Network Centric Systems Six Sigma and the Supply

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

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 Network Centric Systems

Company Background Network Centric Systems 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 >$7 Billion Annual Spend 72% of spend is Direct. . . 28% of spend is Indirect • Core business focus – Government and defense electronics, aviation business

Network Centric Systems Why Talk Supply Chain

Direct Material is Often the Largest Single Product Cost Element… • 50% 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% 15% Material OH Network Centric Systems Labor Product Cost Elements 5% Engr

Material Type Drives The Strategy • Select standard parts from approved suppliers • Tools: Preferred parts list, approved suppliers • Track: % standard parts, # suppliers, OTD 30% Low $ Commodities Medium $ Key Parts 20% Network Centric Systems High $ Critical Parts/ Subassemblies 50% • Partner with best in class suppliers of key technologies • Include supplier on IPT • Tools: Six Sigma With Suppliers • Track part cost and predicted performance

Material Costs Must be Addressed Early in the Design Cycle. . . Network Centric Systems

Selecting Core Competencies Network Centric Systems 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?

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

Raytheon Six Sigma™ versus Traditional Six Sigma Network Centric Systems • The traditional Six Sigma approach, utilized by Motorola, has its underpinnings in hardware design and manufacturing • The Raytheon Six Sigma. TM 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 Raytheon 6 Sigma™ Approach Motorola 6 Sigma Approach

Traditional Approaches What are the elements of part purchase price? Profit G&A/Overhead Scrap/Rework Testing Eng Labor Mfg Labor Material Network Centric Systems What SCM tools are available to reduce price? • Pricing targets • Multiple rounds of bidding • Leverage • Negotiation Which element of cost do these tools address?

Raytheon Six Sigma. TM with Suppliers Network Centric Systems

Down Selection Process for Supplier engagements Network Centric Systems Su pp lie r Sr up e plie i Su l ier l r p p r pp p p pplie S u u S lie upp r lier. S Su lier S p up up pli Su pl r er e i l ie pp r u S Supplier Supply Base Optimization (SBO) Y/N Candidate Evaluator Supplier Supplier 1. Supplier 2. Supplier 3. Supplier 4. Supplier Selection Process Candidate Evaluator 1. 05

Supply Base Optimization Local Houses Outstanding Financial Technology Performers Risks Poor Leaders Performers Sole Low Cost Redundant Sources Directed Providers Capabilities Sources Commodity Providers Acceptable Performers Network Centric Systems Niche Providers Potential Partners Optimization Process Preferred Approved • Eligible to do business with NCS programs based upon merit of evaluation thru optimization process Approved Suppliers Preferred Strategic Restricted • Targeted for business based upon • Delivery • Quality • Cost • Technical (performance driven decisions) Approved (w/restrictions) Strategic • Eligible to do business with specific legacy programs due to programmatic issues (customer direction, re-qual costs, etc. ) • Provides technological and strategic advantage • Risk Mitigation plans required for each • Willing to form partnerships / alliances • Shares risk and opportunities including investments • Transition plans to ASL required for each …Enterprise-wide, Standard Definitions

SBO Background Info Network Centric Systems 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

R 6 s w/Supplier Tools General Raytheon Tools Supplier Selection Decision Tools Supplier Rating System Lean Assessment Tool Supplier Total Assessment Tool SBO Process Radar Charts Y/N Evaluator Candidate Evaluator 1. 5 Network Centric Systems

R 6 s with Suppliers Network Centric Systems R 6 s 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 R 6 s tool or technical expert resources as appropriate • Standard templates drive consistency

The Six Sigma With Suppliers Process Network Centric Systems Process Steps: Step 1: Visualize Analyze the BOM and determine the key suppliers and parts Step 2: Commit Get supplier commitment, set objectives and prepare for workshop by analyzing unit costs and quality Step 3: Prioritize Conduct assessment workshop with supplier to identify improvement projects Step 4: Characterize Begin improvement projects by analyzing current conditions Step 5: Improve Continue improvement projects by implementing needed changes Step 6: Achieve Measure results and determine impact on performance and cost

Prework: Developing the Total Cost of Ownership $ Raytheon Partassociated Costs Raytheon Total Cost of Ownership for a Supplied Part Operation’s Responsibility COPQ Incurred by Raytheon Unit Strip-out Costs Unit Rebuild Costs Schedule Impact Raytheon Costs Incoming Testing Integration Testing Processing Costs Integration Costs Current Price Supplier Profit Raytheon Neg. Price Network Centric Systems Supplier COPQ Supplier Costs Field Failure Impact Field/Sched. Intangibles Profit Prod. Scrap Prod. Rework Customer Return Failure Analysis Cust. Rtn Replacement Cust Rtn Rework Material Engineering Testing Sales Overhead Manufacturing Marketing Purchasing’s Responsibility Focus on Total Cost of Ownership

Example from Actual Prework Network Centric Systems

Y/N Screening Evaluator Network Centric Systems • 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 R 6 s. S success • Numerical score to be used as a comparative

The Y/N Evaluator Network Centric Systems

The Y/N Evaluators Output Network Centric Systems

The Candidate Evaluator 1. 05 Network Centric Systems • Is a tool to estimate the highest potential savings/improvement For Raytheon, the supplier, and the customer • Provides a way to rank order suppliers in the order of the 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

The Candidate Evaluator 1. 05 Network Centric Systems Results

R 6 s with Suppliers Tools u Network Centric Systems DTC/CAIV— Design to Cost / Cost as An Independent Variable Set and achieve product cost goals. u PBS— Performance-Based Specifications Set specifications that clearly state what we need, not how to build it. u 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. u DFSS— Design for Six Sigma Analysis of uncertainty during the requirements definition and design process. u PSP— Part Selection Process Identify opportunities to lower commodity cost, improve part standardization, reduce part count, and identify problem suppliers and parts. u PFMEA — Process Failure Modes and Effects Analysis Improve process flow and identify high-risk process elements. u DOE — Design of Experiments u Lean — Lean Manufacturing Techniques Improve total production process from planning Optimize product designs or manufacturing processes by using experimentation that links variables to performance outputs. through shipping. Achieve consistent operational performance through improved product and information flow. u Blitz — Blitz Workshops Eliminate waste and non-value-added activities in manufacturing and administrative processes. u STAATS — Statistical Analysis and Acceptance Test Software Analyze supplier acceptance test data. Identify test reduction opportunities and parameters that drive yield.

Improvement Tools have Time Phased Benefits 30 X Network Centric Systems Early Involvement DTC PBS Payback DFSS DFMA DOE Transition Effort PSP PFMEA Lean /Kaizen Blitz/PI Production Effort Test reduction 5 X Concept Eval Dem-Val EMD LRIP Typical Program Life Cycle FRP

Linking Product Costs to Applicable Tools Step 1: Cost Components Product Cost Structure Labor Step 2: Cost Drivers Step 3: Applicable Tools Network Centric Systems Material Factory O/H GS&A Non-std processes Test rqmts Rework/repair Oversight 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 Purchase volume Future business outlook DFMA STAATS DOE Automation studies Lean PFMEA Process Improvement PBS DFMA PSP (std, comm) Volume pricing Sub-tier cost reduction Sub-tier source selection Leveraged buys Process Improvement Lean Standardized test sets Lean Consolidated buys Supplier partnering

Assessment Workshop Typical Agenda Day 1 Introductions R 6 s overview Tool detail Supplier introduction Part cost drivers Process tour Brainstorming Network Centric Systems Day 2 Continue brainstorming Prioritize ideas Conduct feasibility studies on ideas generated Debrief Rank opportunities Develop roadmap

Example of Baseline Results Candidate Projects Summary Implementation Cost $600 K Possible Savings $13, 000 K Payback 20 X Network Centric Systems

Preparation is the Secret to Success Process Steps: Step 1: Visualize Step 2: Commit Network Centric Systems Step 2: Define objectives together Supplier Commitment Supplier Collects Pre-work Data Package Step 3: Prioritize Review Data Package Step 4: Characterize Cost Breakout Overhead Labor Burden 10% 20% 10% Support 10% Material 50% Step 5: Improve Step 6: Achieve Identify Workshop Team Material Cost Drivers Electronics 20% Motors 30% Misc 5% Housing 15% Sensors 30%

The Supplier Workshop: The Keystone Process Steps: Step 1: Visualize Step 2: Commit Step 3: Prioritize - Supplier Workshop Assess design and process Learn tools to mitigate cost Identify cost drivers and tool opportunities Step 4: Characterize Step 5: Improve Step 6: Achieve Network Centric Systems Evaluate effect of tools Create action plan

IPDS: The Way We Do Business Defines the way we plan, capture and execute programs Network Centric Systems Provides an environment for continuous process improvement Raytheon Six Sigma. TM Provides “One Company” language and tools to enable program capture and successful execution Provides tools and processes that enable Integrated Product Teams to perform their tasks EVMS, IMP/IMS, CAIV Building a Process Culture - Requires Discipline!

Integrated Product Development System (IPDS) Gates Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Gate 10 Network Centric Systems Gate 11 Transition System Pre. Proposal Start-up Functional. Preliminary Critical Test/Ship. Production and Opportunity Win Proposal Review Strategy Readiness Review Design Readiness Closure • • • Tech Roadmaps • IR&D • Capital Investments • NBI • Strategic Sourcing • (linked to roadmaps) • • Early Supplier Involvement • • • Proposal Development Make vs. Buy Standard Parts Preferred Suppliers Risk Mitigation Material Program Plans Manufacturing Plans 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 • BD • Contracts • Engineering • Finance • Production • Program Management • Quality • Supply Chain Manageme + Customers + Strategic Suppliers

Example 1: Targeting Viewer Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Network Centric Systems Gate 10 Gate 11 System Preliminary Critical Test/Ship. Production. Transition Pre. Proposal Start-up Functional Opportunity Win and Proposal Review Strategy Readiness Review Design Readiness Closure Situation: Critical Component in US Vehicles • 45% of products fail in system or field • Expensive part, slow deliveries • Supplier unhappy with profitability Supplier Benefits: • Rework of specs and testing plan • Reduced process steps by 15% • Redesign to reduce matl cost Payback Ratio: 15: 1 Raytheon Benefits: • Decreased material shortages • Redesigns reduce handling damage and factory rework • Factory yields increased to >85% Payback Ratio: 16: 1

Example 2: Payload Delivery System Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Network Centric Systems Gate 9 Gate 10 Gate 11 Transition System Pre. Proposal Start-up Functional. Preliminary Critical Test/Ship. Production and Opportunity Win Proposal Review Strategy Readiness Review Design Readiness Closure JSOW Situation: • Prototypes produced • Need to cut cost and make more producible • New factory being designed Part Payload Dispenser Results: • Factory designed with Lean principles • Significant cycle time reductions

Example 3: Guided Projectile Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Network Centric Systems Gate 10 Gate 11 Transition System Pre. Proposal Start-up Functional. Preliminary Critical Test/Ship. Production and Opportunity Win Proposal Review Strategy Readiness Review Design Readiness Closure Situation: ERGM • Initial design completed • Need to reduce price by 50% • Aggressive structural requirements Results: • Redesign of major components • Decreased manufacturing complexity • Increased structural integrity ERGM: Precision guided projectile for Naval 5 -inch gun. Also applicable to U. S. Army and Marine Corps 155 mm artillery programs

Example 4: Guidance Component Gate 1 Gate 2 Gate 3 Gate 4 Gate 5 Gate 6 Gate 7 Gate 8 Gate 9 Gate 10 Network Centric Systems Gate 11 System Preliminary Critical Test/Ship. Production. Transition Pre. Proposal Start-up Functional Opportunity Win and Proposal Review Strategy Readiness Review Design Readiness 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: 1

The Right Engagement Yield Handsome Returns Network Centric Systems • ROI is total impact of the project, and is expressed in multiples of investment • Total impact includes gap closure, cost avoidance and cost savings

Success Factors • Carefully select company core competencies • Identify and manage critical supplier relationships • Select strategic suppliers for engagements Network Centric Systems – 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

Back-up • Supplier Relationships and Supplier Performance back-up materials Network Centric Systems

Success Factors Network Centric Systems • 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

Top Reasons for Failure Network Centric Systems • 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