TCOWhen you know the price of everything and the value of nothing

© 2016 by Honeywell International Inc. All rights reserved.

2

Honeywell Overview

AerospaceHome andBuilding

Technologies

Performance Materials And Technologies

$38.6B Global Industrial Company Serving Major Industries Globally

Connected

Plants

Orion Console

Connecting

Homes & Buildings

evohome

Connected

Aircraft And Auto

IntuVue ® 3D Weather Radar

Safety And Productivity

Solutions

Connecting Workers

And Workplaces

Vocollect

$15.2B $9.4B $5.6B $9.2B

Deep Knowledge And Strong Positions Across Major Segments

© 2016 by Honeywell International Inc. All rights reserved.

3

Expanded Workflow And Automation Solutions

Maintenance

and Inspection

Automating

In-Store RetailVocollect

Warehouse Logistics Retail Store

$4BOpportunity

Launches

in 2017

$1BOpportunity

Available

Today

$0.6BOpportunity

Industry

Leader

+500,000 warehouse

operators in more

than 40 countries

+1,000 technicians 2 pilots in October

with more than

10 retailers evaluating

© 2016 by Honeywell International Inc. All rights reserved.

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Intelligrated is a leading single-source

provider of intelligent solutions that drive distribution

and fulfillment productivity for retailers, manufacturers

and logistics providers around the world

Intelligrated

Business Challenges

Technology direction and applicability

Knowledgeable staff Open technology

Risk and downtime Total cost of ownership

Alignment between support strategy and business strategy

Maintain Manage

Ensure

ReduceMinimize

Know

Increasingly Challenging Environment

Uncertainty DriversTypes Examples

Regulatory Sustainability

Macro-Economy FX / Interest Exposure

Operational Ruthless Competitors

Commercial New Disruptors, i.e., Uber, Airbnb, etc.

Technology Future Technologies i.e., the Cloud

CFO CPO

Financial Performance External Spend Management

What CPOs need from CFOs What CFOs need from CPOs

Full Engagement – Accessible and Approachable Reduction of Material cost

Cost Accounting reflecting TCO approaches Visibility and control over non-compliant spend

Support for process automation Capex Mitigation of risk with suppliers

Clear scorecard and trusted results beyond PPV Working capital favorability – terms, inv.

Agreement on what good performance looks like Strategic support of insourcing / outsourcing

Understanding of where Procurement adds value Top notch supplier performance

Trust to manage spend to the maximum extent Use of TCO analysis

CFOs and CPOs share enterprise-wide transparency and influence

TCO – What is it?

• TCO models were first applied to computers by Gartner Research in 1987 for IT investments

• Notwithstanding, many companies still use part price as the prime component for negotiations with their suppliers.

• Systematically accounts for all costs related to a investment decision, or owning a product or service less any reclaim (resale/salvage value)

• Evaluates direct and indirect cost incurred throughout the entire product lifecycle, including:

• Procurement and deployment

• Operations and maintenance

• End-of-life management

• Cost of not upgrading (risk, opportunity, higher costs, etc.)

Get the Whole Picture

A Little Knowledge is a Dangerous Thing…

© Supply Chain Digest

What You Pay vs. What You Get

Understanding TCO and the inherent risks will help you obtain the optimal value for what you buy. BUT…

• Do you own all the prime elements of TCO? NO

• Does your cost system reflect TCO discipline? NO

• Do you fully utilize your suppliers’ resources? NO

Value equates to total benefit less total costs. Therefore, step back and look at the big picture. Long-term.

• Does an eAuction outcome conducted in Asia equal best value? NO

• If you just bought a vacation package, does your cost end there? NO

We need to cast the net out further:

• What are your total costs?

• What are their total costs?

• Quantify the activity and the opportunity

Reduce Operating Costs Example

• Look at all your costs, not just the service agreement

• Compare impact to production (reliability / optimization)

0

50

100

150

200

250

300

350

Self-Maintain Out-Task Out-Source Manage

Prod. Impact

Support

Parts

Inventory

Labor External

Labor Internal

Analyze Your Options Closely

Tip of the “Priceberg”

Why Should We Care About TCO?

Plant Management

Plant Personnel

Board & Exec Mgmt

Recession Hits

Banks Withhold

Analysts Criticize Mgmt

Customer affected & puts the squeeze on

Suppliers Squeezed

Cost Pressures Never End

Staff gets nervous

Why Should Suppliers Continuously Improve?

If they continue to innovate, they will have to pass through the cost reduction.

If they continue to cut costs, they will see reduced profit.

On the other hand,

What’s their business case for a price premium?

When factoring in TCO, that premium could now translate to:• the lowest adjusted cost

• opening the door to identifying areas for improvement

• an opportunity to incentivize the supplier to out-perform the contract

Take the first step. Talk about waste. Talk about redundancy. Talk about non-value add. But don’t talk about price concessions.

End

-of-

life

Man

agem

ent

• Risk planning

• Part impact; assembly mapping & impact

• Component tracking

• Customer alerts lead-time away

• Drawing/BOM updates

• Removal & disposal

• Hazmat/REACH

• Transition inventory

• Last-time buy

• IOS avoidanceO

per

atio

ns

& M

ain

ten

ance

• General maintenance

• Cyber & physical security

• Repair

• Software upgrades

• Hardware upgrades

• Change management

• Backups

• Parts replacement

• Parts availability

• Floor space

• HVAC/power

• Proficiency training

• Auditing/asset tracking

• Downtime

Pro

cure

men

t &

Dep

loym

ent

• Engineering & design

• Equipment including initial spares

• Software

• Implementation

• Documentation

• Installation (material & labor)

• Integration with adjacent systems

• Factory testing

• Site testing

• Commissioning

• Change-over time

• Initial operations & maintenance training

Direct and Indirect Costs Need to be Considered

Application of TCO

Two Key Areas of Focus

• Extend Lifecycle

• Reduce Operating Costs

TCO = ∑NPV (Deployment+ Operating

Costs + End of Life Management)

Blend of Capital and Operating Expense Budgets

Extend Lifecycle Example

System 1: 10-year estimated life• Acquisition $700K

• Operating expense $30K per Year

• TCO = $1M or $100K per year

System 2: 30-year estimated life• Acquisition $700K

• Operating expense $33K per Year

• TCO = $1.7M or $57K per year

System 1: 10-Year Expected Life

System 2: 30-Year Expected Life

Operating Cost

28%

Acquisition Cost

72%

Operating Cost

60%

Acquisition Cost

40%

Applied Lifecycle Duration Changes TCO Significantly

TCO = ∑NPV $700K + ($30K * 10 years)

System 2 is 43% lower TCO/year

TCO = ∑NPV $700K + ($33K * 30 years)

Does it Work?

MAPI reported that companies that managed spend using a Total Cost of Ownership methodology had a 35% higher net operating margin, and that companies with a TCO methodology are twice as likely to enter into pay-for-performance contracts with a supplier, almost twice as likely to realize at least 90% of savings that were agreed to with a supplier, and more than seven times as likely to get supplier quotes with one or more TCO components.

Basic product characteristicsMarket / Customer geographies

Customer constraints

ManufacturingStrategy

Plantcapability

TotalCost

LaunchSite

• Understand basic product / supply chain parameters

• Identify if there are any limiting factors in the site selection process from a customer pointof view (e.g. ITAR, customer “NOs” etc.)

• Understand lead time and inventory options

• Apply total cost model to validate plant selection,or make plant selection in case there are options(working capital considerations, also)

• Final launch site defined

# sites (example)

6

3

3

1

1

13

• Make or Buy approach • Select preferred launch site(s) based on overall

manufacturing strategy, incl. “why not China/MX”(unlimited capacity assumption)

• Identify individual plant / supplier receiving capacity / process capability against given SOP date

Mfg Site Selection Process for New Products

Customer Importance:• High • Medium• Low

Technology Clockspeed:• Fast• Medium• Slow

Profit margins:• High• Medium• Low

Competitive position:• Advantage

•Parity• Disadvantage

Key business strategy:• Main focus• Medium• Low

Process Product

Make Buy

• Make/Buy decisions are driven by the Total Cost Model and Core/Non-Core

• Just because something is non-core does not mean is should be outsourced

- Non-core items should be outsourced if the TCM is less expensive

- Impact on the Total Cost of other make and buy components should be considered in the analysis

• Just because something is Core does not mean that it can not be outsourced

- Core items can be considered for outsource if Toyota can maintain the appropriate level of design, quality and lead-time control at a lower TCM

• Combination of quotes and actual outsourcing experience will be used to estimate costs

Core/Non-Core Analysis & Make/Buy Decision Process

Discussion focuses on a pricingmodel—instead of just price

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