Value Creation through Operations Excellence

Value Creation through Operations Excellence Fredrick Spalcke, Philips, Executive Vice President & Chief Procurement Officer Dr.. Karel Eloot, McKinsey & Company Shanghai, Senior Partner Dr Tsinghua Leadership Course – Operations Module Beijing, November, 2015

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Contents

• Perspective on Operations in China • Operations excellence impact on corporate market value

• Philips excellence in procurement and supply chain

• Excellence in other operations areas • Operations transformation enablers: organization and capability

• Key takeaways

Manufacturing1 is today a pivotal part of China’s economy 2014 China GDP contribution by sector

Construction 11

2014 China employment distribution by sector

Agriculture

Construction

10 12

Agriculture 30

36

43

17

41 Service

Manufacturing1

Service

23 trillion RMB

1 Use industry GDP to represent manufacturing GDP, including traditional manufacturing and mining 2 Use 2008 employment employment portion to extrapolate the manufacturing employment employment in 2014

Manufacturing 130 million people

The strong growth of manufacturing in China has been driven by a unique combination of factors Low labor cost

2014 Labor salary $/hr

Robust supply base

Number of electronic component manufacturers

3,500

Advanced infrastructure

Capex/GDP index of ports %

100

Manufacturing & engineering capacity

High school and above educated Million

282

Huge domestic market

Passenger car sales in 2014 Million units

18

3.3

38.0 1.7

700

56

145

3

91

14

Industries in China are facing challenges in different dimensions Labor cost comparison among LCC (%) Rising costs

More complicated value chain More sophisticated customers’ requirement

100

52

20

No. of countries a leading Chinese Telecom OEM sells to 1

15

70

1995

2000

2005

140

Now

The quality of our panel is lower than Korean competitors and we can not meet high-end customers’ requirement Local panel OEM manager Steel demand vs. supply growth rate in China

More volatile demand

Demand Capacity

Given particular sensitivity to challenges in China, industries need to focus on the top ones of their archetype Pain points • Sophisticated requirement Automotive

High tech

No. of researchers and technicians per million people 4,584

852

• Complicated supply chain • Sophisticated requirement

% of products produced in China 59

50

70

White goods TV Textiles

68

Mobile Computer

• Rising costs • Complicated supply chain

Annual labor salary increase rate, 2010-2015 CARG %

• Complicated supply chain

China FMCG market breakdown

Regional processing

Metals

3,302

200 253 2010

• Rising costs • Volatile demand

3

13

318

552

2015F

-2

T1/T2, 80 cities T3/T4 ~840 cities

% of global capacity in China 45 Steel

70 44 23 Cement Alumina Copper

Contents




• Key takeaways

Operational levers are key drivers of company value

Operational levers

Income

Revenue

• Quality • Delivery reliability • Lead time • Flexibility • Product portfolio

Product cost & Expenses

• Effective sourcing • Design-to-cost • Labor productivity • Labor cost • Capital productivity • Effective use of IT

Operations excellence

Cost and expense Net working capital

Fixed assets

• Process stability • Lead times • Sourcing contracts • Space utilization • Capital productivity

Significant impact potential from operations improvement initiatives Improvement levers Total consolidated potential of 15 - 30% before adjustments for • Price-cost squeeze • Tax effects

Purchasing and supply management Supply chain management Manufacturing

Profit Product development Service operations Sales force effectiveness

MCKINSEY EXPERIENCE

Example pre-tax ROIC1 improvement, Percent

7 - 11 Actual distribution 2-3 of levers depending 5-7 on actual performance 5 - 10 levels, industry, and company 2-3 structure 5 - 14

EVA

Purchasing-capital expenditure items

Invested capital

Supply chain management/network configuration

2-5

Manufacturing inventory Manufacturing investment/ depreciation reductions

1 Partly overlapping potential

2-7

2-3

The key to success in the new environment is becoming efficiency-driven, instead of remaining growth-driven • DtC, DtV, DfX • Modular strategy • Engineering driven

• Labor productivity and Product development

product ideas • R&D excellence

Advanced Manufacturing

Ops Procure- Excellence Capital producment tivity

• "Make or buy“ • Supply and contracting

Supply chain

strategies • Supplier selection and development

• • • • •

Demand sensing and shaping Inventory strategies End-to-end planning, forecasting Logistics optimization “Supply chain 4.0”

• • • •

flexibility Ramp up/down capacities Process design flexibility Resource productivity Innovations / Industry 4.0

• Lean capex • Lean construction • Asset footprint • Asset flexibility Operations transformation and capability building

Contents • Perspective on Operations in China • Operations excellence impact on corporate market value

• Philips excellence in procurement and supply chain – Philips at a glance- Context – Connecting Procurement through processes – Connecting Procurement to Development and Supply Chain


• Key takeaways

Philips is well positioned for the future Mega Trends

• Growing and aging population with more chronic diseases

• Growing demand for integral value-based healthcare solutions

• Growth geographies with growing middle class • Rising health & well-being consciousness

• The world needs more light and energy efficient lighting – Digitalization driving demand for integrated lighting solutions

Our Business Domains e r a c h t l a e H

Imaging systems for diagnostics and therapy Patient care for hospital and home

r Clinical Informatics e l e y & consulting services m u t s s e n f i o L Personal health & well-being C appliances and services g n i t h g i L

Light sources Lighting applications, systems and services

Path to value capture Categories

Measures

• Overhead cost reduction program increased from EUR 1.1

Margin Impact 20161

>100 bps

billion to EUR 1.5 billion by 2015 Productivity

• EUR 1 billion through Design for Excellence (DfX) between

100-200 bps

2014-2016 contributing to gross margin expansion

• End2End productivity gains to be achieved by 2016 Additional Productivity Improvements Investments in productivity Investments in growth Contingency

• Incremental one-time restructuring costs, investments to

>100 bps 300-400 bps

- 50 bps

upgrade IT systems, and re-engineer end to end processes between 2014-2016

• Incremental investments in new (organic) growth in

- 100 bps

adjacencies with returns after 2016

• Contingencies to cater for moderate fluctuations in market

- 50 bps

growth and price erosion compared to our assumptions Net Improvement in 2016 Reported EBITA

1 Approximate margin impact in 2016 compared to 2013 baseline

100-200 bps

Philips is also focusing on operational excellence

Accelerate!

Customer centricity Resource to win End2End Culture Operating model

Philips Accelerate overview Customer focused

People, Assets, and Positions

Strategy, planning and performance management

Processes

Leveraging Industry benchmarks “unless” it truly adds value

e r u t c e t i h c r A IT e Systems n o b k c a B Informa-

tion and (master) data

Simple IT platforms enabling process capabilities across business models

End2End value proposition

Markets

End2End process capabilities End2End customer value chain

IT landscape

PLM

CRM

ERP

Master data domains

Simplified and underpinning all IT platforms

Philips process framework

Connecting procurement through processes

Product development

Procurement


Ops Excellence

Supply chain

Capital productivity

Philips Procurement’s Process House video

Philips Procurement’s Process House video

Most Procurement levers have been identified and promoted for a very long time

• Organizational Positioning

90s

• Global Commodity Management / Global Sourcing • Early Involvement and Early Supplier Involvement (ESI) • E-everything • Total Cost of Ownership • Supplier Quality Management and Development (i.e. Lean) • Make vs. Buy (e2e Value Chain design) • Risk mitigated Value Chains • Corporate Social Responsibility • Circular Economies

90s / 00s

Procurement orchestration of the E2E value chain through external & internal “suppliers”

R&D Technical Partners

Feature Trade-offs

ODMs & OEMs

Channel Partners

Competitive Value Proposition

Hard & Software Customer R&D Platforms Insight Strategies

Global 3rd Party Manufacturing

Suppliers

Procurement

Philips Value Chain1

Make vs. Buy

Manufacturing & Testing

3PL & 3PSCM

Service Alliances

Virtual Vertical Value Chains

Service Distribution & Warehousing & Returns

Customer

Note: A Philips best of best strategy is good for the customers and a great opportunity for suppliers 1 Example

Philips Procurement performance expectation communicated to the shareholders

• EUR 1 billion through Design for Excellence (DfX) between 2014-2016 contributing to gross margin expansion (CEO)

• There are many advanced ways for a Procurement function to drive value to the bottom line, but at the end all these activities must lead to tangible cost reductions and revenue increases through supplier innovation

Connecting Procurement to Marketing, Product development and Supply chain

Marketing • Customer insights • Product strategy • Product positioning • Customer value

Product development

Procurement


Ops Excellence

Supply chain


The Philips DfX process: the tools we use

The Philips DfX process: focus on early savings hypotheses

A• Set up project B• Clarify scope C• Formulate early savings hypotheses D• Generate savings ideas

E• Prioritize, select and allocate resources to ideas F• Report and track savings G• Train/Capability building

C1 “Should cost” analysis

Input for analysis

• Philips – Shop floor

observations – Machine rates – Depreciation – Wages • Market overview – Commodity prices (e.g., raw materials, utilities) – Industry standards (e.g., overheads, productivity) – Taxes and tariffs

Clean sheet cost breakdown

Ex-works Supply material chain cost cost

Application

Material

Landed Labor material cost cost Labor

Depreciation

Other

Manu- Profit facturing cost

Plant overhead

Manufacturing

• What should be the cost of products manufactured/assembled in that plant? • What would be the cost if outsourced?

Exworks product price

C1 Clean sheet

Material

Detailed levers Spend1 ($,M) 1a Negotiate payment terms and conditions 1b Make or buy 1c Consolidate spend 1d Negotiate price/introduce competition 1e Localized vs. Global

Labor

2a 2b 2c 3a 3b

Cost buckets

Levers

1

Total landed cost

Price

2

Volume

3

Efficiency (OLE)

4

Rate

4a Labor rate - regular 4b Labor rate- overheads (overtime, benefits)

5

OEE

5a Improve throughput

6

Plant/facility burden

6a Optimize plant layout 6b Improve energy consumption

Plant overheads

7

Inventory carrying-cost SG&A2

7a 7b

8

Transportation

8a 8b

9

Tax/duties

9a

Landed cost

Corp. allocation

Standardize SKUs/Substitute, materials Reduce excess material Reduce specification Optimize over time Reduce idle time

Improve demand planning 2 Reduce lead time Improve obsolescence Optimize transportation rates/unit 2 Optimize packaging Optimize foot print Optimize foot print

C2 Cost assumptions

Levers

Observations

1a

Negotiate payment terms and conditions with suppliers

• Payment terms matches industry best

1b

Optimize the make vs buy split for key components e.g., XX

• Internal XXX costs not tracking with the

1c

Reduce no. of suppliers in categories like metal parts, XXX by m oving to strategic suppliers

• 70% of spend is consolidated in 14

1d

Renegotiate rates with key suppliers using the “should -cost” clean sheet model on high spend components

• Average/median prices have decreased

2a

Reduce the number of SKUs on components such as frames, XXX by standardization

• Frames and packages are not

2a

Identify cheaper substitutes for high volume raw materials e.g., Aluminum

• Circular pre-cut Al sheets for XXXXX

2b

Eliminate excess material from products and packaging

• Thicker XXXX, packaging and driver

2c

Introduce “good enough” design and

• XXX are XXXX rather than painted

2013 Savings $, M

Annualized $, M

First impact

-

-

-

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

practice of XX days

market cost roadmap

suppliers and other 30% is distributed over ~ 300 suppliers

by <2% from 2011 to 2012 for top external suppliers

Materials

minimize over specification

standardized; over 2000 SKUs

instead of rolled stock

housing; Lengthier cables; XXXXpacks within boxes

C2 Cost assumptions

Levers

Labor

Plant OH

Landed cost

Observations

3a

Optimize overtime in specific cells by cross-training and load balancing

• High degree of throughput variabil-ity

3b

Reduce idle time in facility by optimizing no. of shifts, duration of shift

4a

2013 Savings $, M

Annualized $, M

First impact

XX

XX

XX

• Shift is not fully utilized

XX

XX

XX

Review labor rates in comparison with regional market rates

• Labor rates are in-line with statistics

XX

XX

XX

4b

Review labor OH rates and compare with industry benchmarks

• Labor OH is XX% of overall labor rate

XX

XX

XX

5a

Improve throughput by setting an optimal • Routing plans not in line with similar routing plan industry benchmarks

XX

XX

XX

6a

Optimize plant layout to reduce cell-tocell movement of material

• Sub-optimal cell-to-cell transfer

XX

XX

XX

6b

Reduce energy consumption by minimizing energy waste

• Underutilized parts of the facility e.g.,

XX

XX

XX

7a

Reduce inventory lead time

• Inventory days up from 20 to 50 days in

XX

XX

XX

7b

Improve time to obseletion by assessing write-offs

• Significant amount of old XX boards still

XX

XX

XX

8a

Optimize packaging to reduce shipping costs

• XX packaging has more inserts than

XX

XX

XX

8b

Optimize supplier locations for transportation cost

• Die casting produced in T aiwan,

XX

XX

XX

9a

Optimize supplier locations for duties

• Die casting produced in T aiwan,

XX

XX

XX

on certain cells e.g., painting

from the Bureau of Labor which is in-line with industry benchmarks

Inventory room/tooling shack heated the past year maintained in inventory competitors; Competitor had lesser packing material explore Mexico option explore Mexico option

C2 Cost assumptions summary

Cost buckets

Material for manuf.

(Percent)

($M)

• Supplier base can be

38

Materials (41%)

further consolidated • Low cost countries represent significant portion

XX 3

Freight

• Labor represents a

26

Wages & salaries Labor (41%)

significant portion of total cost (29%) due to intensive use of man power

XX 14

Overhead Utilities Plant overhead (18%)

Observations

4 10

Supplies & other Opex Depreciation Total

5 41

41

• Machines are largely

XX

18 100%

depreciated

• Total cost XXX($XXM) • Minus XXX ($XXM) 39%

XXX should be removed from TCO analysis and addressed in procurement levers

C3 Competitive teardown – localization Pure local supplier Degree of localization (supply base)

Covered by DfX Clean Sheet

MNC supplier in China

Covered by DfX localization

Local supplier + MNC in China

Potential opportunity through localization

MNC in China + Imported

Purely imported Module XYZ Slide

PCBA

• Supplier • Supplier

Casting

Cover

Rotor

Sheet metal

Cable

Power supply

Motor

• TBD

• TBD

• Supplier

• Supplier

• TBD

Competitor

• Supplier

Rack

• Supplier

• TBD


Holding

• Supplier

Competitor


Drives

• TBD

• TBD

• TBD

• Supplier

C3 Competitive teardown – example

C3 Competitive teardown – example

C4 Value engineering – example

Consumer Luminaire Disney Example A Redesigned user interaction

B Reduced redundancy XX% less material usage XX% part count reduction €XX packaging

cost savings

• Small, hidden

• Larger

display display • Complex 4-button • Button-only and knob UI interface • Access hampered Unencumber by adapter cable ed access

Red parts omitted in new design

!"##$% '()*+ ,-. – /0102*3+*+3 4(0 2"##$% 5()*+ *+ 4(0 1*3*4)$ )30

SC4.0 – example physical flow: Shopping cart and drones can be used to improve shelf availability and improve efficiency in cycle counting Camera at shopping cart scans shelves on customers tour

A camera mounted on a drone is scanning the products / pallets

Video streaming the bar codes on the stored goods … … directly to central analysis and calculation, giving …

Branch manager receives information about out of shelf and visited aisles

… an instant basis for decisions!

Improvements

▪ Shelf availability increases ▪ Wrong placed products/broken package can be detected immediately ▪ Information on which aisles are visited – leveraged to improve planogram

Companies have an opportunity to change the way they do purchasing and supplier mgt. by digitizing the end-to-end BUYER process E2E eBUYER PROCESS

Build

Setup for cross- functional impact

Understand

Yield

Analyze demand and supply market dynamics

Develop and align on category/ sourcing strategy

Execute

Implement strategy internally and externally

Review

Manage category and supplier performance

Message or topic title

eBUYER

Contents



• Excellence in other operations areas – Advanced manufacturing – Capital productivity

• Operations transformation enablers: organization and capability

• Key takeaways

Advanced manufacturing: the answer for our volatile world 1 Advanced lean

implementation

2 Resource

Productivity

Product development

Procurement


Ops Excellence

Supply chain


3 Industry 4.0

ADVANCED LEAN IMPLEMENTATION

1 Advanced lean implementation: in our volatile world, advanced lean focuses even more strongly on inflexibility and variability reduction Basic lean implementation

Advanced lean implementation

Waste

Inflexibility

Waste

Variability

Inflexibility

Variability

Traditional demand forecasts

Scenario demand forecasts

d n a m e D

d n a m e D

Time

Balance tradeoffs rather than just focus on visible waste

Use more sophisticated tools (e.g., scenariobased forecasting) Time


1 The need to increase flexibility in operations in light of possible slow down are top COO and CXO concerns “What are the top uncertainties your company is concerned about?”

Percent of respondents who selected uncertainty in top 3 Broader economic slowdown

63

Commodity price volatility

37

Demand shift creating volume drops

33

Economic turmoil in specific regions

33

Demand shift creating volume spikes

30

New competitor/competition

22

Supplier breakdown or quality issue

19

Supplier insolvency

15

Exchange rate risk

15

Natural disaster

11

Labor strike Plant equipment breakdown

7 4

Most are concerned about a broader economic slowdown Other uncertainties are more industry and company specific Carlos Ghosn – "leaders need to be ready to cope with far more externallyimposed crises …"


1 Flexibility and ability to act through cycles

Preempt • How can labor cost be made more flexible? • How manage WIP to optimize capital?

Detect • What leading indicators should be followed? • What systems and processes needed o generate real-time visibility?

Improve productivity and cost structure • Application of lean principles, reduction of waste

Respond • What skills do managers/employees need to rapidly ramp up?

Improve cost flexibility • Scale fixed and variable cost base with demand • Improve ability to weather

Demand

Organizational capability

Capacity

P&L impact

Capture advantage from quick recovery • What degree of flexibility / excess capacity required in plants?

Increase volume flexiblity • Technical/organizational ability of an operating system to meet demand swings


1 For manufacturing companies we typically estimate the maximum flexibility from five high-level categories Lever description

• Fixed and variable cost reduction (>30%) Cost reduction

Fixed cost to variable Flexibility of variable cost

– Personnel and contractors – Indirect purchasing – Energy (efficiency), yield

• Outsourcing with flexible contracts (production functions, production functions) • Work force flexibilization

• Commercial contract restructuring (raw materials, end customer pricing) • Labor contracts flexibility

• Flexibility in operating model (modularity, Production setup flexibility

ramp-up/ramp-down capability, foot-print optimization) • Capital optimization and location of inventory

• Capability building on scenarios and Organization responsiveness

responses, statistical demand forecasting • Scenario planning, trigger points and actions/measures

1 Likely negative impact in maximum utilization scenario

Max impact at low utilization Savings; Percent ~15-30

~15-20

~5-201

~5-10

N/A

RESOURCE PRODUCTIVITY

2 Resource Productive Operations: Energy efficiency requires focus on the technical system, management infrastructure and mindsets Best practices for energy efficiency

Technical limit and standardization approaches

Energy KPIs on leadership’s agenda and cross-functional energy efficiency work

Typical pitfalls in China

Typical opportunities Energy efficiency example

• Rely on technical investment

• Lack of measurement of energy consumption

• Energy consumption savings can reduce hot strip mill energy cost by 15~20%

• Main levers – Technical limit analysis – Energy bridge – Cost curve

Understand and focus on energy cost

• “No risk” mindset drives reluctance to improve

– Parameter control


2 Benchmark with “nature”, not just competitors: Theoretical Limit to understand “how far can I go?” and accelerate improvement Theoretical limit

Performance level

Target state within 24 months and payback < 2 years State after bottomup design future state (incremental approach)

Current state Time


2 Theoretical limit is the minimum amount of energy required theoretically for a system to function Energy consumption per year Can be overcome by changes in operations as they usually come from operating at out-of-spec conditions

50%

Can be partly overcome by capital expenditure but is subject to diminishing returns

Actual Operational Design limit consumption losses

Design losses

Theoretical limit

50%

INNOVATION/INDUSTRY 4.0

3 Industry 4.0 disrupts the industrial value chain and requires companies to rethink their way of doing business • Eliminating inefficiencies across the “digital thread” (i.e., better use of information not

captured/made available/used today) • Achieving an end-to-end digital integration of operations (e.g. raw material to consumer)

• Data, computational power, and connectivity e.g., LPWA1 networks • Analytics and intelligence e.g., big data • Human machine inter-action e.g., augmented reality • Digital-to-physical conversion e.g., 3-D printing

• Build digital

Disruptive technologies

Reach next level of operational effectiveness Adapt business models

• Transform into a digital company

• • •

1 Low-power, wide-area

capabilities Enable collaboration in the ecosystem e.g., definition of standards, building strategic partnership Manage data as a valuable asset Implement 2-speed systems/data architecture Manage cyber security

Four new trends: As-a-service business models, platforms, intellectual-propertyrights-based models, and data-driven business models.

Text


3 Industry 4.0 – disruptive technologies that will change the manufacturing sector from today until 2025 Data, computational power & connectivity

Analytics and intelligence

Human machine interaction

Big data/open data

Digitization and automation of knowledge work

Touch interfaces and next-level GUIs

Additive manufacturing (i.e., 3D Printing)

Quick proliferation via consumer devices

Expanding range of materials, declining prices, increased quality

Significantly reduced costs of computation, storage, and sensors

Internet of things/M2M Reduced cost of small- scale hardware and connectivity (e.g., through LPWA networks)

Cloud technology Centralization of data and virtualization of storage

Breakthrough advances in artificial intelligence and machine learning

Advanced analytics Improved algorithms and largely improved availability of data

Virtual and augmented reality Breakthrough of optical head-mounted displays (e.g., Google Glass)

Conversion to physical world

Advanced robotics (e.g., human-robot collaboration) Advances in AI, machine vision, M2M communication as well as cheaper actuators

Energy storage and harvesting Increasingly cost effective options for storing energy and harvesting energy


3 New forms of human machine interaction can further optimize production processes Augmented reality

Exoskeletons

Gesture recognition

Ubimax apps on Google Glass

Festo ExoHand

Microsoft Kinect

• Exoskeleton emulating

• Input device for Windows

Description • Applications on Google Glass showing locationbased instructions to workers (e.g., directions where to go, how to complete a task)

physiology of human hand • Can support straining manual movements (worn as glove) and transmit human hand movements to robot hand

PCs enabling gesture, facial, and voice recognition

• More efficient warehouse/ • Acceleration of processes • Documentation of Possible assembly/service processes that require straining manual component quality flaws Industry 4.0 work by enabling workers to through pointing at an onapplication • Virtual training of workers • Remote assistance with do them faster and more screen 3D representation plant maintenance often • Enabling of remote handling of dangerous goods


3 Based on advances in technology, robots are gaining performance while getting cheaper Robots are gaining performance while getting cheaper …

… which is driven by significant advancement in technologies

Index of average industrial robot price relative to labor compensation, Percent

3D camera technology

• Advancement in 3D vision systems

Processing & computing technologies

• Progress on programming

105 100 95 90 85 80 75 70 65 60

-5% p.a.

methods for industrial robots, e.g., using augmented reality

• Enables e.g. real-time selflocalization on shop floor Advancement in actuators

55 50 0 2000

enable better object detection • Low-cost consumer-grade 3D imaging systems enable relatively inexpensive robots • Self-localization enables that robots move autonomously on shop floor

2002

2004

2006

2008

2010

2012

• Piezoelectric actuator can be used for handling and grasping of miniature parts • Series elastic actuators can help robots detect and control the force of its movements, and avoid any accident with human “co workers”


3 Eliminating digital inefficiencies along digital thread could unlock potential along 8 different value drivers

6

1st prototype showed serious flaws in test, team is waiting for next one, is too slow

Product finally has more features than the customer is willing to pay for

Supply/demand match

7

Worker spends time documenting process

1

Labor effectiveness Machine is down due to incident - Information was not captured/used to predict maintenance need

Time to market

3

Asset utilization Machine is serviced although condition was still perfect

8 4

Unclear inventory level led to an increased safety stock

Inventories Scrap produced due to wrong specifications of machine

5

Quality

Piece is waiting to pass through process station although it doesn't require processing at this station

2

Resource/process effectiveness

Service/aftersales


3 We have identified a number of use cases that illustrate how impact can be created in 8 value drivers

1

remote 8 Secomea’s access technology

Knapp uses augmented reality glasses to increase warehouse worker effectiveness

facilitates service and predictive maintenance

Motors 7 Local leverages 3D

Service/ after-sales

printing, crowdsourcing, and micro-factories

player 6 Automotive uses Big Data analytics to adapt offerings to customer needs

5

Toyota uses Advanced Analytics to decrease quality issues in production

Labor effectiveness

Resource /process effectiveness

Time to market

Automotive player

2

Supply/ demand match

Bosch uses RFID technology to establish autonomous transport systems

3

Asset utilization

Quality Inventories

4

Condition-based maintenance at BMW and GE leads to fewer breakdowns

Würth developed "intelligent" storage boxes to improve inventory management

Contents



• Excellence in other operations areas – Advanced manufacturing – Capital productivity

• Operations transformation enablers: organization and capability

• Key takeaways


Product development

Procurement


Ops Excellence

Supply chain


CAPITAL PRODUCTIVITY

Capital Productivity: Improving capex efficiency requires strict execution across the entire capex value chain Best practices for capex efficiency

Typical pitfalls in China

• Allocation of capital based on Portfolio optimization

limited experience

• Lack of scientific risk evaluation • Focus on key process design, ignoring supporting system

• Not considering improvement Lean design

Lean design example

• -15% capex reduction while maintaining same level of capacity and quality

• Main levers – Search for each component of

suppliers’ cost base

• Lack of transparency

– Optimize space requirements

contractors too lax

• Lack of understanding of

and cross-functional project management Project management

Typical opportunities

the project for the lowest cost solution that just solves the business problem: Minimum Technical Solution – Fully leverage China supplier chain

opportunities on specs

• Performance management of Procurement and contracting

Typical improvement opportunities

• Construction and ramp-up not closely integrated

– Avoid overcapacity – Reduce initial spare parts

needs – Set high utilization targets


Icon provides a solution for performance management in construction, filling gap in current IT solutions landscape Key construction management functionalities Scheduling

Performance Management

Materials management

Executives

Users Project management

Frontline

Doc mgmt/ Info sharing

3D model interface

N/a

N/a

N/a


Icon improves site productivity by reducing not productive time Do these sound like familiar experiences to you?

Icon’s value added

▪ Site activities are not prepared before

▪ Each frontline manager is notified

planned start date (e.g. drawings not ready, resources not available)

to remove roadblocks before activity start

▪ Site activities are not cross coordinated because disconnected from the masterplan

▪ Root causes for delays are not captured and discussed

▪ Information from the field (e.g. actual progress, forecast) are captured on a daily basis and synchronized with masterplan

▪ Reasons for delays are systematically collected from each site activity on a daily basis and consolidated into Key Indicators1

▪ Productivity targets are not based on

▪ Productivity data are stored and

benchmarks and not cascaded to the frontline

available for benchmarks. Frontline managers have clear target on a daily basis

▪ Individuals are not accountable for improvement actions (e.g. remove roadblocks, improve performances) 1 Connection between Icon’s modules provided as service

▪ Actions are deployed to each responsible and monitored Vs target completion date

Contents




• Key takeaways

Only relying on technical changes is risky; 70% of transformations fail often due to people issues Success rate of transformation %, n = 2,261

… mainly because organizational in the way

health

gets

Percent 70% of change programs fail…

30%

Percent of efforts failing to70% achieve target impact

Other obstacles

14

Inadequate resources or budget

14

Management behavior does not support change

33 Organizational Health factors

Employee resistance to change

39

The big idea: organizations need to manage performance and health with equal rigor Performance

Health

Performance outcomes • How well you are doing, e.g., – Revenue – Profit – Safety performance

Organizational outcomes • How healthy you are, e.g., – Accountability – Culture and climate – Coordination and control

Business processes • What you do to drive performance, e.g., – Business reporting – Strategic planning – Maintenance planning

Management practices • What you do to improve your health, e.g., – Role clarity – Shared vision – Rewards and recognition

Organizational structure • Roles and responsibilities • Talent • Resource allocation

Four core concepts need to be implemented in operations capability building Design concept of CCOE program From …

CEO Perspective

• Short-term solutions

Three• Emphasis on pronged technical details approach only

Change management

• Seeing lean operations as a static process

• Limited to traditional Integrated operation

lean, without considering integrated concepts

To …

• Integrating operational transformation into the overall strategy

• Integrating operating system, management infrastructure and mindset and behaviors

• Seeing transformation as a dynamic process and emphasizing change leadership

• Links between lean, energy consumption and other operational functions, into an integrated system

Operations excellence requires balanced action across 3 dimensions

Operating System

Management Infrastructure

Mindsets & Behaviors

Operating System

Mission

Tools and approaches to achieve a step change in operational performance

Achieve major improvements in productivity, overall Objectives equipment effectiveness, ontime delivery and inventory

Management Infrastructure Performance management and organization to support the operating system and enable continuous improvement Ensure sustainability of step change results and achieve further incremental continuous productivity improvements

Mindsets and Capabilities Ownership and skill for the lean transformation on all levels of the organization

Ensure sustainability of step change results and achieve further incremental continuous productivity improvements

Experiential learning is the preferred approach for adult capability building

JUST-IN-TIME EXAMPLE Focus in the following

Recall rate of simple learning content1 Learning by

Hearing (explanation) Seeing (example)

Recall rate after 3 months in %

10

32

Doing (experience)

65

I hear and I forget, I see and I remember, I do and I understand. 1 Numbers determined in concrete example by teaching small, simple chunks of information to 3 groups

!"#$%&'%(

Experiential learning uses a blended learning approach Delivery

Examples

Why it matters

Forum

• Academy

• Free-risk environment

– Theoretical content and practical

exercises to teach a single skill

• Boot camp – Immersion classroom with fieldwork

Field

• On-the-job – Immediate application in ‘real-world’

• Exchange learning – In-the-field knowledge sharing

Feedback

– Feedback based on job performance

to practice the skills and build understanding • Peer interaction reinforces behavior and makes it sustainable

• To apply skills – adults need 22 consistent applications of a new skill before it becomes automatic

• Gives the individual practical suggestions to improve the learning and act on it

Refresh your memory: Philips Procurement

We completed building our Capability Building Process Key milestones

Reasoning

Target Q3 2013

We defined our team..

2

Standardized our roles..

We standardized our Roles & Responsibilities across procurement, in 25 Job Families, in later phase to 21 Job Families

3

Competency Profiles

We defined which competencies for success we need to develop in each of our roles

Q4 2013

Q1 2014

We know who is part of our current Procurement community

1

Brand new Top Team

Scientifically validated & Externally benchmarked Q2-4 2014

4

Capability Assessment

Q3-4 2014

We are assessing all of our team members against these competencies, developing Individual, tailored, learning journey’s for individual accelerated growth

We created learning guides per job family 5

Job Rotation

Resource to Win – through Development 10%

through formal learning

20%

through others

70%

on the job

Procurement Job Family Structure: 5 Sub-functions, 21 Job

Families and 87 Jobs 5 SubFunctions

Procurement Engineering (PE)

Commodity Management (CM)

Market Procurement (MP)

Governance

Support

21 Job Families

PE Business Partners

CM Managers

MP Managers

Contracting & Nego Excellence

Analysts

87 Jobs

1 SSC = Procurement Shared Service Center

We have completed our competency profiles, knowing per job family which competencies lead to success

Capability Development Priority & Insights: Growing the capabilities which matter to each individual’s success Indicates your manager has identified these competencies as the top two most critically important capabilities to be successful your role

Two strength and development areas will be indicated based upon your overall score per competency and the importance of the competency as selected by your manager. Strength areas, e.g.: • Timely Decision Making • Conflict Management

Functional competencies Manager

Dealing with Ambiguity Interpersonal

Development areas, e.g.: • Intellectual Horsepower • Building Effective Teams

Self

Matrix Manager

Business Acumen

Building Effective Teams

Priority Setting

Motivating Others

Conflict Management

Timely Decision Making

Intellectual Horsepower

We create Oxygen for the Procurement organization to succeed through strong talents everywhere

Business drivers

Oxygen Cycle

• Reinforcing result oriented culture • Bring in stronger Procurement specialist capabilities into the function, in all of our Job Families

• Repositioning people inside or outside of Philips, and by bringing in new talents;

• Based on our Capability Analysis and Performance Stacked Ranking programs • Reductions are performance based, mostly not through transformation

45(30+ 650.7'%8+

!"#"$%&%'( *+"&(,%,

!

Line Manager & HRBP review

!

-'"./01 2"+/%+3

Management Team collective & calibrated ranking

Self & Manager Assessment

Stacked Ranking outcome: 20% A-players, ~70% B-players and ~10% lower performers

257 (20%) A-players

876 (68%) B-players

162 (12%) C-players

Grade 55 and below: Grade 60 – 70: A: 31 (9%)

B: 262 (75%)

C: 56 (16%)

A: 152 (21%)

B: 473 (66%)

Grade 80 and up: C: 87 (13%)

A: 68 (34%)

B: 111 (56%)

C: 19 (10%)

Contents

• Perspective on Operations Operations in China • Operations excellence impact on corporate market value



• Key takeaways

Key takeaways (1/2)

• China’s economy is at a turning point – operations excellence is key to address rising cost, increasing consumer expectations and demand volatility

• Operations is a major lever to deliver value to companies across industries – both to increase profitability and to enable growth • Operations excellence comprises two dimensions – an advantageous strategic footprint and superior execution excellence (applying “classical” and “digital” tools) • Superior execution is the backbone of excellent operations – requiring a strong operating system, a rigorous management system, and strong mindsets & capabilities embedded in the organization • Experiential learning is the preferred approach for adult capability building allowing to make improvements sustainable and scalable

Key takeaways (2/2) Several levers can be pulled to capture the full value of operations: • Procurement integrates into the end-to-end value chain of external and internal “suppliers”, using DfX, TCO, value engineering, competitive tear down, clean sheets, etc. cross-functionally with Marketing and R&D • Excellence in the supply chain requires collaborative end-toend planning, supply chain segmentation, moving the global footprint closer to customers, and digital tools • Increasing volatility (e.g. market demand, disasters, currency fluctuations) requires agile operations, advanced lean (focusing strongly on inflexibility and variability reduction), and Industry 4.0 tools as major strategic levers • Resource Productivity Operations use Energy efficiency and Value-in-Use concepts to maximize the output per unit energy and material input • Achieving high Capital Productivity requires full leverage of the China supplier landscape, optimized and lean space/spec requirements, as well as rigorous performance management

The key to success in the new environment is becoming efficiency-driven, through application of operations excellence tools discussed today • DtC, DtV, DfX • Modular strategy • Engineering driven

• Labor productivity and Product development

product ideas • R&D excellence


Ops Procure- Excellence Capital producment tivity

• "Make or buy“ • Supply and contracting

Supply chain

strategies • Supplier selection and development

• • • • •

Demand sensing and shaping Inventory strategies End-to-end planning, forecasting Logistics optimization “Supply chain 4.0”

• • • •

flexibility Ramp up/down capacities Process design flexibility Resource productivity Innovations / Industry 4.0

• Lean capex • Lean construction • Asset footprint • Asset flexibility Operations transformation and capability building

Value Creation through Operations Excellence

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