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Global sourcingGlobal sourcing

St BlSteve BlancoVP, Operational ExcellenceElectrical Group

© 2008 Eaton Corporation. All rights reserved.

Electrical Group

Who is Eaton? 2008 Sales- $15.4 Billion

Eaton is a power management company helping customers to utilize electrical, hydraulic and mechanical power more

f l ff ti l d ffi i tlsafely, effectively and efficiently.By DestinationBy Segment

Auto12%

Truck15%

Aerospace12%

Hydraulic16%

Electrical45%

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Global Sourcing ---Agendag g

• Supply chain priority• Considerations in sourcing globally

• Strategy alignment• Commodity analysis• Total landed cost• Risks

• Savings approach• Examples

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Supply Chain priority-pp y p y• In the past 5- 10 years… companies have accelerated

Global Sourcing…. LCC…BCC…g• Companies established global sourcing goals to take

advantage of the expected 15-30% savings from sourcing in “best cost countries”sourcing in best cost countries

• For Eaton….. 2002 8%2007 > 30%

Over $1 5 Billion per year4 4

Over $1.5 Billion per year

Results of best cost country sourcingResults– big savings with some projects, unexpected challenges for

others….

y g

• Inconsistent Quality

Why the challenges?

• Inconsistent Quality • Demand Variation • Obsolete Inventory:Obsolete Inventory:

• Long pipelines of defective material when an issue is found

• Design changes• Added “hidden” costs of the global sourcing

C lt l i i ti5 5

• Cultural miscommunications

Sourcing Considerationsg

Eaton’s approach… pp

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Sourcing Considerations- Strategy Alignmentg gy gAligning Strategies – Making the “Right” Sourcing Decision

BusinessStrategy

Product StrategyProduct Strategy

Manufacturing Strategy

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Sourcing Considerations- Commodity Analysis• Natural currency

hedge• Minimize language,

• “Best in the World” Quality, Productivity

• Minimize total landed

g y y

Minimize language, cultural issuescost

• Benefit from low labor costs

• Minimize total landed

High

sity GlobalGlobalGlobal

BCCBCCBCCRegionalRegionalRegional

BCCBCCBCCManual Assembly

M l S b A bl • Minimize total landed cost

Inte

ns BCCBCCBCC BCCBCCBCCManual Sub-Assembly

• Commodities should be sourced regionally

• Source technically demanding parts from C t f E llab

or I CenterCenterCenter

of of of RegionalRegionalRegionalSupplySupplySupply

Precision Machining

Cold FormingCenters of Excellence

Low

La ExcellenceExcellenceExcellenceIP/ Specialized

SupplySupplySupply

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Low High

Logistics Cost

Sourcing Considerations- Total Landed Cost

Piece price and tooling

F i ht/ T t tiFreight/ Transportation•Duty and tariff•Inventory carrying costs

Exposure costs•Cost of poor quality, containment actions•Product changesExpedited freight•Expedited freight

Communication / support

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pp•Supplier maintenance/ relationships•Phone, travel, etc…

Sourcing Considerations - Risksg

E i i k

Such as…

Economic risks

Natural Disasters

Energy costs

Natural Disasters

Energy costs

Raw material availability

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The Approach- Evaluating the savingspp g g

Cost savings hurdle rateId tif i “h dl t ” b d b i• Identify a savings “hurdle rate” based on business requirements.

• Typical hurdle rates for Fortune 500 company exceed yp p y20-25% ROI

• After all costs are included, is the project attractive at X% i ?savings?

• Alternative investment factor must be inclusive of cost savings assessmentsavings assessment• What other options are available?• Each sourcing decision will carry it’s own “hurdle rates” on case-

by-case basis

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by-case basis

The Approach-BCC Cost Savings Formula (Example %)g ( p )

Total Cost Saving = CP-(BPC+F+DT+CQ+CC+AC+RF) CP =Current Price CPBPC =BCC Piece Cost -BPC F =Freight + 5% All #’F Freight 5%DT =Duties/Tariffs + 5%CQ =Cost of Quality + 2%CC =Carrying Cost + 1%

All #’s are guidelines and need to be determined on a

bCC =Carrying Cost + 1%AC =Administrative Cost + 1%RF =Risk Factor + 5%

case-by-case basis

=Total Cost Savings

If Total Cost Savings % > Hurdle Rate %

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Then Project is a “Go”

Examples of applying the approach…p pp y g pp

EXAMPLESEXAMPLES

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BCC Cost Savings Formula (Example #1)g ( p )

Piece CostDomestic Supplier Cost $5 25

Total CostDomestic Supplier Cost $5 25Domestic Supplier Cost $5.25

BCC Supplier Cost 3.10 Cost Savings $2.15Initial Cost Savings % 41%

Domestic Supplier Cost $5.25 BCC Supplier Cost 3.10

Cost Savings $2.15Premium Additions

-Freight (5%) 0.16

Old model would indicate project is a “Go”

Freight (5%) 0.16-Duties(5%) 0.16-Cost of Quality (2%) 0.06-Carrying Cost (1%) 0.03-Admin. Cost (1%) 0.03( )-Risk Factor (5%) 0.16Total BCC Cost Premium $0.60

Net BCC Cost Savings $1.55Cost Savings % 30%Opportunity Cost Hurdle Rate 15%

This new model would also indicate a “Go” as the cost savings of 30% has exceeded the

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as the cost savings of 30% has exceeded the 15% hurdle rate set for this project / commodity.

BCC Cost Savings Formula (Example #2)g ( p )

Piece CostDomestic Supplier Cost $5 25

Total Cost Domestic Supplier Cost $5 25Domestic Supplier Cost $5.25

BCC Supplier Cost 4.10 Cost Savings $1.15Initial Cost Savings % 22%

Domestic Supplier Cost $5.25 BCC Supplier Cost 4.10

Cost Savings $1.15Premium Additions

-Freight (5%) 0.21t a Cost Sa gs % %

Old model would indicate project is a “Go”

Freight (5%) 0.21-Duties(5%) 0.21-Cost of Quality (2%) 0.08-Carrying Cost (1%) 0.04-Admin. Cost (1%) 0.04( )-Risk Factor (5%) 0.21

Total BCC Cost Premium $0.79Net BCC Cost Savings $0.36Cost Savings % 7%Opportunity Cost Hurdle Rate 15%

This new model would indicate a “No-Go” as the cost savings of 7% does not exceed the

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as the cost savings of 7% does not exceed the 15% hurdle rate required for this project / commodity.

Summaryy• Support your Supply Chain priorities by maximizing the

value of global sourcing…value of global sourcing… • Strategy Alignment• Commodity Analysis• Total costs• Risks

• Conditions change have an approach flexible enough to• Conditions change- have an approach flexible enough to account for new horizon issues.

• Effective sourcing considerations can enable anEffective sourcing considerations can enable an organization to fully understand the true impact of their decisions.

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