www.kalypso.com

Complexity Management

Drive Cost Savings to Fund the Future

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Webinar Overview

I. Introductions

II. Overview of Kalypso

III. Today’s Challenge

IV. Product Proliferation

V. Complexity Reduction

VI. Case Studies

VII. Results

VIII. Complexity Management Methodology

IX. Q&A

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Introductions

Scott brings over 20 years of professionalexperience to our clients, with a strongbackground in strategy development, product/brandmanagement, innovation leadership, and businesstransformation in the food industry.

Prior to joining Kalypso, Scott’s professional experienceincluded Sales, Marketing and Innovation leadership roleswith Dow Chemical, Kellogg’s, Pillsbury and the SchwanFood Company. Scott has extensive experience in leadingcross functional brand, innovation and business teams withaccountability for sales and profit objectives. Scott has lednumerous business transformation and process improvementinitiatives including portfolio management and value basedmanagement. Scott has a passion for winning with newproducts and working collaboratively with cross functionalpartners to deliver Innovation leadership.

Scott holds a MBA from the Carlson School of Management,University of Minnesota; a MIM from Thunderbird GlobalSchool of Management; and a BBA in Finance from theUniversity of Iowa.

Scott GambleSenior Manager

Brian SharpPractice Leader

Brian brings over 20 years of experiencein business management, marketing, andcommercial development. He leads the firm’s Pricing &Value Management Practice.

Brian’s client work is focused on the integration ofbusiness strategy and commercial execution with valuescience. Brian is currently leading several large scalevalue management engagements at leading globaltechnology companies.

Prior to joining Kalypso, Brian was with LordCorporation, a high tech industrial manufacturer servingthe Aerospace & Defense and Auto industries where heled their global automotive business. Prior to that, heheld a variety of commercial leadership roles in Europe,Latin America and Asia with BP and Castrol.

He received a BS in Chemical Engineering with aconcentration in Bio-medical Engineering, from theUniversity of Texas at Austin.

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The Kalypso Difference

Kalypso is a consulting firm focused exclusively on innovation. Ourpeople are leading business professionals who combine experience inselect industries with product and process innovation expertise.

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Kalypso Capabilities

Our services are designed to help companies become more innovativeand provide a systemic view of new product & service development.

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Industries We Serve

TechnologyTechnology Consumer BusinessConsumer Business

ManufacturingManufacturing

AutomotiveAutomotive

Life SciencesLife Sciences

Aerospace & DefenseAerospace & Defense

Public SectorPublic Sector

EnergyEnergy

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Firms that invest in innovationduring downturn win duringrecovery

How do you invest ininnovation in challengingtimes?

Today’s Challenge

Tony Hillier, “Sustaining Marketing Spend During Tough Times—A Strategic Imperative Backed by Evidence from PIMS

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Portfolio Management Shift

Source: www.tech-clarity.com

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Holistic approach to Portfolio Management

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Dilution of brand power and shelf spaceclutter amongst other factors.

Frequent setups and shortproduction runs, driving upmanufacturing costs.

Supplier fragmentation leading to lossof buying leverage and ultimately

higher material costs.

Difficulties forecasting sales,ultimately resulting in

increased inventory andtransportation costs.

Product proliferation occurs when organizations market large numbers of similar

products in the same market segment, product line, price band or distribution channel.

A Common Cause of Complexity is ProductProliferation

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Our Experience with Product Proliferation

• Companies have increased the number of active products which hasresulted in reduced sales/item and added complexity across the valuechain.

• Products are developed with minimal innovation causing overlaps inmarket segmentation, price band, product lines and/or distributionchannels.

• Acquisition and mergers create proliferation of products and brands.

• Sales and Marketing incentives are tied to revenue growth which doesnot account for profitability.

• Poor visibility to true product profitability. "Allocated” costs distortprofit impact.

• Lack of clear accountability and difficulty with gaining organizationalalignment to take action.

• Lack of portfolio management throughout entire lifecycle. Newproducts are often launched and old products are rarely discontinued.

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Our Experience with Complexity Reduction

The bottom 20-40% of existing products are profit dilutive, consumescarce resources and drive organizational complexity

Reducing proliferation and organizational complexity through Kalypso’sprocess can save up to 250 basis points of profit margin

Fuel for Growth

• Manufacturingefficiencies

• Procurementefficiencies

• Inventory turns

• Storage, transportation& distribution

• Forecasting

• Working capital andpeople resources

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ApproachApproach

Case Study

ResultsResults

SituationSituation

• Improve profitability, reduce operatingcomplexity and costs throughout divisions

• Reduce SAP data migration costs• Obsoleted 66% of active products and 380k

part numbers prior to SAP data migration• Increased price on least profitable products• Implemented portfolio management

reducing complexity from new products

• $4B oil & natural gas products and serviceprovider

• Weak profitability• Overrun with complexity• About to migrate product data from legacy

system to SAP

• $100M cost savings• Reduced operational complexity

• Product support• Training• Manufacturing• Planning

• Deliver significant cost reductions through rationalization and economies of scale• Improved inventory turns• Improved profitability by eliminating or re-pricing least profitable products• $1.5MM SAP data conversion savings

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ApproachApproach

Case Study

ResultsResults

SituationSituation

• Create common base platforms acrossmultiple products

• Platforms must allow for modular designthat has the flexibility to cater to customerneed

• Deliver significant cost reductions throughrationalization and economies of scale

• $2.5B food company• Difficulty managing raw material complexity• Raw material proliferation

• Diseconomies of scale• Complex raw material management

• About to migrate product data from legacysystem to SAP

• $40MM of annual savings• Developed product platforms that optimized operational efficiencies while still managing to

facilitate customized products through modular designs.• Built platforms that reduced raw materials by 40%.

• Ingredient platform A:• 600 to 180

• Ingredient platform B:• 10,000 to 1,000

• Reduced complexity• Increased purchasing leverage• Reduced inventory

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-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

High Productivity SKU's Medium Productivity SKU's Low & NegativeProductivity SKU's

% of SKU's

% of Revenue

% of Operating Profit

-20%

0%

20%

40%

60%

80%

100%

120%

High Productivity SKU's Medium Productivity SKU's Low & Negative ProductivitySKU's

% of SKU's

% of Revenue

% of Operating Profit

Pre Post % Change

# of SKUs 208 155 -25.5%

Revenue ($Millions) 1,000.0$ 976.0$ -2.4%

Operating Profit ($Millions) 43.0$ 56.5$ 31.4%

Pre Complexity Management Post Complexity Management

CPG firm saved $13.5 million in complexity management to reinvest ininnovation and growth initiatives

Complexity Management Results - Example

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Phase 1:Assessment

Phase 1:Assessment

Phase 2:Development

Phase 2:Development

GrowGrow ImproveImprove ExitExit

Cross-Functional Rationalization Workshops

Internal

Assessment

Internal

AssessmentExternal

Assessment

External

Assessment

Hand off to TacticalPlan

Hand off to Tactical

Plan

Complexity Management MethodologyStrategic Phases

Segment 1

Segment 4

Segment 3Segment 2

Segment 5 Segment 6

Financial

Assessment

Financial

Assessment

External

Assessment

External

Assessment

Business Unit

Internal

Assessment

Internal

AssessmentComplexity Rating(1 - least complex, 5 - most complex)

BrandProduct

CodeProductName Country

SupplyChain MFG Proc. QA R&D PKG

Aosta 40000001Pepperoni France 5 3 2 1 1 1

Aosta 40000002Sausage France 2 1 1 2 1 1

Aosta 40000003Ham France 1 4 4 5 5 1

Aosta 40000004Turkey France 2 1 1 1 1 1

Aosta 40000005Chicken France 2 4 2 1 3 5

Obvious cuts for

immediate

return & system

clean-up

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Rationalization Workshop Process

Complexity Rating (1 - least complex, 5 - most complex)

BrandProduct

CodeProductName Country

SupplyChain MFG Proc. QA R&D PKG

Aosta 40000001Pepperoni France 5 3 2 1 1 1

Aosta 40000002Sausage France 2 1 1 2 1 1

Aosta 40000003Ham France 1 4 4 5 5 1

Aosta 40000004Turkey France 2 1 1 1 1 1

Aosta 40000005Chicken France 2 4 2 1 3 5

BrandProduct

CodeProductName Market Channel

MarketShare

(High orLow)

MarketGrowth

Rate (Highor Low)

ProductivitySegment

StrategyPositioning

ExternalScore

XYZ 40000001 Pepperoni National Retail Low High High Grow 3

XYZ 40000002 Sausage National Retail High Low Medium Grow 2

ABC 40000003 Ham National Retail Low Low Low Maintain 4

ABC 40000004 Turkey Regional PL Low High Negative Harvest 1

ABC 40000005 Chicken Regional PL Low Low Negative Harvest 2

Cross Functional

Rationalization Workshops

Functionalarea decision

makers

Functionalarea decision

makers

External Assessment ToolExternal Assessment Tool

Internal AssessmentTool

Internal AssessmentTool

Collaborativefacilitation

process

Collaborativefacilitation

process

Low andNegative SKU

Universe

Segmentation process to identifystrategic action plan for all SKUs

in project portfolio

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Scorecard

Measure Improvement

Develop Tactical

Execution Plans

Establish ImplementationTeams

Establish ImplementationTeams

Complexity Management MethodologyTactical Phases

GrowGrow ImproveImprove ExitExit

Hand off fromStrategic Plan

Hand off fromStrategic Plan

Phase 3:Implementation Plan

Phase 3:Implementation Plan

Phase 4:Execution

Phase 4:Execution

Phase 5:Ongoing Management

Phase 5:Ongoing Management

Execute Plans Developed inPhase 3

Execute Plans Developed inPhase 3

KPI GOAL OWNER G/Y/R KPI GOAL OWNER G/Y/R

DistributionDeliver 1,250 pts. of

distribution (-

125 v 2007)VP Sales SKU Reduction

Rationalize 53 SKU's

by March 2008VP Marketing

Net RevenueDeliver $976m in

2008VP Sales COS Reduction

0.9 pt COS

reduction to 69.7%

VP Supply

Chain

Net Revenue

Recapture $ 8m of

revenue from

rationalized SKU's by

September

VP Sales Sales Expense

Reduction

$3.0 m expense

reduction (-0.1 pts)VP Sales

Marketing Expense

Reduction

$2.0 m expense

reduction (no pt.

change)VP Marketing

G&A Expense

Reduction

$6.0m expense

reduction (-0.4 pts)President

R&D Expense

Reduction

$0.5 m expense

reduction (no pt.

change)

VP R&D

Timeframe: Jan 2008 - Dec 2008

Executive Sponsor: Name

Initiative Leader : Name

Strategy: Improve operating Income by 1.5pts. or $14m through product rationalization and complexity reduction

S

C

O

R

E

C

A

R

D

Strategic Imperative: Operating Income Improvement

Rationale: Escalating commodity prices and increased business complexity have eroded 1.5 pts. of operating income.

Legend for Success Criteria: Above threshold Below threshold Within risk range

External Performance Measures Internal Performance Measures

Initiative: Product Rationalization

(Insert Company Logo) P&LNumber of SKU's 208 155 -53

Division A 68 58 -10

Division B 75 45 -30

Division C 65 52 -13

(in $Millions)% of

Revenue

% of

Revenue Pt. Change

Revenue 1,000$ 976$ (24.0)$

Cost of Sales 706$ 70.6% 680$ 69.7% (26.0)$ -0.9%

COGS 590$ 59.0% 572$ 58.6% (18.0)$ -0.4%

Storage & Distribution 116$ 11.6% 108$ 11.1% (8.0)$ -0.5%

Gross Profit 294$ 29.4% 296$ 30.3% 2.0$ 0.9%

Operating Expense 251$ 25.1% 240$ 24.5% (11.5)$ -0.6%

Sales Expense 72$ 7.2% 69$ 7.1% (3.0)$ -0.1%

Marketing Expense 85$ 8.5% 83$ 8.5% (2.0)$ 0.0%

General & Admin Expense 78$ 7.8% 72$ 7.4% (6.0)$ -0.4%

R&D Expense 16$ 1.6% 16$ 1.6% (0.5)$ 0.0%

Operating Profit 43$ 4.3% 57$ 5.8% 13.5$ 1.5%

Post Rationalization ChangeRationalization TargetsPre-Rationalization Actual

Financial Assessment Tool

Portfolio

Management Process

Portfolio

Management Process

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Scorecard Establishes Clear KPI’s that DriveAccountability and Results

Rationalization Scorecard

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Summary Messages

• Complexity Management can provide up to 5.0 points of profitmargin improvement, supply chain efficiency gains and improvedresource utilization with near term payback

• Complexity Management can provide fuel for your innovationgrowth in challenging times

• Kalypso provides an integrated comprehensive approach tocomplexity management to deliver real sustainable results

• Nimble, flexible, and responsive to your needs. Working besideand behind you every step along the way

• Your trusted partner for tough challenges. Committed to you andthe success of your organization

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Thank You

• Email questions or comments to scott.gamble@kalypso.com orbrian.sharp@kalypso.com

• We will email you today’s presentation

• For more information about Kalypso, visit www.kalypso.com