Pathways To Excellence :

1. Pathways To Excellence: Current & Future Trends in Six Sigma, Lean, Productivity & Process Excellence Prepared for the Quality & Performance Forum Presented by Chris Bogan - President & Chief Executive Officer

2. A T C G T C A G 98% of genes of Chimpanzees and humans are similar. 100% of Chris Bogan’s genes resemble those of Elvis & other human beings 80% of genes of mice and humans are similar. Evolution of Excellence In life and business, small variations create enormous performance & outcome differences. “If we consider the genomes to be the book of life . . . they can be divided into 350 chapters. Each species has the same chapters, but they are organized in a different order.” – Eric Lander, Director of Whitehead Institute / MIT Center for Genome Research

3. Management Trends: Quality leaders must assess which management tools and approaches will lead to high performance. Then they must fit the right tools to the right situations for their company’s lifecycle and competitive landscape.

4. INCREASE SHAREHOLDER VALUE Increase Value Through Free Cash Flow Warren Buffet presents this view of how to create value. Value is created by enhancing free cash flow. Effective productivity efforts help managers improve the operational drivers of free cash flow. INCREASE REVENUE INCREASE LONG TERM FREE CASH FLOWS IMPROVE OPERATING MARGIN REDUCE CAPITAL EXPENDITURES REDUCE WORKING CAPITAL INVESTMENT LOWER TAX RATE REDUCE COST OF CAPITAL DURATION OF CASH FLOWS

5. Benchmarking: Top Management Tools Mission Statements (83%) Customer Satisfaction(86%) TQM(72%) Competitor Profiling(71%) Benchmarking (70%) Pay-for-Performance(70%) Reengineering(67%) Strategic Alliances(62%) Cycle Time Reduction(55%) Self-directed Teams(55%) Bain & Company’s Management Tools global survey creates a “crystal ball” into the rise and fall of key management trends and their corresponding tools. 1993 1996 2000 2004 • Strategic Planning (79%) • CRM (75%) • Benchmarking(73%) • Outsourcing (73%) • Customer Segmentation(72%) • Mission Statements(72%) • Core Competencies(65%) • Strategic Alliances(63%) • Growth Strategies(62%) • Process Reengineering/TQM61% / (61%) • Six Sigma (34%) • Strategic Planning (83%) • Mission Statements(86%) • Benchmarking(79%) • Customer Satisfaction (79%) • Core Competencies(69%) • TQM(66%) • Reengineering(65%) • Pay for Performance(63%) • Strategic Alliances(61%) • Growth Strategies(55%) • Strategic Planning (76%) • Mission Statements(70%) • Benchmarking(69%) • Outsourcing (69%) • Customer Satisfaction(60%) • Growth Strategies(55%) • Strategic Alliances(53%) • Pay for Performance(52%) • Cycle Time Reduction(55%) • Self-directed Teams(55%) • Process Reengineering/TQM38% / 41%) Source: Bain & Co. – 2005 Mgt. Tools Survey

6. Telecommunications Pharmaceuticals Financial Services Increasing Use Customer Retention Growth Strategy Cost Reduction Industry Segments Prioritize Opportunity Differently Industry-specific competitive dynamics greatly influence perception of what project types produce greatest value in a given economic period. During project design, wise benchmarkers examine competitors and other industries which have already addressed your priority issues. Three Sample Economic Sectors Rank Priorities Differently What types of benchmarking projects did you pursue last year? N = 30 companies participating in study

7. Productivity Approach: Six Sigma More than 90% of respondents report that six sigma is either useful or best suited to reducing costs and cycle time. Only 15% of respondents view it as best suited to HR improvements. What have been your experiences with six sigma? What have been its strengths and weaknesses? How can it be improved? BEST SUITED TOOL USEFUL TOOL 96% Cost Reduction 68% 28% 93% Cycle Time Reduction 55% 38% Supply Chain Improvements 38% 51% Finance Improvements 33% 53% New Product Improvements 43% 39% HR Improvements 15% 63% Sales Improvements 18% 51% Marketing Improvements 18% 48% 0% 20% 40% 60% 80% 100% N = 84 % of companies

8. Productivity Approach: Reengineering Reengineering receives the fewest votes compared to other productivity approaches as a “best suited” approach across improvements goals. However, close to half of the benchmark class consistently view reengineering as “useful” across goals. As with all other approaches, reengineering is seen as least useful to marketing, sales and human resources. How is reengineering best implemented? BEST SUITED TOOL USEFUL TOOL 31% 47% Cost Reduction 29% 48% Cycle Time Reduction Supply Chain Improvements 21% 53% Finance Improvements 33% 38% New Product Improvements 25% 41% 17% 48% HR Improvements Sales Improvements 16% 45% Marketing Improvements 15% 40% 0% 20% 40% 60% 80% 100% N = 84 % of companies

9. Productivity Approach: Lean Sigma Lean sigma is viewed as well-suited to all goals. Well over half the benchmark class considers it best suited for cost and cycle reduction and supply chain. Over a quarter consider it best suited to improving sales, new products and financial processes. What has been your experience/knowledge of lean sigma? How different is it from lean or six sigma approaches? USEFUL TOOL BEST SUITED TOOL Cycle Time Reduction 71% 17% 67% 21% Cost Reduction 55% 32% Supply Chain Improvements 32% 46% Finance Improvements 36% 39% New Product Improvements 22% 47% HR Improvements 25% 40% Sales Improvements 22% 40% Marketing Improvements N = 84 0% 20% 40% 60% 80% 100% % of companies

10. Productivity Approach More than half of the benchmark class uses lean or six sigma to improve productivity. Sixteen percent of companies cite “other” methods—often home-grown approaches combining several elements of quality approaches. In what ways do “home-grown” approaches work or not work? What approaches might appeal to industries other than manufacturing and transportation? Which productivity improvement approach best describes that employed by your organization? Cycle Time Reduction 6% Lean Lean Sigma 11% 38% *Other approaches include: • Black Belt methodologies (process streamlining) • DFSS • PDCA • Lean with Kaizen • Basic TQM and Baldrige • Process management & reengineering • Combination of all or some Other* 16% Six Sigma N = 84 29%

11. Fitting Approach To Competitive Needs The productivity platform should integrate the right set of tools and approaches to reflect the company’s competitive and marketplace needs. Here’s a snapshot of one company’s approach to harnessing complementary tools. The Rexam Way Lean Enterprise Internal Best Practices 5S VSM SMED TPM 6 SIGMA MEASURING PROGRESS

12. Fitting Quality Structures To Competitive Needs: Quality leaders evolve their forms and approaches to optimize performance in different life stages of their organizations!

13. Product Responsibility & Approach Quality organizations reflect different approaches reflecting different product scopes and business models. Food & Beverage companies, for example, are responsible for more than 500 products. However, more than half the benchmarked quality organizations handle fewer than 50 products. For how many total products (formulations, not SKUs) is your quality organization responsible? >500 26% 401-500 3% 301-400 5% 201-300 3% Number of Products 101-200 5% 51-100 5% <50 53% Percent of Companies N = 38

14. Manufacturing Sites Served The number of sites for which quality organizations are held responsible range widely. Close to 80% of benchmarked respondents are responsible for less than 10 manufacturing sites. However, this evaluation does not account for site size and complexity. For how many manufacturing sites is your quality organization responsible? N = 38

15. Organizational Structure More than half the benchmark class employs some type of centralized structure. Those companies that selected “other” also tend to have some form of centralization involved. Which approach best describes your company's quality structure? Other 11% • Centralized at the corporate level with council from operating companies. • Centralized at the corporate level, decentralized in the field. • Centralized corporate headquarters, decentralized in manufacturing. • Globally Hybridized from BU / Affiliates centralized by BU Hybrid centralized global council of quality leaders 8% from functional areas Hybrid centralized global council of quality leaders 5% from business units Hybrid centralized global council of quality leaders 3% from operating companies Decentralized by regional/geographic area 8% Decentralized by product area or business unit 11% Centralized by functional area 8% Centralized by product area or business unit 18% 29% Centralized at corporate headquarters N = 38

16. Leadership & Investment: Resources are always limited. Quality leaders must determine where best to invest capital and staff resources to drive grow and productivity.

17. Reporting Relationships by Structure Reporting relationships differ by structure. While reporting relationships for centralized and mixed structures vary widely, the majority of decentralized quality organizations report to the Operations VP and close to half of all hybrid quality organizations report to C-level executives. To whom does your senior-most quality executive report in the organization? N = 38

18. Corporate Quality Managers Most benchmarked companies have fewer than 20 managers in their corporate quality organizations. On average, within the quality organization, how many corporate employees are categorized as managers and above? N = varies

19. Spend by Total Sites & Products The food & beverage industry in general handles more manufacturing sites and products than most benchmarked companies. The best companies spend less than $2.9M per 100 quality FTEs. Total Quality Spend = Sum of Corporate Quality and Non-Corporate Quality Spend. Total Quality Spend by Manufacturing Sites and Products Managed $30.00 $30.00 $25.00 $25.00 $20.00 $20.00 quality FTEs Total quality spend (in millions) per 100 $15.00 $15.00 $10.00 $10.00 $5.00 $5.00 $0.00 $0.00 0 1-5 6-10 11-15 16-20 21-30 31-40 41-50 >50 <50 51-100 101-200 201-300 301-400 401-500 >500 Number of manufacturing sites Total number of products Food & Beverage Companies Benchmark Class N = 24

20. Quality Organization Staffing Levels Companies in the top quartile for staffing level performance have fewer than 14 Quality FTEs per 1000 company FTEs. Quality Organization staffing ranges from 4.3 Quality FTEs per 1000 company FTEs to 88 Quality FTEs per 1000 company FTEs, with a weighted average of 23.8 (Food & beverage industry weighted average = 22.1). Quality Organization Staffing Levels Weighted Average = 23.8 Top Quartile Food & Beverage Companies Benchmark Class N = 24

21. Staffing Levels vs. Manufacturing Sites The majority of Food & Beverage companies handle >30 manufacturing sites. The best quality organizations in the Food & Beverage industry have 14 quality FTEs/1000 company FTEs. Quality Organization Staffing Levels by Number of Manufacturing Sites 100 90 80 70 60 Number of quality FTEs per 1000 company FTEs 50 40 30 20 10 0 0 1-5 6-10 11-15 16-20 21-30 31-40 41-50 >50 10 Number of Manufacturing Sites Food & Beverage Companies Benchmark Class N = 24

22. Staffing Levels vs. Total Products All Food & Beverage companies handle >500 products. The best quality organizations in the Food & Beverage industry have 14 quality FTEs/1000 company FTEs. Quality Organization Staffing Levels by Number of Total Products 100 90 80 70 60 Number of quality FTEs per 1000 company FTEs 50 40 30 20 10 0 <50 51-100 101-200 201-300 301-400 401-500 >500 Number of Total Products Food & Beverage Companies Benchmark Class N = 24

23. Productivity Benchmarks: Quality leaders use benchmarks to gauge their organizations health, progress and relative productivity.

24. Neanderthals History & Lessons Homo Sapiens History & Lessons • 400,000 years of history • Same approach • Little innovation or change • Failure when confronted by more agile competition. • 100,000 years of history • Symbolic thought & language • Learning & best practice sharing • Success through innovation & continuous improvement Cultural Obstacles You should expect cultural obstacles. Some people find it unnatural to share, exchange & learn from others’ best practices and experiences.

25. Targeted Saving/Revenue Goal IT and finance have the loftiest goals for their productivity efforts, with between $270-$407 million in expected annual savings/revenue. How can more industries such as health care with a great potential for savings benefit from productivity approaches?Why is the target for financial services so high? What is your operating unit’s targeted six sigma, lean, etc. value contribution? $311 m = Average for segment 12% of respondents $34 m = Average for segment $407 m $450,000,000 $400,000,000 $270 m $350,000,000 88% of respondents $300,000,000 $Savings/Revenue $250,000,000 $200,000,000 $150,000,000 $49 m $100,000,000 $45 m $31 m $50,000,000 $17 m $15 m $13 m $25,000,000 0 IT Government Health Care Manufacturing Transportation Communications Chemical/Petroleum Financial Services N=80 Industries

26. Productivity Ratios The majority of companies save up to 7% of their unit’s revenue target through lean or six sigma or both. Few companies (7%) are able to achieve greater than 10%. What is the best estimate of your 2003 productivity improvement-to-sales ratio? Over 10 Percent 8-10 Percent 1-2 Percent 7% 35% 18% 75% of respondents at or under 7% of target 20% 3-4 Percent 20% 5-7 Percent N=80

27. Ratios of Black to Green Belts Almost 75% of responding companies staff their six sigma initiatives with from one to ten green belts per black belt. What numbers of green belts (entry level training) and black belts (expert project managers training) are engaged in your six sigma or lean performance improvement process? 35 29 75% of respondents 30 25 21 20 # of companies 15 10 6 4 5 2 0 1 to 1-5 1 to 6-10 1 to 11-15 1 to 16-20 1 to >20 N=80 Ratio of black to green belt

28. Savings Contributions Target One quarter of responding companies have specific targets against which their black belts must deliver contributions from their projects to meet performance targets. How do companies without annual contributions by black belts measuring their results? What might be the reason that more industries aren’t reporting annual contributions as a means of performance measurement? 64% of companies with an annual contribution are in the manufacturing industry. Transportation is the second largest industry group with annual contributions. Do you have an annual aggregate financial value contribution target that your black belts must contribute from their projects to meet overall performance targets? Yes 24% No 76% N=80

29. Black Belt Contribution Of those companies that have a contribution target for their black belts (25%), 86% have targets less than $5 million annually. What do you feel is a reasonable contribution from black belts to reach objectives? What are the estimated values of the annual contributions that black belts must make to meet performance targets? 35% 30% 32% 27% 27% 25% % of companies 20% 15% 14% 10% 5% 0% $100K-500K $>500K-1M >$1M- 4.99 M  $5M N=80 Range of $ Contributions

30. Black Belt Productivity Close to 60% of companies report having black belts oversee between one to three projects annually to achieve their annual contributions, followed by another quarter of the benchmark class completing four to five. What is the average number of projects overseen by a black belt per year to achieve the annual value contribution required? 57% 60% 50% 40% % of Companies 30% 25% 20% 10% 9% 10% 0% One to Three Four to Five Six to Ten Over Ten N=80 # of Projects

31. Average Cycle Time Per Project Close to 40% of companies report completing their improvement projects within between four to six months. Six to nine months is the next most common cycle time. How do you think that quality projects can be accomplished faster? Which of the following best describes the average cycle time of your unit’s six sigma, lean or other improvement projects? 39% 40% 35% 30% 30% % of Companies 25% 16% 20% 15% 10% 10% 4% 5% 0% Six to Nine Months One Month or Less One to Three Months Four to Six Months Ten Months or More N=80 Project Duration

32. Percentage of Benefit Per Function Companies find that 88% of productivity efforts benefit operations, followed by manufacturing and “other,” such as collections and administration. What are the implications for industries with a heavy emphasis on sales and marketing like the pharmaceutical industry? What percentage of your unit’s six sigma, lean or other improvement projects benefit the following functions? 88% Operations Manufacturing 49% 20% Other* Supply Chain 16% Engineering 15% Customer Service 15% 13% R&D/New Product Development IT 12% Sales 10% 8% Financial Services 8% Support Services 7% Marketing 5% HR N=80 * Legal, Collections, Administration, Health care 0% 20% 40% 60% 80% 100% % of Companies

33. Self-Rating of Effectiveness By Function Benchmarked companies feel that they are most effective applying lean and six sigma efforts to manufacturing. Overall, over half of responding companies find that they are effective across all areas, except marketing where 44% of companies feel effective. What is your effectiveness in applying six sigma, lean or other improvement approaches to the following opportunity areas?* HIGHLY EFFECTIVE EFFECTIVE 62% 23% Manufacturing 34% 46% Supply Chain Engineering 39% 34% Customer Service 32% 40% Service Support 26% 41% Financial Services 20% 46% 20% R&D 43% 22% IT 40% 13% 44% HR 41% 10% Sales 33% Marketing 11% N=80 0% 20% 40% 60% 80% 100% * Note: Operations was not a category for this scale. % of Companies

34. Targeted Annual Saving/Revenue Goal IT and finance have the loftiest goals for their productivity efforts, with between $270-$407 million in expected annual savings/revenue. How can more industries such as health care with a great potential for savings benefit from productivity approaches?Why is the target for financial services so high? What is your operating unit’s targeted six sigma, lean, etc. value contribution? $311 m = Average for segment 12% of respondents $34 m = Average for segment $407 m $450,000,000 $400,000,000 $270 m $350,000,000 88% of respondents $300,000,000 $Savings/Revenue $250,000,000 $200,000,000 $150,000,000 $49 m $100,000,000 $45 m $31 m $50,000,000 $17 m $15 m $13 m $25,000,000 0 IT Government Health Care Manufacturing Transportation Communications Chemical/Petroleum Financial Services N=80 Industries

35. There are many pathways up the mountain. You better have a map!

36. Pathways To Excellence Discussion: What is the agenda in your organization for productivity and competitive success during the next 12 months in your organization?

37. Capability Summary This presentation is the result of primary research. Executives at top companies turn to Best Practices, LLC for actionable and insightful solutions based on the world-class operations of other leading organizations. Let our researchers uncover the next great insights for your operation through our benchmarking research and Internet surveys. Best Practices, LLC 6350 Quadrangle Drive, Suite 200 Chapel Hill, NC 27517 919-403-0251 best@best-in-class.com www.best-in-class.com