Procurement and Supplier engagement in New Product Development Driving OMX early in the development cycle
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Fortive Professional Instrumentation Industrial Technologies Revenue $3.0B Revenue $3.2B Field Solutions* Product Realization* Sensing Technologies Transportation Technologies Automation & Specialty Franchise Distribution Strong brands, leading market positions in attractive industrial verticals All financial metrics based on 2015. *Advanced Instrumentation & Solutions
Fortive Portfolio Overview 2015 Revenue $6.2B By Business Professional Instrumentation 48% Industrial Technologies 52% By Geography 1 ROW 4% HGM 22% EU 16% NA 58% Growth Drivers Changing environmental regulations Energy efficiency, safety and security requirements Growing industrial base in high growth markets Global trend toward connected devices, software and digital service Business Characteristics Anticipate core revenue growth GDP/GDP+ Investment grade credit rating Strong capital allocation bias toward M&A Experienced leadership team and Board of Directors 1 NA is North America (55% in the U.S.), EU is Europe, HGM is High Growth Markets, ROW is Rest of World. Strong financials. Secular growth drivers. M&A bias. All financial metrics based on 2015 unless otherwise indicated. * Anticipated annual performance. 4
Background During the new product development process early supplier engagement impacts a number of considerations including: 80% of product costs are set during design (DARPA) Cost of change increases while opportunity decreases as we approach launch Sourcing risk (capability and continuity) requires a procurement professional to develop and execute a strategy Research shows early engagement improves New Product Development performance: Product cost reduction of nearly 18%. (Aberdeen 2006) 10% to 20% improvements in time-to-market cycles. (Aberdeen 2006) We will talk in detail how to engage suppliers and drive the following benefits: Increased quality through early engagement (producibility and DFM/DFA) Best cost at product launch (through familiarity of the application and leveraging supplier expertise) Reduce time to qualify parts (through a front end loaded part qual process) Avoiding requalification when we transition to production (de-risk) Lower risk of changing suppliers impacting schedule (confirming sources early in the process) Minimize risks by evaluating supplier qualifications before entering the design phase.(supplier selection and producibility)
NPD Sourcing Objectives It is the intent that by providing a framework for early engagement by procurement and suppliers in NPD projects that we can support two objectives: First that the new product development teams which drive organic growth in our businesses get the needed cross-functional support to launch products with the best possible cost structure and on time to plan. Second that the sourcing of components is done with a plan to minimize risk and ensure a supply chain capable of supporting the forecasted volumes and growth. best cost at launch + quality parts + longer term supply arrangements = predictable growth for all 6
Why is it needed? Earlier is better up front investment avoids costly changes in design and streamlines qualification.
NPD Toll Gate & Phase Overview Supplier engagement in this process proves the design and the process!
2015 process assessment Parameters: Early Supplier engagement in NPI projects Stage of Procurement involvement with NPI process Agreement Coverage - Development Agreement/Supply Agreement Preferred Supplier List / Program - Includes Supplier Technology Capability Technology Roadmaps - Opco technology needs/supplier Technology roadmaps Preferred Parts List Documented NPI Procurement Process / Checklist Component/ Part qualification process Procurement Staffing to support NPI NPI Scorecard, KPIs or other metrics 10 attributes assessed - deeper dive to uncover best practices underway 9
Procurement Phase Activities Phase 1: Feasibility Phase 2: Planning & Definition Phase 3: Design Phase 4: Qualification Phase 5: Pilot Phase 6: Transition (full production) Engage with key suppliers and enabling technology providers Define preliminary product costs Involve suppliers on concepts to optimiaze design and arrive at estimates for new parts Benchmark costs on similar products or parts when possible Define sourcing strategy at product level Understand products and parts effected by reduced volumes or phase out Engage key suppliers to codevelop product s and complete design reviews (focus: DFMfg, DFReliabiltiy, DFService) Ensure support for design spins (increased intensity when using SDR) Review component obsolescence risk on current and new parts Update product costs Execute sourcing plans Initiate Capital Requests for long lead items Initiate tooling maintenance plans Vendor and process qualification (PPAP if applicable) Finalize all sourcing agreements Finalize costed BOM at production volumes (loaded into ERP) Initiate remaining Capital Requests Initiate tooling records per opco policy Begin inventory burn and transitions Finalize spares, service, and support arrangements for purchase components Production quantities initiated and sustaining process in place Handoff to planning or buyers for production Variances to costed BOMs are reviewed to ensure negotiated pricing is reflected in receipts/invoices Sourcing plans closed Document lessons learned Initiate depreciation of capital per opco procedure Function specific standard work is needed to support the overall project plan 10
3 Key Improvements 1) Formalize sourcing plans Flexible but robust document template deployed to all opcos. This documents is the basis for the strategic and tactical discussions that take place within the project team. Initiating these early in the process (no later than stage 2) to avoiding designing into a corner Exposing risks that could impact the product launch sometimes simple parts have unintended consequences on the overall project plan Documents the linkage between the technology roadmap and open innovation discussions to the specific project charter. Short term: focus efforts on the current projects and document the plan, exposing any gaps that could impact launch (OTD and cost which ultimately may limit growth). Long term: create a process to better facilitate discussions around our product plans and the suppliers technology roadmaps. When enabling technologies are at stake greater focus is needed.
3 Key Improvements 2) Conduct producibility reviews with key suppliers Collaboration important to understand the fit of technology to the customer requirements, the process to the specification, and the supplier to the program. Reduces risk of change later in the game (see cost of change graph) We know our customer but you know your capabilities together we can capturing your input to improve DFM/DFA criteria. If we know the quality and cost drivers before design freeze we can make adjustments to optimize. Avoid costly re-verification/re-validation late in the cycle. Note: There is a strong tie between these reviews, product level design reviews, and the prototyping process -all are complementary in nature and can and should be conducted in a coordinated effort. Short term: it is never to late to dive deep on current project to expose manufacturing risks prior to launch that may jeopardize growth for all parties Long term: including these supplier reviews in the standard work create a forum for the ad hoc discussions held today ensuring follow-up and closure to benefit the predictability of launch (OTD and cost)
3 Key Improvements 3) Should-cost using knowledge-based engineering (KBE) tools 80% of product costs are driven by design decisions. We need to create a greater understanding of the elements where we can be flexible. Open dialogue between suppliers, engineers, and procurement creates greatest value for our end customer which will maximize our growth opportunity. Engaging key suppliers in this process will improve the accuracy and create a common baseline for discussions. Empowering the engineers with these KBE tools will reduce the churn of costing multiple design option while at the same time shortening cycle time. Couple this with SDR and the prototyping process to further mitigate risk and increase predictability. Short term: commodity phased development and rollout. Greatest impact on mechanical parts given the nature of the design tools available (solid modeling) Long term: product costing during the earlier design stages impacts launch plans and growth. These tools when deployed will provide an early look into the costs allowing customer pricing to optimize the overall growth.
Supplier Takeaway 1) Participation is needed during all phases of development: a) Up front by engaging in active discussions around the supplier s technology roadmap and our product plans to identify mutual growth opportunities b) Engage early in the project lifecycle (often prior to stage 2 for key enabling technologies) to reduce risks and increase certainty c) Deeper dive reviews to focus on maximizing value let s put the money where we know it will drive customers to buy and grow together 2) Support the prototyping process to reduce design risk and ensure a successful launch this is an opportunity to improve your process to produce 3) Support the development and deployment of KBE should-cost tools to maximize value and reduce waste. Supplier s enabling technology may be the breakthrough we need for extraordinary growth. Actively engage in our development process and we will grow together. 14