Steve Case Supplier Relations and Productivity Expert October 2006

Network Centric Systems

Steve CaseSupplier Relations and Productivity Expert

October 2006

Six Sigma and the Supply Chain

Export control review number TDR 06-9001

Network Centric SystemsAgenda

• Introduction– Raytheon overview– Why talk about the Supply Chain?– Clock-speed

• Raytheon Six Sigma– What is it?

• Involving suppliers in Six Sigma– Applying a structured methodology– Impact of insertion points

Network Centric SystemsCompany BackgroundCompany Background

Raytheon at a glanceThe data presented represents the The data presented represents the entireentire Raytheon CompanyRaytheon Company

Raytheon at a glanceThe data presented represents the The data presented represents the entireentire Raytheon CompanyRaytheon Company

• Early years– Radio tubes, WW II radar technology

• Today – $21.9 Billion in Sales in 2005

– 76,400 employees, 20+ countries

– 27,000+ suppliers

– >$7 Billion Annual Spend

– 72% of spend is Direct . . . 28% of spend is Indirect

• Core business focus– Government and defense electronics, business

aviation


Why Talk Supply Chain

Network Centric SystemsDirect Material is Often the Largest

Single Product Cost Element…

Material OH Labor Engr Product Cost Elements

50%

30%15% 5%

• To meet our cost and Six Sigma goals, we must manage supply as a core process, same as product development and project management, etc

• To meet our cost and Six Sigma goals, we must manage supply as a core process, same as product development and project management, etc


30%

50%

20%

Low $Commodities

High $Critical Parts/

Subassemblies

Medium $ Key Parts

• Partner with best in class suppliers of key technologies

• Include supplier on IPT• Tools: Six Sigma With Suppliers• Track part cost and predicted performance

• Partner with best in class suppliers of key technologies

• Include supplier on IPT• Tools: Six Sigma With Suppliers• Track part cost and predicted performance

• Select standard parts from approved suppliers

• Tools: Preferred parts list, approved suppliers

• Track: % standard parts, # suppliers, OTD

• Select standard parts from approved suppliers

• Tools: Preferred parts list, approved suppliers

• Track: % standard parts, # suppliers, OTD

Material Type Drives The Strategy

Network Centric SystemsMaterial Costs Must be Addressed

Early in the Design Cycle . . .

Network Centric SystemsSelecting Core Competencies

Where should we invest our limited resources to develop capabilities that will become our core competencies in the future?

Ask yourself:• Which subcomponents will have the highest barriers to entry in the

future?

• Which will demand the highest profit margins in the future?

• Which subcomponents will drive customer purchasing behavior in the future?

• Which subcomponents are we good at producing today?


Prioritize

Characterize

Improve

Visualize

Achieve Commit

Raytheon Six SigmaTM is a knowledge based process we will use to transform our culture, maximize customer value and enable business growth.

Raytheon Six SigmaTM


Raytheon Six Sigma™ versus Traditional Six Sigma

• The traditional Six Sigma approach, utilized by Motorola, has its underpinnings in hardware design and manufacturing

• The Raytheon Six SigmaTM approach was 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

(statistical & lean tools)

– Supported by a full time Six Sigma Expert network

– Leads to a culture change

Raytheon6 Sigma™ Approach

Motorola6 Sigma Approach


0

20

40

60

80

100

PartPrice

Typical Part

Traditional Approaches

What are the elements of part purchase price?

• Pricing targets

Which element of cost do these tools address?

What SCM tools are available to reduce price?

Material

Mfg Labor

Eng Labor

Testing

Scrap/Rework

G&A/Overhead

Profit

• Multiple rounds of bidding

• Leverage

• Negotiation

Network Centric SystemsRaytheon Six SigmaTM with Suppliers

Network Centric SystemsDown Selection Process for

Supplier engagements

SupplierSupplier

Supplier

Suppli

er

Supplier

Supplier

Supplier

SupplierSup

plier

SupplierSupplier

Supplier

Supp

lier

SupplierSupplier SupplierSupplier Supplier

SupplierSupplier

Supply Base Optimization (SBO)

1.Supplier

2.Supplier

3.Supplier

4.Supplier

Supplier Selection Process

Y/N Candidate Evaluator

Candidate Evaluator 1.05

Network Centric SystemsSupply Base Optimization

Optimization Process

Poor Performers

Acceptable Performers

Outstanding Performers

Commodity Providers

Niche Providers

Sole Sources Directed

Sources

Technology Leaders

Low Cost Providers

Potential Partners

Financial Risks

Redundant Capabilities

Approved Suppliers

Preferred

Local Houses

Strategic

Restricted

Preferred• Targeted for business based upon

•Delivery•Quality•Cost•Technical

(performance driven decisions)

Strategic• Provides technological and strategic

advantage

• Willing to form partnerships / alliances

• Shares risk and opportunities including investments

Approved

• Eligible to do business with NCS

programs based upon merit of evaluation

thru optimization process

Approved (w/restrictions)• Eligible to do business with specific

legacy programs due to programmatic issues (customer direction, re-qual costs, etc.)

• Risk Mitigation plans required for each

• Transition plans to ASL required for each

…Enterprise-wide, Standard Definitions

Network Centric SystemsSBO Background Info

What is Supply Base Optimization ?

• A data led, systematic approach to identifying a cross-functionally endorsed list of suppliers within a

given commodity family

• Stratification within a specific commodity family that identifies (1) approved suppliers, (2) preferred

suppliers and (3) strategic suppliers

• A dynamic commodity strategy for each commodity family which forces continuous optimization of the

supply base, through the utilization of cross-functional subject matter experts (Eng, Quality, SCM, PL,

etc.)

• A Disciplined Governance process for list maintenance and standardized use of the SBO outputs


Supplier SelectionDecision Tools

Supplier Rating System

Lean Assessment Tool

Supplier Total Assessment Tool

SBO Process

Radar Charts

Y/N Evaluator

Candidate Evaluator 1.5

Gen

eral

Ray

theo

n T

oo

lsR

6s w

/Su

pp

lier

To

ols

Network Centric SystemsR6with Suppliers

R6s with Suppliers is a targeted effort examining total cost of ownership for a part or service focussed on maximizing cost reduction while minimizing investment. Features:

• Widely proven methodology

• Uses a gated flow making investment incremental

• Leverages upon the large pool of R6s tool or technical expert

resources as appropriate

• Standard templates drive consistency

Network Centric SystemsThe Six Sigma With Suppliers

Process

Step 1: VisualizeStep 1: Visualize

Step 2: CommitStep 2: Commit

Step 4: CharacterizeStep 4: Characterize

Step 5: ImproveStep 5: Improve

Step 6: AchieveStep 6: Achieve

Process Steps:Process Steps:

Step 3: PrioritizeStep 3: Prioritize

Analyze the BOM and determine the key suppliers and parts

Get supplier commitment, set objectives and prepare for workshop by analyzing unit costs and quality

Conduct assessment workshop with supplier to identify improvement projects

Begin improvement projects by analyzing current conditions

Continue improvement projects by implementing needed changes

Measure results and determine impact on performance and cost


Prework: Developing the Total Cost of Ownership

Purchasing’s Responsibility

Operation’s Responsibility$

Supplier Costs

COPQ Incurred by Raytheon

Raytheon Costs

Supplier Profit

Supplier COPQRaytheonNeg.Price Supplier

Cost

RaytheonTotal

Cost ofOwnership

for aSupplied

Part

Material OverheadEngineering ManufacturingTesting MarketingSales

Prod. ScrapProd. ReworkCustomer Return Failure Analysis Cust. Rtn ReplacementCust Rtn Rework

Incoming TestingIntegration TestingProcessing CostsIntegration Costs

Unit Strip-out Costs Field Failure ImpactUnit Rebuild Costs Field/Sched. IntangiblesSchedule Impact

Profit

RaytheonPart-

associatedCosts

Current Price

Focus on Total Cost of Ownership


Total Cost BreakdownTotal Cost Est

Material Cost 44%

Labor Costs29%

Cost of Poor Quality

(COPQ)27%

COPQ BreakdownTotal COPQ Est

Top Material Cost DriversRepresenting Top 52% of Material CostLabor Breakout by Module

Example from Actual Prework

Network Centric Systems Y/N Screening Evaluator

• Purpose: Recommended for initial general evaluation of potential suppliers. It provides a quick look at the viability of a candidate or it allows the comparison and prioritization of multiple candidates

• Minimal product and supplier knowledge is required

• Normally filled out by SCM personnel (MPM, Buyers), or interested IPT members

Output is radar chart• that provide a graphical representation of supplier candidacy

•Identifies risk areas to R6sS success

•Numerical score to be used as a comparative

Network Centric SystemsThe Y/N Evaluator

Network Centric Systems The Y/N Evaluators Output

Network Centric SystemsThe Candidate Evaluator 1.05

• Is a tool to estimate the highest potential savings/improvement

• Provides a way to rank order suppliers in the order of the

For Raytheon, the supplier, and the customer

highest potential payback

• Provides an estimate of where the savings are coming from and where they are going

• Provides a consistent methodology for ranking suppliers for supplier engagements

• Requires detailed knowledge including time-phased procurement plans and contract information, Raytheon program, product and supplier background• Used by trained SCM personnel or IPT


Results

The Candidate Evaluator 1.05

Network Centric SystemsR6 with Suppliers Tools

DTC/CAIV— Design to Cost / Cost as An Independent Variable Set and achieve product cost goals. PBS— Performance-Based Specifications Set specifications that clearly state what we need, not how to build it. DFMA— Design for Manufacturability and Assembly Identify alternative design solutions to eliminate non-essential

elements of the design and non-essential steps in the manufacturing process. DFSS— Design for Six Sigma Analysis of uncertainty during the requirements definition and design process. PSP— Part Selection Process Identify opportunities to lower commodity cost, improve part standardization, reduce

part count, and identify problem suppliers and parts. PFMEA — Process Failure Modes and Effects Analysis Improve process flow and identify high-risk process

elements. DOE — Design of Experiments Optimize product designs or manufacturing processes by using experimentation that

links variables to performance outputs. Lean — Lean Manufacturing Techniques Improve total production process from planning through shipping. Achieve

consistent operational performance through improved product and information flow. Blitz — Blitz Workshops Eliminate waste and non-value-added activities in manufacturing and administrative processes. STAATS — Statistical Analysis and Acceptance Test Software Analyze supplier acceptance test data. Identify test

reduction opportunities and parameters that drive yield.


Lean /Kaizen Blitz/PILean /Kaizen Blitz/PI

PFMEAPFMEA

PSPPSP

DTCDTC

DOEDOE

Test reductionTest reduction

DFSSDFSS

Pay

bac

k

5X

30XPBSPBS

DFMADFMA

Early Involvement

Transition Effort

Concept Eval Dem-Val EMD LRIP FRP

Typical Program Life Cycle

Production Effort

Improvement Tools have Time Phased Benefits


Product Cost Structure

Labor Material Factory O/H GS&A

Step 3:ApplicableTools

Non-std processesTest rqmtsRework/repairOversightLabor efficiencySetup times

Step 2:Cost Drivers

Non-std partsMil partsTech. decisionsMake/buy policiesBuying leverageSupplier costsInspection rqmts

BuildingsSupport costsInventoryAutomation levelSchedule mgmt

Admin supportCorporate expensesMarketingPurchase volumeFuture business outlook

DFMASTAATSDOEAutomation

studiesLean PFMEAProcess

Improvement

PBS DFMAPSP (std, comm)Volume pricingSub-tier cost reductionSub-tier source selectionLeveraged buys

Process ImprovementLeanStandardized test sets

LeanConsolidated buysSupplier partnering

Step 1:CostComponents

Linking Product Costs to Applicable Tools


Day 1

IntroductionsR6 overviewTool detailSupplier introductionPart cost driversProcess tourBrainstorming

Day 2

Continue brainstormingPrioritize ideas Conduct feasibility studies

on ideas generatedDebriefRank opportunities Develop roadmap

Assessment Workshop Typical Agenda


SummaryImplementation Cost $600KPossible Savings $13,000KPayback 20X

Example of Baseline Results

Part OpportunityPayback

RatioCost

Reduction/Part Cost Savings

Feasibility & Implementation

CostCumulative Impl. Costs

1 Spine DFMA 46 $300 $3,150,000 $68,000 $68,0001 Retaining Rod DFMA 33 $300 $3,150,000 $96,000 $164,0001 Assembly PFMEA 32 $45 $472,500 $15,000 $179,0001 Plug DFMA 26 $100 $1,050,000 $40,000 $219,0001 Test Reduction 23 $22 $231,000 $10,000 $229,0001 Lean Blitz 21 $123 $1,291,500 $62,500 $291,5001 Housing DFMA 13 $85 $892,500 $68,000 $359,5002 Assembly DFMA 19 $280 $979,160 $50,500 $410,0002 Lean Blitz 18 $315 $1,101,555 $62,500 $472,5002 Test Reduction 17 $50 $174,850 $10,000 $482,5002 Machining PFMEA 16 $70 $244,790 $15,000 $497,5002 B Stitch PFMEA 11 $80 $279,760 $25,000 $522,5002 Assembly PFMEA 7 $28 $97,916 $15,000 $537,5002 Casting Supplier DOE 5 $92 $321,724 $71,000 $608,500

22 $13,437,255 $608,500

Candidate Projects


Review DataPackage

IdentifyWorkshop Team

Supplier CollectsPre-work Data

Package

Supplier Commitment

Step 2: Define objectives together

Supplier Pre-work: Collecting the Data



ApplyTools(roadmap)

Non-stdprocesses

Test rqmtsRework/repairOversightLabor efficiencySetup times

AssessDrivers(workshop)




PBSDFMASTAATSDOEAutomation

studiesAgile/CFM/PIPFMEASWI

PBSDFMAPSP (std, comm)Volume pricingSub-tier cost

reductionSub-tier source selectionLeveraged buys

PBSPIAgile/CFMStandardized

test setsSWI

Agile/CFMConsolidated buysSupplier partnering

BaselineCosts(prework)

Cost Breakout

Labor20%

Material50%

Support10%

Burden10%

Overhead10%

Housing15%

Sensors30%

Motors30%

Electronics20%

Misc5%

Material Cost Drivers








Preparation is theSecret to Success


Assess design and process

Learn tools to mitigate cost

Identify cost drivers and tool

opportunities

Evaluate effect of tools

Create action plan

Cost Breakout

Machining26%

Rod Assemblies6%

Shaft8%

Core13%

Electronics5%

Overhead16%

Assembly26%

Tool Definitions DTC/CAIV— Design to Cost / Cost as An Independent Variable Set and achieve product

cost goals.

PBS— Performance-Based Specifications Set specifications that clearly state what we need,not how to build it.

DFMA— Design for Manufacturability and Assembly Identify alternative design solutions toeliminate non-essential elements of the design and non-essential steps in the manufacturing process.

SWI— Software Improvement Optimize the development and architecture of software projects.

PSP— Part Selection Process Identify opportunities to lower commodity cost, improve partstandardization, reduce part count, and identify problem suppliers and parts.

PFMEA — Process Failure Modes and Effects Analysis Improve process flow and identifyhigh-risk process elements.

DOE — Design of Experiments Optimize product designs or manufacturing processes byusing experimentation that links variables to performance outputs.

CFM/Agile — Continuous-Flow Manufacturing/Agile Manufacturing Improve totalproduction process from planning through shipping. Achieve consistent operational performancethrough improved product and information flow.

PI — Process Improvement Workshops Eliminate waste and non-value-added activities inmanufacturing and administrative processes.

STAATS — Statistical Analysis and Acceptance Test Software Analyze supplieracceptance test data. Identify test reduction opportunities and parameters that drive yield.Cost Driver / Tool Linkage



ApplyTools(roadmap)

Non-std processesTest rqmtsRework/repairOversightLabor efficiencySetup times

AssessDrivers(workshop)




DFMASTAATSDOEAutomation

studiesAgile/CFMPFMEAPISWI

PBSDFMAPSP (std, comm)Volume pricingSub-tier cost

reductionSub-tier source selectionLeveraged buys

PIAgile/CFMStandardized

test setsSWI

Agile/CFMConsolidated buysSupplier partnering

BaselineCosts(prework)

0 10 20 30 40 50

Spine DFMA

Retaining Rod DFMA

Assembly PFMEA

Melt Plug DFMA

STAATS (ERGM)

CFM (ERGM)

Housing DFMA

Payback Ratios

Project

Implementation Roadmap

Flow Solder DOE

Redesign for SMTechnology

Assembly Process PFMEA

CFM Engagement

Jan Apr Jul Oct Jan Apr Jul

2000 2001

Step 3: Prioritize - Supplier Workshop








The Supplier Workshop: The Keystone

IPDS: The Way We Do Business

Defines the way we plan, capture and execute programs

Provides tools and processes that enable Integrated Product Teams to perform their tasks

EVMS, IMP/IMS, CAIV

Provides “One Company” language and tools to enable program capture and successful execution

Building a Process Culture - Requires Discipline!

Provides an environment for continuous process improvement

Raytheon Six SigmaTM


Network Centric SystemsIntegrated Product Development

System (IPDS) Gates

Gate1

OpportunityReview

OpportunityReview

Gate2

WinStrategy

WinStrategy

Gate3

Pre-Proposal

Readiness

Pre-Proposal

Readiness

Gate4

ProposalReview

ProposalReview

Gate5

Start-upReview

Start-upReview

Gate6

SystemFunctional

Review

SystemFunctional

Review

Gate7

PreliminaryDesign

PreliminaryDesign

Gate8

CriticalDesign

CriticalDesign

Gate9

Test/ShipReadiness

Test/ShipReadiness

Gate10

ProductionReadiness

ProductionReadiness

Gate11

Transitionand

Closure

Transitionand

Closure

• Tech Roadmaps• IR&D• Capital Investments• NBI• Strategic Sourcing

(linked to roadmaps)• Early Supplier Involvement

• Design Rules/Standardization• Strategic Make vs. Buy• DFSS (Performance Scorecards)• Identify Key Supplier Characteristics• Integrated Business Planning• Risk Identification/Reduction• Early Supplier Involvement• Teaming and Partnering

• Proposal Development• Make vs. Buy• Standard Parts• Preferred Suppliers• Risk Mitigation• Material Program Plans• Manufacturing Plans

• BD• Contracts• Engineering• Finance• Production• Program Management• Quality• Supply Chain Management+ Customers+ Strategic Suppliers

Network Centric SystemsExample 1: Targeting Viewer

Gate1

OpportunityReview

OpportunityReview

Gate2

WinStrategy

WinStrategy

Gate3

Pre-Proposal

Readiness

Pre-Proposal

Readiness

Gate4

ProposalReview

ProposalReview

Gate5

Start-upReview

Start-upReview

Gate6

SystemFunctional

Review

SystemFunctional

Review

Gate7

PreliminaryDesign

PreliminaryDesign

Gate8

CriticalDesign

CriticalDesign

Gate9

Test/ShipReadiness

Test/ShipReadiness

Gate10

ProductionReadiness

ProductionReadiness

Gate11

Transitionand

Closure

Transitionand

Closure

Raytheon Benefits:• Decreased material shortages• Redesigns reduce handling damage and

factory rework• Factory yields increased to >85%

Situation:• 45% of products fail in system or field• Expensive part, slow deliveries• Supplier unhappy with profitability

Critical Component in US Vehicles

Critical Component in US Vehicles

Supplier Benefits:• Rework of specs and testing plan• Reduced process steps by 15%• Redesign to reduce matl cost

Payback Ratio: 15:1Payback Ratio: 15:1 Payback Ratio: 16:1Payback Ratio: 16:1

Network Centric SystemsExample 2: Payload

Delivery System

Gate1

OpportunityReview

OpportunityReview

Gate2

WinStrategy

WinStrategy

Gate3

Pre-Proposal

Readiness

Pre-Proposal

Readiness

Gate4

ProposalReview

ProposalReview

Gate5

Start-upReview

Start-upReview

Gate6

SystemFunctional

Review

SystemFunctional

Review

Gate7

PreliminaryDesign

PreliminaryDesign

Gate8

CriticalDesign

CriticalDesign

Gate9

Test/ShipReadiness

Test/ShipReadiness

Gate10

ProductionReadiness

ProductionReadiness

Gate11

Transitionand

Closure

Transitionand

Closure

Results:• Factory designed with Lean principles•Significant cycle time reductions

JSOWJSOW

Part - Payload Dispenser

Part - Payload Dispenser

Situation:• Prototypes produced• Need to cut cost and make more

producible• New factory being designed

Network Centric SystemsExample 3: Guided Projectile

Gate1

OpportunityReview

OpportunityReview

Gate2

WinStrategy

WinStrategy

Gate3

Pre-Proposal

Readiness

Pre-Proposal

Readiness

Gate4

ProposalReview

ProposalReview

Gate5

Start-upReview

Start-upReview

Gate6

SystemFunctional

Review

SystemFunctional

Review

Gate7

PreliminaryDesign

PreliminaryDesign

Gate8

CriticalDesign

CriticalDesign

Gate9

Test/ShipReadiness

Test/ShipReadiness

Gate10

ProductionReadiness

ProductionReadiness

Gate11

Transitionand

Closure

Transitionand

Closure

Situation:• Initial design completed• Need to reduce price by 50%• Aggressive structural requirements

ERGM: Precision guided projectile for Naval 5-inch gun. Also applicable to U.S. Army and

Marine Corps 155mm artillery programs

Results:• Redesign of major components• Decreased manufacturing complexity• Increased structural integrity

ERGM

Network Centric SystemsExample 4: Guidance Component

Gate1

OpportunityReview

OpportunityReview

Gate2

WinStrategy

WinStrategy

Gate3

Pre-Proposal

Readiness

Pre-Proposal

Readiness

Gate4

ProposalReview

ProposalReview

Gate5

Start-upReview

Start-upReview

Gate6

SystemFunctional

Review

SystemFunctional

Review

Gate7

PreliminaryDesign

PreliminaryDesign

Gate8

CriticalDesign

CriticalDesign

Gate9

Test/ShipReadiness

Test/ShipReadiness

Gate10

ProductionReadiness

ProductionReadiness

Gate11

Transitionand

Closure

Transitionand

Closure

Situation:• Next generation guidance system needed• Reduce the price by 40%• Meet performance profiles of multiple

programs

Results:• Redesign of tri-mount frame• Decreased manufacturing complexity

Payback Ratio: 65:1Payback Ratio: 65:1

Network Centric SystemsThe Right Engagement

Yield Handsome Returns

0

10

20

30

40

50

60

70

0 200 400 600 800

Investment

RO

I

Tech Dev

DFSS

LRIP

Prod

• ROI is total impact of the project, and is expressed in multiples of investment

• Total impact includes gap closure, cost avoidance and cost savings

Network Centric SystemsSuccess Factors

• Carefully select company core competencies

• Identify and manage critical supplier relationships

• Select strategic suppliers for engagements– Spend time up front to collect the essential data that no one

person has

– Target both immediate and long-term results

– Use gated process that spends investment money incrementally

– Ensure customer involvement

– Gain top executive support for process and pull for results

Network Centric SystemsBack-up

• Supplier Relationships and Supplier Performance back-up materials

Network Centric SystemsSuccess Factors

• Dollarize potential impact before engaging management

• Align multiple departments - both functional and product related

• Communicate clear, structured methodology and roadmap during initial kickoff and revisit often

• Spend time up front to collect the essential data that no one has

• Offer up data to the supplier, don’t just demand it of them

• Target both immediate and long-term results

• Use gated process that spends investment money incrementally

• Ensure customer is involved

• Gain top executive support for process and pull for results

Network Centric SystemsTop Reasons for Failure

• Tried to engage supplier during price negotiations

• Product managers kicked off workshop by listing constraints

• Price is far less than supplier costs

• Supplier is a competitor

• Supplier can’t dollarize their own costs

• Supplier cost model entries are far higher than actual costs

• Engineers are unwilling to consider modifications

• Prework data collected is incomplete

• Distrust between supplier and OEM

Documents

Steve Case Supplier Relations and Productivity Expert October 2006