April 17 2014 Eaton Corporation Sustainable Growth through

April 17, 2014 Eaton Corporation Sustainable Growth through Network Optimization SCM Expert Team Tiffany Wendler Lukas Brenner Andrew Tye Patrick Haslanger GSCMI 2014 Case Competition – Team 1: Wendler

Your Supply Chain Management Expert Team Tiffany Wendler Lukas Brenner Andrew Tye Patrick Haslanger 2

Agenda 1§ 2§ 3§ 4§ 5§ 6§ Tiffany Wendler Current Situation and Problem Statement Recommendation Analysis Implementation Risk and Mitigation Measures Conclusion 3

1 Company Overview – Eaton Corporation Company Highlights Tiffany Wendler Organizational Structure § Power management company § Provide energy-efficient solutions to manage electrical, hydraulic and mechanical power § Sales $22 b (2013) § Efficiency, reliability, safety § 175 countries § 102, 000 employees Eaton Corporation Electrical Aerospace Vehicle Hydraulics Electrical Sector § Largest sector § Comprehensive portfolio of end-to-end electrical solutions including distribution, generation, quality control equipment, full-scale engineering and support services § Product categories § Automation and Control § Circuit Protection § Electrical Distribution § Residential Power Management § Backup Power and Monitoring Systems 4

1 Current Supply Chain Network Tiffany Wendler Supply Chain Network § § § 2 plants: NC, SC 16 CMSC sites 1 third party CDC 2 warehouses: CA, NC 1 DBN: TX Top 5 orders: Dallas, Los Angeles, Atlanta, Houston, Chicago Challenges CMSC (including SAT and SVC) Plant Warehouse CDC § Frequent stockouts on the west coast § Growing demand of high tech companies requiring short lead times § No clear order structure § Warehouses not dedicated to electric sector no priority § Unequal performance between east and west Currently a very complicated supply chain 5

1 Problem Statement Tiffany Wendler Eaton Corporation strives to improve its existing supply chain network for the Electrical Sector. § Short-term: level performance in east and west through reducing premium flights and DOH inventory § Long-term: ensure sustainable growth, especially on the west coast 6

2 Recommendations Short-term Optimize inventory levels for all CMSC sites Tiffany Wendler Financial impact: Savings: $2. 49 m Decrease air freight shipments Long-term Add warehouse space in LA area Savings: $3. 72 m Source strategically from 2 -3 close-by sources 7

3 ST-Measure 1: Reduce Air Freight Current Air Freight Situation Lukas Brenner Current Distribution § Air freight makes 8% in weight and 40% in cost 100% 8% § Costs per mile are considerably higher for air shipment 100% 39% Air § Air freight’s intended use is for emergency shipments Ground § Transportation via air is used regularly to catch up with late orders; especially for West Coast Weight Cost Short-Term Measures to Reduce Air Freight § Address 3 largest users of air freight: Chicago, LA and San Francisco Ratio: Air Freight Volume over Total Volume at Location* § Dallas-SVC sources currently 53% of goods value from Puerto Rico (air freight inevitable) § Develop actions plans for 3 facilities including special expert consultation, re-design for quickwins, improved ahead-planning to increase truck freight share Ø 8% Chicago-Dallas. SVC LASAT SFSAT ST measures possible to support – real effective measures in LT planned *For 16 CMSC Locations , SVC/SAT selectively used to visualize differences 8

ST-Measure 2: Reduction CMSC Inventory 3 A Approach to Minimize Inventory – 3 days $1. 69 m Total Savings - in $t - 2, 037 § Utilize periodic inventory system by ordering every 3 days § Reduce time between order receipt and shipment in plant from 2 days to 1 day § Calculate necessary average inventory (S. L. 99%) § Result: 83% of inventory can be reduced B Lukas Brenner 1, 668 345 24 Inv. Holding Inv. Cost As-Is Decrease Inv. Holding waiting Cost time 1 d optimal Approach to Minimize Overall Costs – 6 days § Expand order period from 3 to 6 days § Trucks can be loaded more extensively since demand of CMSC will aggregate during additional 3 days § Assumption: Reduce LTL rate by 25% from an average $0. 30 to $0. 23 § Result: 77% of inventory can be reduced ($1. 56 m savings) 25% of ground shipping costs can be saved ($0. 92 m) $2. 49 m Total Savings Assume - holding costs of 10%; Total shipment costs by truck prior to optimization: $3, 681 t - in $t - 2, 037 1, 544 473 20 Inv. Decrease Holding Decreases waiting Cost As-Is time 1 d 920 Inv. Holding Cost optimal Shipping Cost Reduction 9

SA go T Ch S ica AT go Cl -S ev V el an C d. S Da AT lla s De -SA T nv er -S Ha VC rtf or Ha d-S A rtf or T Ho d-S us VC to Ho n-S AT u Lo sto n s. A ng SVC e Lo l s A es-S AT ng Ne ele sw Je SVC rs e Or y-SA la nd T o. Ph S oe AT n Po ix-S A rtl an T d Ra -SV C l ei Sa gh n fra -SA T nc isc Se o-S. . at tle. S St Lo AT ui s-S AT ica Ch C SV e- or a- T SA a- nt nt la m lti Ba At la At nt a- SA T n ta Ba -S lti m VC or Ch e-S ica AT g Ch o-S ica AT g Cl ev o-SV el an C d. Da SAT lla s. Da SAT lla De s-SV C nv er De -SA T nv Ha er-S V rtf or C d Ha rtf SAT or Ho d-S us VC to Ho n-S A u Lo sto T s A n. SV n Lo gele C s. A s ng -SA Ne ele T sw Je SVC rs e Or y-S A la nd T o Ph -S oe AT n Po ix-S rtl A an T d. R S Sa ale VC igh n fra nc SAT isc o Se -SA at T tle -S St Lo AT ui s-S AT la At At la 3 ST-Measure 2: Reduction CMSC Inventory 1, 800, 000 1, 600, 000 1, 400, 000 1, 200, 000 1, 000 800, 000 600, 000 400, 000 200, 000 - 100 80 60 40 20 - *Dallas-SVC (as outlier) not included: DOH (new) 163 days: location where optimal inventory > current inventory Lukas Brenner B Optimal Inventory vs. Actual Inventory (in $) - Based on p=6 - Optimal Inv. Actual Avg. Inv. DOH: Days of Inventory on Hand Comparison (in days)* DOH (new) DOH (old) Avg. inv. at each location can be reduced by $705 k – DOH* down from 39 to 8 days 10

3 LT-Option 1: Create 1 -2 New CMSC Sites Pros § § § Andrew Tye Cons Reduce regional logistics costs Improve inventory turnover Enhance brand image Increase responsiveness to regional demand Better customization possible Root-cause Issues § § § Does not tackle root-cause Close-by warehouses cannot supply No focus on long-term growth High shipping costs if located in the west High investment needed Future demand is expected at regions where CMSCs already exist Financial Considerations § Root-cause of problem: Missing supply from warehouse/plants at west coast § New CMSC cannot increase supply but might increase demand for respective product § Building CMSC needs high initial investment as it includes production factory § Running costs are high due to production cost, sales team and overheads Problem is not solved, but potentially increased It is not feasible to build additional CMSCs Do not add two new CMSC sites 11

3 LT-Option 2: Optimization (Warehouse LA) Approach Andrew Tye Pros & Cons § No direct sourcing from Puerto Rico and from plants “Other” § Optimize sourcing by reducing # of CMSC-suppliers § Where possible source from plant/warehouse in region to decreases miles and shipping costs § Add one warehouse in west to increase capacity, level performance and enable future growth (renting warehouse space also possible) - in $t - § § § Reduce pressure on W 34 and W 87 Dedication to electrical sector Shorter lead time to CMSC sites Reduce shipping costs Simplify supply chain structure § High shipping costs to east if located west § High capital investment Analysis Total Savings: $3. 72 m 6, 022 2, 341 1, 381 2, 300 New warehouse Total Shipping Savings Air Network Total Shipping Costs As-Is Transportation Redesign (Land Costs Transportation) Optimized Redesign of sourcing network including one LA warehouse saves $3. 72 m Assume saving of nearly all air freight cost through optimized sourcing 12

3 LT-Option 2: Optimization (Warehouse LA) Andrew Tye Add warehouse space in the LA area (equivalent to CDC capacity) 13

3 LT-Option 3: Optimization (DBNs as Storage ) Approach Andrew Tye Pros & Cons § Add 9 additional DBNs (warehouse function) § No direct sourcing from Eaton plants anymore § No direct sourcing from Puerto Rico and from plants “Other” § Source from the 9 additional DBNs in local area to reduce miles and shipping costs § Investment in 9 assets necessary § Reduce pressure on W 34 & W 87 § Dedication to electrical sector is possible § Improve local CMSC performance § Decrease lead time § Not focused on long-term growth § Complication of the overall supply chain (complexity) § Difficult to manage § High investment required (9 DBNs at CMSCs) Analysis - in $t Total Savings: $4. 3 m (only $0. 6 m higher than Opt. 2) 6, 022 2, 341 1, 950 1, 731 Total Shipping Savings Air Network Total Shipping Costs As-Is Transportation Redesign (Land Costs Transportation) Optimized Do not extend 9 CMSCs to DBNs - costs do not outweigh benefits Assume saving of nearly all air freight cost through optimized sourcing 14

4 Implementation: Organizational Change Simplification § Establish clear roles and responsibilities § Plant: produce regular items in large batches § CMSC: only customer contact point, produces special orders with local sourcing § Warehouse: serves as storage and distribution center § Eaton plants: used for special orders only § DBN: implemented based on capacity of respective CMSC Patrick Haslanger Impact § § Less complexity Less inventory Better customer service Lower transportation costs § Standardize production and transportation priorities § Based on order size, customer importance and financial implication § Written down in policies § Profitability § Reduced lead time § Less decision-making § Centralized organization of procurement § Less decision-making § Optimized profit Organizational changes will simplify the supply chain and decrease costs 15

4 Implementation: Timeline & Action Items Patrick Haslanger Long Term Short Term Level performance between east and west Strategic sourcing from 2 -3 sources Establish clear rules for sourcing Redesign supply network for 5 critical CMSC Redesign supply network for all CMSCs Increase capacity by adding warehouse space Reduce air freight shipping Inventory level optimization: Reduction of safety stock Organizational Change: Simplification and clear responsibilities Milestone 1 Kick-off immediate changes to decrease costs Milestone 2 Decrease overall inventory levels Milestone 3 Reduce overall shipping costs Milestone 4 Increase capacity 16

5 Risks and Mitigation Risks Patrick Haslanger Mitigation Measure Probability/Impact Initial investments to achieve cost savings are high § Assess initial investment need in detail § Focus on renting/outsourcing instead low/medium Resistance to change from employees might occur § Involve and empower employees in the process early on § Communicate benefits high/medium Increased interdependence of CMSC and plants/warehouses § Implement scenario planning § Increase cooperation between entities high/medium Increased complexity § Assign specialists team to target specific issues § Align planning activities medium/low 17

6 Conclusion Option Short-term Patrick Haslanger Description Measure 1 Optimize inventory levels for all CMSC sites Measure 2 Decrease air freight shipments Financial Strategic Summary Savings: $2. 49 m Long-term Option 1 Create one or two new CMSC sites Option 2 Optimization: Add warehouse space Option 3 Optimization: Extend CMSC storage Savings: $3. 72 m 18

Thank You! Questions? 19

1 Current Structure And come from… Current Situation Orders mainly go to… 20

1 Current Structure External Suppliers Eaton Plants Warehouse W 34 Warehouse W 87 Plant Sumter Plant Fayetteville CDC DBN CMSC 1 CMSC 2 … CMSC 16 Customers From suppliers From plants/CDC From warehouses From CMSC 21

Target Structure External Suppliers Plant Sumter Plant Fayetteville Warehouse W 87 Warehouse W 34 DBN CMSC 1 CMSC 2 … CMSC 16 Customers From suppliers From plants From warehouses From CMSC 22

Transportation Cost http: //richardtorian. blogspot. com/2012/01/cost-per-ton-mile-for-four-shipping. html 23

Redesign Network and Increase Capacity (B) Add capacity at CSMCs equivalent to 9 CDCs 24

Short-term measures: Reduction of Inventory Order Quantity in $-Value CMSC site Total Atlanta-SAT 6, 325, 254 Atlanta-SVC 7, 578, 607 Baltimore-SAT 4, 277, 874 Chicago-SAT 5, 720, 035 Chicago-SVC 6, 405, 533 Cleveland-SAT 5, 484, 891 Dallas-SAT 7, 588, 695 Dallas-SVC 9, 457, 220 Denver-SAT 6, 332, 400 Denver-SVC 3, 940, 268 Hartford-SAT 5, 720, 883 Hartford-SVC 6, 150, 607 Houston-SAT 4, 972, 726 Houston-SVC 8, 440, 786 Los Angeles-SAT 9, 335, 966 Los Angeles-SVC 7, 376, 935 New Jersey-SAT 4, 367, 654 Orlando-SAT 5, 956, 920 Phoenix-SAT 4, 861, 302 Portland-SVC 4, 972, 556 Raleigh-SAT 5, 674, 095 San francisco-SAT 5, 049, 130 Seattle-SAT 4, 550, 998 St Louis-SAT 5, 228, 942 Total 145, 770, 278 p Order- Shipment Gap 99% Co. C SUM Hold. Cost 3, 450, 731 345, 073 20, 367, 405 2, 036, 741 16, 916, 674 1, 691, 667 St. Dev (of P+L (in Mean Months) D) M) (in M) Optimal Inv. Actual Avg. Inv. Diff. in % 215, 634 5 0. 170 527, 104 232, 955 899, 181 666, 226 386% 108, 689 5 0. 169 631, 551 135, 640 898, 220 762, 580 662% 93, 861 5 0. 169 356, 489 107, 551 660, 821 553, 270 614% 79, 611 6 0. 193 476, 670 105, 227 759, 572 654, 345 722% 99, 077 6 0. 200 533, 794 129, 764 959, 812 830, 048 740% 83, 245 5 0. 171 457, 074 102, 879 656, 580 553, 701 638% 112, 826 6 0. 190 632, 391 146, 090 1, 219, 931 1, 073, 841 835% 203, 478 5 0. 182 788, 102 241, 468 75, 799 -165, 669 31% 122, 215 6 0. 213 527, 700 157, 641 876, 008 718, 367 556% 60, 395 7 0. 226 328, 356 83, 156 498, 253 415, 097 599% 91, 263 5 0. 171 476, 740 111, 609 743, 944 632, 335 667% 111, 048 5 0. 171 512, 551 132, 447 1, 064, 410 931, 963 804% 72, 055 6 0. 192 414, 394 94, 241 773, 745 679, 504 821% 163, 664 6 0. 199 703, 399 204, 958 1, 491, 512 1, 286, 554 728% 131, 076 6 0. 210 777, 997 178, 529 1, 645, 203 1, 466, 674 922% 153, 345 7 0. 220 614, 745 197, 912 1, 105, 960 908, 049 559% 44, 205 5 0. 173 363, 971 60, 976 628, 373 567, 397 1031% 175, 939 5 0. 171 496, 410 193, 851 749, 806 555, 954 387% 92, 158 6 0. 213 405, 109 119, 193 742, 992 623, 799 623% 121, 680 7 0. 224 414, 380 154, 790 922, 198 767, 408 596% 147, 605 5 0. 171 472, 841 165, 564 816, 549 650, 984 493% 101, 206 6 0. 208 420, 761 128, 469 825, 681 697, 212 643% 103, 709 6 0. 209 379, 250 129, 337 643, 998 514, 661 498% 112, 200 6 0. 193 435, 745 136, 486 708, 858 572, 373 519% 116, 674 6 0. 19 506, 147 143, 780 848, 642 704, 861 628% Average 3 1 2. 326 0. 1 COGS 8, 827, 309. 21 10, 519, 020. 23 7, 126, 208. 30 8, 034, 856. 22 10, 562, 412. 18 8, 359, 329. 74 12, 842, 765. 06 727, 846. 49 9, 557, 337. 44 6, 178, 902. 50 8, 873, 699. 55 9, 791, 807. 38 7, 578, 959. 35 13, 435, 899. 79 14, 972, 556. 01 11, 824, 734. 37 7, 730, 412. 51 7, 937, 949. 43 6, 623, 160. 94 7, 109, 000. 06 8, 361, 580. 91 8, 054, 330. 48 9, 321, 026. 36 7, 245, 677. 26 8, 816, 532. 57 DOH (new) DOH (old) 9. 50 87. 8867 4. 64 31. 238 5. 43 33. 5057 4. 71 34. 71 4. 42 42. 5475 4. 43 28. 429 4. 10 35. 2762 119. 43 38. 4794 5. 94 33. 6839 4. 84 29. 8283 4. 53 30. 3086 4. 87 40. 4891 4. 48 37. 205 5. 49 57. 6586 4. 29 39. 7762 6. 03 34. 5762 2. 84 31. 1482 8. 79 34. 6288 6. 48 41. 1353 7. 84 60. 6347 7. 13 35. 8077 5. 74 38. 166 5. 00 25. 0579 6. 78 35. 7631 10. 32 39. 08 25

Overview: Shipping Costs (as-is) 26

3 LT-Option 4: Simplification Current Structure § § From suppliers From plants/CDC Proposed Structure CMSC as only customer contact point CMSC produces special orders only Abandon usage of Eaton plants Incorporate CDC in warehouse/CMSC structure From warehouses From CMSC 27

3 Other Options Option Further Considerations a) Daily milk-run from warehouses to CMSC § Lt. L are a major reason for high costs § Reduce shipping frequency and pool close-by locations § Reduce shipping costs § Weight and size of daily orders is not fixed for CMSC sites § High interdependency § High degree of coordination necessary § Current supply chain cannot support milk -runs due to lack of planning b) Change mode of transportation § Rail transportation could be cheaper than truck § Not feasible due to lead time § For highly standardized products only Supply chain needs to improve planning before implementing these options 28