Strategic Importance Criteria and Supplier Effectiveness in Decision Making

Make-or-Buy Supporting Slides

Strategic importance criteria PRODUCT NAME Weighting Item A scores Item A weighted Item B scores Item B weighted Further components Criteria A Criteria B Customer value Criteria C Criteria A Criteria B Profit generation Criteria C Criteria A Criteria B Intellectual capital Criteria C 100% Total

Examples of strategic importance criteria for other products PUMPS LARGE VEHICLES PACKAGING MATERIALS Quality & reliability Energy efficiency Flexible for customisation 15% 15% 15% Product integrity Sales differentiator present Sales differentiator future Emerging technologies Customisable features Aftermarket profit External market opportunity 20% Application performance 5% Provides value to Retailer 5% Provides value to Distributor 10% Consumer differentiator 10% Customisation enabler 15% Product line profit 5% Enables total solution profit Process is source of profit 10% 10% 10% 5% 15% 13.3% 13.3% 13.3% CUSTOMER VALUE Direct profit Aftermarket profit 20% 20% PROFIT GENERATOR Unique product/process capability 15% Patented designs Unique know-how New production technology 10% Patented process 10% Process technology leadership 10% Process barrier to entry 5% 2.5% 2.5% INTELLECTUAL CAPITAL FOOD MACHINERY TRANSPORTATION SERVICES Operating Reliability Functional/Aesthetic Upgrade Responsive Cycle Times SPECIALITY CHEMICALS Application differentiation Product integrity/reliability Customisation enabler Responsiveness 20% 20% 5% 5% 13.3% Application differentiation 13.3% EHS assurance 13.3% Qualification advantage Customisation / responsiveness 20% 10% 10% 10% CUSTOMER VALUE New machine profit Pricing flexibility enabler OEM & licensee profit Spares/service profit Unique product Unique manufacturing process 10% 10% 10% 10% 5% 5% Direct Contract Profit Supports Other Services Profits Supports External Profits 20% Direct profit 10% Supports other sales 10% 30% 10% PROFIT GENERATOR Unique Product/Process Capability 20% Unique product/process IP 10% INTELLECTUAL CAPITAL

Supplier effectiveness criteria Shower pump example Component: Filter Weighting Item A scores Item A weighted Item B scores Item B weighted Further components Quality Cost Delivery Innovation 40% 30% 20% 10% Total 100%

Strategic Importance scoring 1 2 3 4 5 Very Low Low Medium High Very High Contribution to differentiated competitive positioning Contribution to innovative features and options that the customer values Importance in assuring quality and in-service reliability Very low impact on customer value Low impact on customer value Medium impact on customer value High impact on customer value Very high impact on customer value Customer Value Contribution to high margin sales Ability to deliver at low cost Very low impact on profitability Low impact on profitability Medium impact profitability High impact on profitability Very high impact on profitability Profit Generation Intellectual Capital Degree of protectable IP or proprietary know-how that competitors find difficult to copy Very low level of IP and proprietary know- how Low level of IP and proprietary know-how Medium level of IP and proprietary know-how High level of IP and proprietary know-how Very high level of IP and proprietary know- how

Supplier effectiveness scoring 1 2 3 4 5 We are much better We are We are equal to supplier Supplier is moderately better Supplier is much better moderately better How does this supplier s Quality performance compare with ours?1 We are much better on quality We are moderately better on quality We are equal to supplier on quality Supplier moderately better on quality Supplier is much better on quality Quality How does the supplier s long term cost compare with ours (including delivery)?2 We are much better on cost We are moderately better on cost We are equal to supplier on cost Supplier moderately better on cost Supplier is much better on cost Cost How does this supplier s lead-time and delivery performance compare with ours?3 We are much better on delivery lead-time and reliability We are moderately better on delivery lead-time and reliability We are equal to supplier on delivery lead-time and reliability Supplier moderately better on delivery lead-time and reliability Supplier is much better on delivery lead-time and reliability Delivery How does this supplier s participation and investment in innovation compare to ours?4 We are participating and investing much more in innovation We are participating and investing moderately more in innovation We participate and invest equally in innovation Supplier participating and investing moderately more in innovation Supplier participating and investing much more in innovation Innovation 1 This must be supported by a fundamental capability advantage in quality performance 2 This must be supported by an inherent cost advantage in manufacturing, procurement and/or distribution 3 This must be supported by a fundamental capability advantage in delivery performance 4 This must be supported by a fundamental advantage in R&D capability

Risk analysis tool Start Make or strategic alliance yes Could the supplier become an effective competitor? Buy no no Make or strategic alliance yes yes Are there technologies in the work- package we must protect? Is the work-package process hard to transfer? Make in one place no no Will investment in our own ability to perform this work-package make us more competitive? yes yes Does performing this work package enhance our ability to innovate? Make Make no no yes yes Are we giving the supplier too much negotiating strength? Is our service quality vulnerable to supplier cycle-time variations? Make some Make some no no Make or strategic alliance yes yes Are we giving the supplier too much negotiating strength? Is the transfer irreversible? Make some no no Is performing this work-package necessary in order to manage suppliers? no yes yes Is the true cost of supplier development prohibitive? Make some Make

Sample strategic importance vs supplier effectiveness chart 5 Strategic importance 3 1 3 5 Supplier effectiveness