Supplier Performance

Supplier Performance

Measuring Supplier Measuring Supplier Performance Corporate Quality Policy Continuous process improvement is a way of life at Howmet. An objective, ongoing system for measuring supplier performance is a vital tool for encouraging improvement and assuring that products meet our standards and our customers standards. The measurement system also helps us determine our best suppliers when we award new and follow-on business. We are committed to providing products and services of the highest quality and reliability, in total conformance with customer expectations. To achieve this objective, each of us is dedicated to continual process improvement as a way of life. What We Measure Howmet uses a computer database to evaluate suppliers performance in the areas of: Quality Delivery Service Total Cost A combination of data from each category determines total overall performance. The Supplier Price Index (SPI) factors rework and other quality and delivery issues to calculate the real cost of a purchase to Howmet. The information is used for negotiating contracts and awarding new business. Mario Longhi President and Chief Executive Officer Who We Measure All active and approved suppliers of products, materials and services that directly influence the quality of Howmet manufactured products are subject to performance ratings. How We Measure Performance evaluations are based on Howmet operations data. Criteria include: Is the product acceptable? (Quality) Do shipments meet predetermined schedules and quantities? (Delivery) Is product and service support timely? (Service) Does performance fit contract parameters for quality, delivery and service, and does it control Total Cost?

Performance For More Information Acceptable Details on the measurement criteria Howmet uses are on the following pages. These measurement criteria are provided for information and guidance to our suppliers only, and do not create any rights of suppliers or third parties, or any obligations of Howmet. Howmet reserves the right to change, supplement or eliminate any or all of these criteria at any time. Suppliers that sustain composite performance levels of 75% to 89.9% will be awarded business before those in lesser performance categories. Business consideration is based on composite score, SPI acceptable performance rank and Q Factor rank. If you have questions, or need more information, contact your Howmet Procurement Representative at www.howmet.com; Procurement: Procurement Contacts. Performance Categories Performance Categories Preferred Suppliers that sustain composite performance levels of 94% to 100% will receive preference for new and follow-on business. Business consideration is based on the composite score, the Supplier Price Index ranking among all preferred suppliers and the Q Factor the SPI ranking compared with similar suppliers. Certified Howmet encourages suppliers rated acceptable to attain preferred status. Acceptable Suppliers that have achieved and maintained 90% to 93.9% for three consecutive reporting quarters may request program requirements to attain Certified Supplier status by contacting their Procurement Representative. Marginal Suppliers that sustain composite performance levels of 65% to 74.9% will be awarded business that has not already gone to preferred and acceptable suppliers. Business consideration is based on composite score, SPI marginal performance rank and Q Factor rank. Howmet encourages suppliers in this category to attain acceptable status. Supplier Ethics Suppliers that sustain composite performance levels of 90% to 93.9% will be awarded business based on the supplier s ability to provide products, materials or services in accordance with the Supplier Certification Control plan. Suppliers in each of the four Performance Categories will be assigned an enhanced priority (60% of the available service percentage points) for having instituted documented compliance and values based Ethics programs. Business consideration is based on composite score, SPI Acceptable performance rank and Q Factor rank relative to the commodity specific control plan. 1

Measurement Criteria 55% Quality = of Performance Measurement 2. Quality ratings for high volume components ceramic Quality = 55% of Performance Measurement The quality measurement is based on the following: Material or product receipt acceptance rates Rejections that occur after Howmet receives a product or during work-in-process Howmet bases quality ratings on volume purchases. 1. Quality ratings for low-volume material bulk material such as gases and grains are calculated by totaling the number of receipts rejected in a specific month, then dividing by the number of receipts received. Howmet assigns a reason code to each nonconforming characteristic it detects after a product is received or during work-in-process. The code shows the severity of the nonconformity. Each reason code has a value predetermined by its impact on Howmet processes. Adding the reason code s value to the value for the place the nonconformity occurred gives the point penalty. cores, carbide burrs, quartz rods, etc. for a specific month use the following formula based on parts per million (PPM): Formula Number of Parts Rejected Sample Size X 1,000,000 PPM Quality Performance Criteria* Measurement Score 000-800 100 Points 800-1600 95 Points 1600-1800 90 Points 1800-2400 85 Points 2400 or greater 0 Points * Howmet reserves the right 35% to revise PPM scoring criteria. Delivery = of Perfo Formula (Receipt Rejected / Total Monthly Receipts) (Reason Code weight + Point of Location weight / Total Monthly Receipts) = Point Loss The result is subtracted from the available supplier s quality percentage points. 2

Delivery = 35% of Performance Measurement Howmet rates delivery performance on how well suppliers meet the schedule agreed to in the purchase order. Criteria are the number of receipts that arrive on time within a six-day delivery window, the number that arrive early or late, and whether the supplier meets all delivery criteria set out in the purchase order. The measurement compares the actual date a product arrives at a Howmet receiving department with the date specified in the purchase order. Suppliers are penalized for deviations in delivery dates and quantities. Range of Days Credits (% Points) Within 6-day delivery window 100 Early Late 5-6 * 2-3 60 rmance Measurement 7-8 * 4-5 20 >8 * >5 0 * Days early beyond the allowable window will be calculated as part of total cost in the Supplier Price Index Service = 10% of Performance Measurement The service rating reflects three factors: how well the suppliers carry out the purchase order; how well the business support systems and related activities are utilized in servicing the customer; and whether or not the supplier has instituted documented compliance and values based Ethics programs. Formula (Quantity Received / Quantity Required) x Delivery Penalty Partial Deliveries Rating Service Performance Level Credit (% Points) Good Competent, meets expectations 90.0 100.0 Acceptable Tolerable but below expectations 80.0 89.9 Unacceptable Results are not adequate 70.0 79.9 (Number of Receipts 1) x Partial Delivery Amount of 0.20 Rating Ethics Performance Level Credit (% Points) Acceptable Has an Ethics program 100.0 Unacceptable Does not have an Ethics program 0.0 Service = 10% of Performance Measurement 3

Supplier Price Index Supplier Price Index The Supplier Price Index calculates two types of cost Howmet s own expense for processing nonconforming materials from suppliers and any overtime labor costs Howmet incurs to maintain customer schedules. Total Cost Definitions Item Price: Initial purchase price Non-Performance Cost (NPC): Actual purchase cost, including rework and associated costs Howmet considers indirect and direct non-productive labor costs when it determines the real cost of purchasing an item from a supplier. Q Factor (Q): Supplier s quality and delivery ranking as compared with all others who supply that commodity to Howmet Indirect Labor Costs: Except for sorting products, a nonproductive direct labor cost, all costs are considered indirect labor costs for determining the Supplier Price Index. Howmet will not recover these costs from suppliers. However, Howmet will consider these costs when negotiating follow-on contracts and long-term agreements. Nonconformance Costs (NCC): Sum of all Supplier Price Index indirect costs Direct Labor Cost: Suppliers are responsible for any non-productive direct labor costs such as any sorting or rework Howmet must do to maintain production schedules. Before work begins, a Howmet procurement representative will coordinate authorization for the costs with suppliers. Howmet also factors these costs into the Supplier Price Index. Formula Supplier Price Index SPI = [(Item Price + NPC) + (Q x NCC)] / Item Price Supplier Price Index Calculations Indirect Labor Costs Supplier-Detected Nonconformance Report (SDAR submittals) Supplier Nonconformance Report (multiplied by point of location weight) Partial Deliveries or Receipts Replacing Rejected or Returned Material Early Delivery Late Delivery $100 processing fee $200 processing fee $100 processing fee for each additional delivery $100 processing fee for each additional delivery $50 per day $100 per day Direct Labor Cost Howmet labor force sorts or reworks $60 per hour 4

Measure What Is Your Company s Performance Rating? Measure Howmet advises suppliers of their performance ratings quarterly. In addition, Howmet provides enough data to perform root cause analysis on items or activities that do not conform. Howmet s procurement representative will supply a copy of Howmet s Supplier Nonconformance Report within 10 days after a nonconformity is found. Howmet requires all suppliers to act immediately to: Investigate the non-conformity Remediate it Find its root cause Determine corrective actions Verify the cause of the nonconformity was eliminated Howmet s Strategy The Supplier Performance Measurement System helps Howmet maintain its position as the premier manufacturer of castings for the aerospace and power generation industries. Howmet is committed to fulfilling its responsibilities to customers, employees, stakeholders, suppliers, and the communities where it does business by continuously improving its own operations and those of its suppliers. 5

Howmet Corporation, 2001 Procurement Copyright Services 2001 1600 Howmet South Castings Warner Street Whitehall, Printed MI in U.S.A. 49461-1897 9 Old Kings Highway South Darien, CT 06820