Steve Case

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Six Sigma and the Supply Chain
Steve Case Supplier Relations and Productivity
Expert October 2006
Export control review number TDR 06-9001
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Agenda

• 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

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Company Background
Raytheon at a glance The data presented
represents the entire Raytheon 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
• gt7 Billion Annual Spend
• 72 of spend is Direct . . . 28 of
  spend is Indirect
• Core business focus
• Government and defense electronics,
  business aviation

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Why Talk Supply Chain
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Direct Material is Often the Largest Single
Product Cost Element

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

50
30
15
5
Material OH Labor
Engr Product Cost Elements
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Material Type Drives The Strategy
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Material Costs Must be Addressed Early in the
Design Cycle . . .
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Selecting 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?

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

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Traditional Approaches

• What are the elements of part purchase price?

What SCM tools are available to reduce price?

• Pricing targets

• Multiple rounds of bidding

• Leverage

• Negotiation

Which element of cost do these tools address?
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Raytheon Six SigmaTM with Suppliers
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Down Selection Process for Supplier engagements
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Supply Base Optimization
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SBO 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

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Supplier SelectionDecision Tools
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R6s with 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

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The Six Sigma With Suppliers Process
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
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Prework Developing the Total Cost of Ownership
Focus on Total Cost of Ownership
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Example from Actual Prework
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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

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The Y/N Evaluator
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The Y/N Evaluators Output
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The Candidate Evaluator 1.05
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The Candidate Evaluator 1.05
Results
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R6s 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.

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Improvement Tools have Time Phased Benefits
Early Involvement
DTC
30X
PBS
DFSS
DFMA
Payback
Transition Effort
PSP
PFMEA
Lean /Kaizen Blitz/PI
Production Effort
Test reduction
5X
Concept Eval Dem-Val EMD
LRIP FRP Typical Program Life
Cycle
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Linking Product Costs to Applicable Tools
Product Cost Structure
Step 1 Cost Components
GSA
Labor
Material
Factory O/H
Non-std processes Test rqmts Rework/repair Oversig
ht Labor efficiency Setup times
Non-std parts Mil parts Tech. decisions Make/buy
policies Buying leverage Supplier
costs Inspection rqmts
Buildings Support costs Inventory Automation
level Schedule mgmt
Admin support Corporate expenses Marketing Purchas
e volume Future business outlook
Step 2 Cost Drivers
PBS DFMA PSP (std, comm) Volume pricing Sub-tier
cost reduction Sub-tier source
selection Leveraged buys
DFMA STAATS DOE Automation studies Lean
PFMEA Process Improvement
Process Improvement Lean Standardized test
sets
Lean Consolidated buys Supplier partnering
Step 3 Applicable Tools
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Assessment Workshop Typical Agenda
Day 1 Introductions R6s overview Tool
detail Supplier introduction Part cost
drivers Process tour Brainstorming
Day 2 Continue brainstorming Prioritize ideas
Conduct feasibility studies on ideas
generated Debrief Rank opportunities Develop
roadmap
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Example of Baseline Results
Candidate Projects
Summary
Implementation Cost 600K Possible Savings
13,000K Payback
20X
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Preparation is theSecret to Success
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The Supplier Workshop The Keystone
Step 3 Prioritize - Supplier Workshop
Assess design and process
Learn tools to mitigate cost
Identify cost drivers and tool opportunities
Evaluate effect of tools
Create action plan
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IPDS The Way We Do Business
Network Centric Systems
Defines the way we plan, capture and execute
programs
Provides an environment for continuous process
improvement Raytheon Six SigmaTM
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!
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Integrated Product Development System (IPDS) Gates
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Example 1 Targeting Viewer
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Example 2 Payload Delivery System
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Example 3 Guided Projectile
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Example 4 Guidance Component

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

Payback Ratio 651
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The Right EngagementYield Handsome Returns

• ROI is total impact of the project, and is
  expressed in multiples of investment
• Total impact includes gap closure, cost avoidance
  and cost savings

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Success 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

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Back-up

• Supplier Relationships and Supplier Performance
  back-up materials

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Success 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, dont 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

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Top 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 cant 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