Eaton Business System Supply Chain Transferable Practices Richard

Eaton Business System Supply Chain Transferable Practices Richard D. Holder, Vice President, Eaton Business System DLA Conference – April 2008 Jackson, MS © 2007 Eaton Corporation. All rights reserved.

Eaton Business System Defined “The collection of proven foundation elements, tools and processes that will give Eaton a significant advantage when they are deployed as prescribed across the organization. Wherever there is a significant advantage to Eaton to standardize an aspect of our business, we will do so by adopting and deploying a common element, tool or business process. The sum of these elements, tools and processes, aligned and integrated, is EBS. ”

EBS - The Power of One Eaton The Eaton Business System. . . • • Promotes consistent performance Provides us with proven solutions Standardizes our core tools and processes Enables us to focus on what’s important—driving breakthrough results, improving profitability, promoting growth

Eaton Business System 7 Main Components The Eaton Business System consists of 7 main components, which encompass all of our tools, processes and practices. . . • • Foundation Planning Growth Operational Excellence Functional Excellence Assessment Learning

Supply Chain Management An Element of EBS Operational Excellence represents the tools and processes proven to drive performance excellence. Global competitive pressures demand that we achieve operational excellence. Global customer requirements demand perfect performance. We meet and exceed these global requirements by using our EBS Op. Ex tools. Supply Chain Management is one element of the Operational Excellence component that offers a set of proven tools, processes and practices used throughout Eaton.

SCM Strategy “Enable Eaton’s vision to be the most admired company in our markets through superior supply chain performance facilitated by world class associates, partners and suppliers. ” OUTCOMES Income Growth ROIC Sales Growth FCF to Sales RESULTS Annual Productivity Supplier Reduction Logistics Cost Out DPO Improvement DOH Improvement Global Business Systems Organizational Capability Eaton Values (Ethics, Regulatory, Green)

Transferable Practice Outsourcing Services © 2007 Eaton Corporation. All rights reserved.

The Opportunity • Improve product quality, on-time delivery, and productivity • Focus resources on Eaton’s core competency of manufacturing • Increase production equipment availability and reliability How does Eaton better utilize its resources, both equipment and people?

The Situation • Reactive maintenance • New manufacturing technology requiring higher maintenance skill sets • Sub-optimized equipment performance

The Solution • Outsource maintenance to core competent service provider • Increase proactive and predictive maintenance • Immediate access to skills and technology

The Benefits • • Increased equipment availability and reliability Improved product quality Improved on-time delivery Focus on what we do best: Manufacture Availability/ Reliability Cost $

Transferable Practice – Si. OP © 2007 Eaton Corporation. All rights reserved.

The Opportunity • Improve on-time delivery and reduce inventory • Reduce variability in supplier releases • Eliminate stock outs • Eliminate premium freight How does Eaton improve supplier order releases?

Si. OP Process - Definition Si. OP = Sales inventory & Operations Planning In general terms, this is a process of shaking hands over future supply and demand positions. In essence, the process asks: 1. “What is the demand? ” – Forecasts, market intelligence, etc. 2. “Can it be met? ” – Internal and external capacity modeling 3. “If not, what actions need to be taken? ” – Contingency planning 4. “How are the inputs/outputs measuring up? ” – Process Measurements: l l l Forecast accuracy, both OEM and aftermarket Delivery performance, both internal and external Past due, inventory, etc.

Si. OP Planning Cycle Meeting Schedule: 1. Pre-Si. OP Demand OEM and AM forecast and market intelligence 2. Demand Approval Review the first draft of demand 3. Pre-Si. OP Fulfillment Division and plant review of capacity and manpower to meet the demand 4. Integration Meeting Team reviews demand, supply, and inventory plans and discusses issues 5. Executive Review Metrics and process review

Supplier Vis Overview - Description What is Supplier Vis? • A web-based application that gives both Eaton and its suppliers total visibility of the supply chain • The standard tool that Eaton has adopted for managing replenishment • Elements of the web tool: • Forecast - View & export up to one year of forecast (configurable buckets) • PO Inquiry - View the status and detail of all PO’s • Inventory – On-hand inventory, in-transit inventory, and min-max status • Schedules – View all detail for firm and planned releases • ASN – Build shipments and monitor open ASN’s

Supplier Vis Overview - Benefits to Eaton: • Eliminates Waste – Eliminates the need for material planners to maintain releases and shuffle volumes of paper (shortage reports, in-transit summaries, etc. ). • Enables VMI - Vendor Managed Inventory. This eliminates paperwork and manual processes, creating time for inventory management and system maintenance. More value-add time. For example, Truck has added 250 material planners to its team by utilizing Vis. • On one screen, the Eaton planner can see the status of their supplier: inventory, intransit quantity, and critical parts. • One common tool for planning - Allows us to fully realize the benefits of min-max planning – Control our inventory and maximizing supplier capacity. • Enables Divisional Planning - One planner for each supplier results in one forecast, one set of priorities, and one point of contact. Allows planning of multiple sites.

Supplier Vis Overview - Benefits to Suppliers: • Access to the true demand, based on pull, results in a smoother demand profile and the ability to maximize capacity. • Visibility to in-transit and receiving information. • Suppliers get one consolidated forecast (52 weeks). • Label & Pack Slip capability – drive standardization and receiving accuracy! • ASN feature eliminates the need to manage the “Four Pieces of Data” – PO, Line, Release, and Shipment data. • This improved ASN function, in conjunction with a parallel launch of ERS (evaluated receipts settlement), eliminates the creation of invoice holds, resulting in on-time payment.

Transferable Practice – Lean The United States Marine Corps 2 nd Marine Air Wing

Kings Mountain / 2 nd Marine Air Wing Relationship • • 2004 Eaton Kings Mountain wins the North Carolina Gold Shingo Prize 2005 2 nd MAW is looking for benchmarking opportunities for their AIRSpeed initiative in LEAN 2005 August Eaton KM hosts 20 Marines for a benchmarking visit (see Article) 2006 Eaton KM is invited to the 2 nd MAW AIRSpeed conference to present our LEAN Journey

Article from MCAS Cherry Point, NC September 1, 2005 Newsletter Marine machine learns art of lean CPL. CULLEN J. TIERNAN COMBAT CORRESPONDENT Time is money. With this concept close to heart, 20 Marines from throughout the 2 nd Marine Aircraft Wing visited Eaton Corporation in Kings Mountain Aug. 28. Kings Mountain is an industry leader in transmissions for heavyduty commercial vehicles in America. The corporation was the recipient of the first-ever North Shingo Prize for Excellence in Manufacturing. Dubbed the "Nobel prize of Manufacturing, " the prize is administered by North Carolina State University. "This is an opportunity to learn, " said Maj. Anthony J. Manual, supply officer with Marine Wing Headquarters Squadron-2, and an organizer of the event. "Kings Mountain has gone through a transformation, discovering the art of the possible. You can go back to your shops and say 'I saw this, ' and try it!" According to Manual, the purpose of the Marines visit was to learn and see how a major company became more efficient by using lean manufacturing techniques and take that knowledge back to their shops and spread it throughout the Marine Corps. Lean means "manufacturing without waste. " Waste has many forms. Material, time, idle equipment and inventory are examples, according to www. strategosinc. com. Lean Manufacturing improves material handling, inventory, quality, scheduling, personnel and customer satisfaction. "I went to a course on lean manufacturing given by Lockheed Martin, " said Sgt. William C. Wade Jr. , a power plants mechanic with Marine Aviation Logistics Squadron 29. "It's changed things in my shop. We have a significantly faster turnaround time now, our organizational skills have vastly improved. If you have the parts that you need in the right spot, there are fewer bumps along the road. " The managers at Kings Mountain admitted that the changes which take place in order to implement the Lean system may be a pain at first, but said they said the sacrifices are well worth it. He added, that implementing the changes is a leadership test. According to the corporation, leaders need to get out on the floor and teach and show people why the new system is better. "We have a strategic planning process, " said one of the managers. "We set up projects, and we judge whether things would cost us more in production than it's worth. Based on timing, resources and impact, there is a process we follow and evaluate. " As the Marines in uniform toured Kings Mountain, they were greeted with the patriotic smiles and waves of the workers, as American flags fluttered throughout the factory. "We really appreciate your help and support, " said Manual. "We know all the Marines will take the knowledge they have (gathered) today back to their shops. We were all touched by your patriotism; you are all warriors in civilian clothing. "

The Situation December 2004 • Labor Productivity of 48% • Safety Issues • Quality 16, 050 ppm • Excess Inventory • Work Life Balance • • Hard work but no satisfaction No Teamwork

Lean Journey Begins Main Shaft Gears 2007 2006 2004 2005 CFM/5 S Kaizen

2005 Kaizen Event • Value Stream Map • CFM • 5 S • Standardized Work • Safety • Ergonomics

2005 Kaizen Event Results • Productivity • • Labor Productivity improves 11% • Standardized work • Setup time reduced • Quality improves 28% Manufacturing Footprint • 9 cells to 6 cells • Reduced manpower • Improved inventory

Lean Journey Continues Main Shaft Gears 2007 2006 2004 2005 OEE Pilot Standard Work & Setup Kaizens

The Benefits: Mainshaft Gear Cells Labor Prod=75. 0% Quality 3, 000 Labor Prod=63. 3% Quality 5, 348 Labor Prod=48% Quality 16, 050 Labor Prod=53. 5% Quality 11, 500 2005 2004 2007 2006 OEE Pilot Std Work Setup Kaizens CFM/5 S Kaizen