
Example …
Design Re-Use Example Clusters

31
People development and hiring is a major part of the
transformation to the new sourcing model since the required skills
are different
Critical Skills in the New Purchasing Model

 Insight and knowledge to know what well run facilities look like

 Aptitude to develop and apply cost tables, models and understanding

 Capacity to drive continuous improvement with a constant focus on removing waste

 Ability to recognize competitive suppliers who can also continually improve upon performance

 Effectiveness in interfacing with engineering and product planning

 Recognition of inherent benefits of stability in design specification and demand

 A focus on productivity improvements separately from VA / VE improvements

 Ability to help suppliers drive the identified performance improvements

32
Aligning metrics – both within the Purchasing organization and
how Purchasing is measured – requires a true paradigm shift
Common / Traditional Purchasing Metrics Roadblocks and Challenges
 Piece price savings typically the key metric for most of  Often the best performers under the
Purchasing
traditional system are most resistant
 Purchasing held responsible for material cost, to change
Engineering for design/quality
– As the new approach no longer
 Savings generally price-based and do not consider focuses on price reductions, it
model-to-model improvement / low cost design upfront appears to question earlier
 Price and negotiation-based metrics create incentive for successes
wrong behavior (start with less than ideal design / cost – Tough negotiation skills are no
and negotiate to reduce price) longer the key success factor
 Traditional leadership expectations of
Purchasing, Engineering, Finance and
Sales all need to change to drive a
New Metrics
paradigm shift top-down throughout
 Focused on performance relative to ideal, and the organization
improvement against it
 Key dimensions include cost, quality, delivery, innovation
 Engineering and Purchasing are both responsible – and
accountable – for achieving material cost targets
 Price-to-price savings are down played

33
 Measuring yourself and the supply base against this ideal
performance is a key element of this shift in philosophy
Cost / Price Reduction Needs To Be
LLEE
MPP
AM Based On Reality Changes
EEXXA
NTT
IIEEN
CLL
C Ideal Supplier Gap to Enablers to Lower Cost
Part XXX Cost Element Cost Quote Ideal (Reality Changes)
Reduce Scrap, Leverage Material
Price
Raw Materials $ 2.00 $ 2.50 $ 0.50 Buy
Leverage Material Buy,
Quoted $2.69 Traditional Metrics: Purchased Parts 0.75 1.00 0.25 Redesign, Reduce Scrap
Price Price-to-Price Savings Increase Labor Utilization,
5% Labor 1.50 2.00 0.50 Automate, Low Cost Ctry
$2.55 Machines/Building/ Increase Machine Efficiency,
Facilities/Tooling 2.00 2.50 0.50 Tooling Optimization
5% Reasonable Level / Management
$2.43 SG&A 1.00 1.25 0.25 Efficiency
Reasonable Level for Industry /
5% Profit 1.00 1.00 - Services Provided
$2.35 Targeted $2.30 Total Cost $ 8.25 $ 10.25 $ 2.00

Improvement
Cost
Agreed
Agreed Cost
Cost with
with
Modeled
$2.17 Supplier
Supplier Improvement
Improvement  In the new model, price reductions without
Plan
Plan New Metrics: underlying cost improvement, i.e., “reality
Performance Vs. Ideal changes”, are not enduring
Ideal $1.49  The new metrics are thus based on how close
cost and reality are to the ideal
Ideal Cost
Target

1 2 3 Time
(in years)

34
This new model requires a fundamental shift in mind set

TODAY TOMORROW
 Price based supplier competition  Continuous improvement through elimination of
waste – and knowing where waste is
– Typical supplier practice of bidding at or
below cost because it intends to make it up – Advantaged network and footprint
on changes – Set and meet targeted / required cost
– So many suppliers that the focus must be on reductions with suppliers
managing transactions and emergencies – Targets for productivity, material, and
– Organization mindset of frequent bidding and engineering improvements set and monitored
supplier churn separately
– Hard to enter into collaborative relationships
 Reality-based cost standards, models, and
 LTAs with built-in YOY or PO to PO price understanding are critical tools for moving to
advantaged supplier model
reductions
– Incentives based on year over year reduction  Suppliers are compared to best ideal costs
– Difficult to understand levels of program by program and evaluated at least each
competitiveness for productivity, materials, year, and targets are set accordingly
and engineering
– Cost, quality, and delivery based
– Arguably, suppliers attempt to incorporate improvement targets
LTAs in price
– Ensure supplier is advantaged over market,
and know what is ideal
 Frequent price based negotiations, often
contributing to combative interactions – Integrated relationships and cooperative /
knowledge sharing

35