EBU Supplier Conference Presentation

1Engine Business Opportunities and Challenges

Steve Spaulding May 2, 2014

Cummins Confidential

Cummins Engine Business Overview

Afternoon Session Agenda: 1:00 -1:30 - Engine Business Opportunities

and Challenges -- Steve Spaulding 1:30 - 2:00 Supplier Quality Key Initiatives

-- Russ Skinner 2:00 - 2:30 Aftermarket Opportunities and

Challenges -- Norbert Nusterer 2:30 - 3:00 -- Supplier Audience Qs & As

2Cummins Confidential

Diversified Global Power Leader

Four Complementary Businesses

Engines PowerGeneration

Components Distribution

5/6/2014 Cummins Confidential4

3Dana A. Drake-CoxHMLD

Purch Ldr

EBU Purchasing, Supply Chainand Quality Leadership Staff April 17, 2014

Steve A. SpauldingVP EB Purchasing , Supply Chain & Quality

Con OSullivanHHP Purch Ldr

Mike C. LewisImprovement

Leader

Russell SkinnerEBU Direct Materials

Supplier Quality Leader

Marina OlikaraDirector of

Finance

Steven W. ReedyEBU VPI Purch Ldr

Larry GriffinNew & ReCon

Parts Purch Ldr

Rocio RodriguezDirector HR EBU

Support Groups

Bruce LaneSupply Chain

Mgmt

Heather PattersonEx. Admin. Assoc.

Ian BrookQuality

Champion

Scott MannEBU Direct Material

Purch Ldr

Damodar MuleyDirector EBU IT NP&R

Purchasing & FinanceMariana Capelo

Brazil IPOHarvey Zhang

China IPON S Giri

India IPO

Cummins ConfidentialCummins Confidential

~ Cu

mm

ins

CONF

IDEN

TIAL

~

Engine Business Unit Revenue

Consolidated Sales Sales of Unconsolidated Engine JVs

2014 Guidance:4 6% Y-o-Y Sales Growth6 8% Y-o-Y Sales Growth

4Engine Business2013 Revenue $10.0 billion


Whats changedsince 2011

Global GDP Growth has SlowedSlowed4%4% 2.5%2.5%


Whats changed since 2011: End Markets

Truck market

Excavator market

17%17%37%37%

Truck market

25%25%Truck market

27%27%

Global Power Generation

20%20%Mining

50%50%


Emission Regulations Drive Growth

6Cummins Confidential5/6/2014

Cummins Confidential 11

Natural GasDiesel

Broad and Increasing Product Range

ISF/QSF2.8

QSK95


New Products: New Markets

In RailIn Rail5.0L V8

Turbo Diesel


New Products: Fit For Market

L9.3


ISGISG

New Products: Fit For Market


Customers Want Recent New Products

ISF 2.8/3.8

Engine Business Has Strong Market Share

On Highway

Off Highway


Strong Global PositionSupplyChain Operations Distribution Service

660000+ + Distributor Locations

Technical Centers

OperationsComponents

Regional Parts Distribution

Sales and Service

International Distributors

6,5006,500++Dealer Locations

190+190+Countries & Territories


Worldwide EngineManufacturing Facilities

BrazilSao Paulo B / C series,

N14, ISB / ISM

JapanOyama B / Chi

(KCEC JV)

China & RussiaChongqing M / N / K (CCEC JV)Xiangfan B / C series (DCEC JV)

Beijing 2.8 / 3.8L (BFCEC JV)Xian M (XCEC JV)

Guangxi B (GCIC JV)Chelny B (ZCK JV)

IndiaPune C / N / K19 / V28 /

K38/50 / QSK60 (CIL)Phaltan Megasite TCL2, TCL3,

PHP, & NRPJamshedpur B-series (TCL JV)

United StatesColumbus ISB6.7

Seymour K19 / V903 / QSK19 &QST30 (CKEC JV)

Jamestown ISX12 / ISX15Rocky Mount B / C series,

ISB6.7 / ISC8.3 / ISL9, ISL G, QSB / QSC / QSL

Charleston Marine EnginesClovis CNG

Memphis ReCon

United KingdomCumbernauld - ReCon Engines:

B / C / M11 / NT / N14 / K19 / QSK19, ISB / ISC

Darlington B / C series,ISB / ISC / ISL, QSB / QSC

Daventry K / QSK / QSV

TurkeyIzmir B / C series (Lic)

MexicoSan Luis Potosi ReCon Engines:

B / C Series, L10 / M11 / N14 / K19,ISB / ISC / ISL / ISM / ISX

KoreaDaegu B

series (HCEC JV)

10


Leveraging Scale & Global Presence

South America50,925

Asia481,574

North America363,827

Europe57,202

The worlds largest independent manufacturer of diesel engines

953,528 Engines Produced in 2013


One Plan, One Heartbeat

This is not just Supply Chain. This is Business Transformation.

HHP and HMLD Implementing Synchronized Business Planning (SBP) In 2014

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HHP 2014 VOLUMES (engines/day)PLANT MODEL Quarter 1 Quarter 2 Quarter 3 Quarter 4 Average

DAV

38L 2.3 3.0 3.0 2.7 2.8

45L 0.2 0.2 0.3 0.3 0.3

50L 3.3 5.2 3.7 4.1 4.1

60L 6.6 7.7 6.7 7.3 7.1

78L 0.9 1.0 1.2 1.2 1.1

91L 0.2 0.3 0.2 0.2 0.2

Total DAV 13.5 17.4 15.1 15.8 15.5

SEP

19L 8.4 11.0 8.8 8.1 9.1

30L 5.5 5.5 5.7 6.0 5.7

Total SEP 13.9 16.5 14.5 14.1 14.8

CIL / PHP

19L 4.5 4.4 2.5 3.4 3.7

23L 2.2 2.8 3.0 4.3 3.1

38L 4.2 3.8 4.2 4.2 4.1

50L 6.4 7.0 7.9 7.3 7.2

60L 0.2 0.3 0.4 0.4 0.3

Total CIL/ PHP 17.5 18.3 18.0 19.6 18.4

CCEC

19L 19.2 21.6 19.7 18.6 19.8

38L 9.7 11.5 11.1 11.1 10.9

50L 1.5 1.8 1.6 1.8 1.7

Total CCEC 30.4 34.9 32.4 31.5 32.3


2014 Cummins HMLD Forecasted Volumes

HD JEP Q1 Actual and Full Yr Demand Forecast :

MR Q1 Actual and Full Yr Demand Forecast:Jan Feb Mar 1Q 2014 Apr May Jun 2Q 2014 Jul Aug Sep 3Q2014 Oct Nov Dec 4Q2014 2014 Total

RMEP 11,684 12,497 12,297 36,478 14,956 12,611 13,183 40,750 13,170 12,332 12,326 37,828 13,613 12,411 11,545 37,569 152,625 CMEP 35,236 33,852 31,103 33,768 133,959 DEP 2,239 2,710 2,812 7,761 2,845 2,783 3,916 9,544 4,010 4,346 3,970 12,326 2,647 2,507 2,243 7,397 37,028 CBL 5,991 5,888 4,983 16,862 5,584 5,904 3,015 14,503 6,178 5,239 5,400 16,817 6,754 5,095 2,683 14,532 62,714 KCEC 2,183 2,494 2,200 6,877 2,373 1,900 2,262 6,535 2,584 1,965 2,591 7,140 2,971 2,216 2,732 7,919 28,471

103,214 105,184 105,214 101,185 414,797 JVK+P&S 36,996 40,109 36,430 113,535 40,841 37,875 36,986 115,702 43,240 34,118 38,378 115,735 43,964 36,156 31,184 111,304 456,277

!" #

!

!

"# !

$ %#$

12


2014 HMLD Joint Venture Volumes

Q1 Q2 Q3 Q4 2014 TotalDCEC 36,610 48,018 39,568 41,817 166,013 BFCEC 27,579 35,519 30,668 31,514 125,280 XCEC 1,726 1,601 610 729 4,666 GCIC 3,335 3,925 2,750 3,492 13,502 TCL 28,726 23,341 27,044 27,671 106,782 ZCK 2,573 3,133 2,227 2,547 10,480 HCEC 5 710 2,621 3,617 6,953 KCEC 16,524 13,748 13,493 16,461 60,226 Total 117,078 129,995 118,981 127,848 493,902


Global Platform Based Cost Reduction

DCEC

GCIC

TCL

CBLDEP

RMEP

CMEP

Direct Material

LogisticsManufacturing

Indirect Material

ISB 6.7

Harnessing Global knowledge for common gainsAdvantages: Benchmarking Best Practices and

Cost Reduction Ideas Obtaining More Cost Saving Ideas

for each plant Increase Total Cost Savings for

Cummins Avoiding Duplicated Practices and

Processes, ex: Engineering Approval

13


Cummins is Positioned Well For Accelerated Growth An Expanding Product Range

Four macro trends are still driving growth1. Emissions Standards2. Price and Availability of Energy3. Globalization4. Infrastructure Growth in Emerging Markets

Positioned well to capture the growth Technology Partners Global Supply Chain, Mfg and Service Footprint


Customer and Partner Relationships

14


What Cummins Needs From Our Suppliers.. Positioned to Grow and Expand With Cummins as our

Customer demand grows Eye on the Future Come to Work Every Day with a Passion and Energy

Towards Continuous Improvement Bring Innovation and Creativity in Design Collaboration

With Cummins Be Proactive Open Communication on Constraints No Surprises Drive Efficiency and Productivity Gains To Remain

Competitive Globally Quality Parts (Suppliers below 50 In-plant PPM),

Delivered On Time World Wide At The Lowest Total Cost To Our Plants and Aftermarket


Zero Defect Mentality Changing Our Mindset and Performance

Customer expectations are 100% uptime for all Cummins products (with maintenance performed)

Customers expect the next product to be better than the last product

Customer next time buy decisions are largely based upon last products quality and performance uptime

We need our suppliers to be under

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QUALITY Matters

Supplier Quality Key InitiativesZero Defect Mentality

Russ SkinnerEngine Business Purchasing Quality LeaderMay 2, 2014

16


Topics

Historical Supplier Quality Performance (PPM)Supplier Quality Key Initiatives Importance Of Quality Final Comments On Quality

31


OEM PPM Performance Supplier Caused

Flat

Significant Quality Spills

17


In-plant Supplier PPM Performance

Mixed Trends

Significant Quality Spills

Flat


Example Of Key Customer Score Card - Quality

34

18


2013 Supplier Quality Statistics

Supplier Caused In-Plant PPM 34% of suppliers had in-plant PPM >100 7% of suppliers had in-plant PPM between 0 and 100 59% of suppliers had 0 in-plant defects in 2013

ZERO PPM IS ACHIEVEABLE!!


Supplier Quality Key Initiatives 2014 & Beyond

1. CQI19 Sub Tiered Supplier Control (Pass Through Characteristics) (PTC)

2. Supplier Corrective Action Request (SCAR)Scoring3. Supplier Training4. Supplier Improvement Process (SIP)5. End Of Line Defects (Packaging, Preservation, Part ID) 6. Supplier Change Request (SCR)

36

19


1. Supplier Pass Through Characteristics

In 2012 AIAG released a common supplier management process (CQI-19) to improve sub-tier supplier performance One of the areas of focus is to address pass through

characteristics (PTC) of highest impact to the Original Equipment Manufactures (OEMs)

Multiple 6 sigma projects are in process at Cummins to identify PTCs. These PTCs will be identified on the print by a

The primary intent for indentifying PTCs is to highlight minor characteristics that may not have robust quality control plans in place.

P


Why the increased focus on supplier PTCs?

38

ChassisLine

Customer line stops if

connections cannot be

made!!

Engine Dress Line

20


2. Supplier Corrective Action Request (SCAR) Scorecard

What is it? An objective checklist that assesses a

suppliers SCAR performance in meeting Cummins expectations (supplier handbook)

Broken down into 5 categories:1. Problem Description (12pts)2. Containment (18pts)3. Short Term Action (12pts)4. Long Term Action (40pts)5. Supporting Evidence (18pts)

Score will be out of 100 90 and above is be passing Below 90 will rejected and require

additional work5/6/2014 39


Why is SCAR scoring important?

The goal of this initiative is to drive improvements in the quality of SCARs and ultimately driving 100% right first time in solving problems (ZERO repeat defects)

Help Cummins identify problem areas that will drive focus for improvement and additional training both at Cummins and the supply base

In some cases Cummins has gone back to ask questions and found that the work has been done but did not get documented in the SCAR

21


3. Supplier Training

Supplier Quality Summit was held in February 2014 with 50 suppliers causing most quality disruptions in 2013

A survey was sent to these suppliers asking for input on what top 5 training topics was most needed to support their quality improvement efforts1. Problem Solving/Root Cause Analysis 2. End of Line Defects3. Failsafing4. Supplier Scorecards5. Cummins Engineering Standards


Supplier Training Completed Training Modules

SCAR Scorecard End of Line Defects Manufacturing Quality Verification - MQV Qualified Laboratory Documentation Cummins Engineering Standards on PPAP Layouts CQI-19 (Sub-tier Supplier Management)

Currently Under Development Root Cause Analysis

Overview and more detailed workshop sessions (3P5Y) APQP (Overview) PPAP (Overview) FMEA Pass Through Characteristics Safe Launch 6 Sigma Overview

22


Why is Supplier Training Important?

Provides knowledge of quality tools and processes Will help your company to continuously improve your

quality performance & culture We want to work together to improve.


4. Supplier Improvement Process (SIP)What is SIP?

A collaborative effort with suppliers to improve their quality performance

Started 2007all US assembly plants have SIPprograms

Focus is on systemic quality improvements Expect supplier senior management leadership Monthly scorecards provided Formal quarterly reviews held with all suppliers

participating/presenting Plant & Executive SIP processes

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How You Are Selected For SIP?

EBU Purchasing and Plant personnel regularly review all quality performance data: PPM performance OEM defects Disruptions (quantity of MNCs and NCMRs) SCARs/SCAR closure performance

Plants develop a SIP scorecard for suppliers with highest disruptions/causing the most pain, and if scores are high enough, they request Purchasing notify the supplier we want them to participate in SIP

When a supplier is selected for SIP, we notify them formally via a letter from EBU Purchasing Quality Leader


How You Exit SIP?

Exit Targets: Established by the engine plants Are achievable based on historic performance Use Rolling Six Month Scores

Exit Criteria: 6 month rolling score below exit target for at least 3

consecutive months

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5. End of Line Defects (EOL) End of Line Defects are considered part

identification, part preservation, and packaging/part protection defects.

Examples: Wrong, missing or mixed Part Number Bar Coding Errors Wrong Labeling/Tags Incorrect Quantity Rust Prevention Damaged Parts Packaging Inadequate


Why Is It Important To Reduce EOL defects? Cummins Plants:

Approximately 25% of all Cummins plant disruptions and rejects are in this category of defects

Rejected material can impact inventory and cause down time for Cummins line

Suppliers: Increase in expedited shipping Increase in 3rd party sort and

certified shipments Increase supplier in plant PPM

Rust

25


6. Supplier Change Requests (SCR) Once the suppliers process is PPAP approved, that

process, its control plan, PFMEA, etc. are frozen and must be followed and not changed when those parts are produced for Cummins.

Suppliers often want to and should change the product or manufacturing process: Cost savings Scrap reduction Process improvement Efficiency Corrective action (NCMR/SCAR response) others

When change is required, it needs to be done in a planned, controlled and approved manner!


Why Supplier Change Requests Are Important?

Inadequately managed changes can be a huge barrier to good quality Complex systems make anticipating ALL the consequences of a change very

difficult. Changes that appear harmless can severely affect

Cummins assembly processes Our customers assembly processes Our engines performance in the field Warranty

Changes that appear beneficial have many times had a negative impact on CMI There are many examples of good intentioned changes that have caused line

shut downs, campaigns, and customer issues for Cummins

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How poor quality can impact customer!

Quality issue caused changing an engine in boat that requires cutting hole in side of boat to remove it!


How poor quality can impact customer! Aerial view of key Cummins customer automotive vehicle

plant where 5,000+ vehicles are on hold in yard as result of quality spill!

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Chilean Mine Incident 19L engines used to drill some of the holes for air and food delivery!

Why is product reliability important?


V903 Military Applications Used To Protect And Serve!! USCG 41

Foot Patrol Boat

M9ACE5

Bradley

Bradley Power Pack in Vehicle

Why is product reliability important?

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Final Comments On Quality Improved quality and timeliness of supplier corrective

actions are needed Develop your quality strategy with a mission to achieve

ZERO defects and aggressively execute it Increase focus on PTCs and develop strategy to control Dont rely on manual inspection processes to provide

long term sustainable quality improvements. Dont be satisfied with legacy quality systems. Are you

striving to be world class by investing in latest manufacturing technology and processes?

If you suspect a product problem please notify us immediately. Every minute counts!


REMEMBER.

QUALITY Matters

29

New and ReCon PartsNorbert NustererVice President New and ReCon PartsMay 2, 2014


New and ReCon Parts Supply ChainG L O B A L S U P P L Y B A S E

Manufacturing Plants (CMI or JV)

Customer Plants CMI Plants Distribution BU

ReCon Plants

Parts Distribution Centers

Other Channels

JV Kitting New and ReCon Parts

Whole Goods Make to Order Sell to OEMs

Cyclical

Aftermarket Products Off the shelf

Sell to distribution channel(s) Non Cyclical

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Core Operational Functions

New and ReCon PartsOrganization Chart

Ne

w a

nd

Re

Con

Pa

rtsNorbert Nusterer

Vice President New and ReCon Parts

Doug SunkelExecutive Director -

Global Logistics

Eduardo Martinez GM New and ReCon Parts

Manufacturing

Rob EnrightExecutive Director -Sales and Marketing


250 Sales and Marketing staff in 20 countries 17 Distribution Centers in 12 countries

8 ReCon Plants in 8 countries

New and ReCon Parts Network

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Core Support Functions


Ne

w a

nd

Re

Con

Pa

rtsNorbert Nusterer


Allen PierceExecutive Director -Quality Management


Global Logistics


Manufacturing


Anuja MazgaonkarDirector - Finance

Angelina RodriguezDirector -

6 Sigma and Quality SystemsKevin Westerson

Executive Director Research, Technology and Engineering


Dotted LineSupport

Functions


Ne

w a

nd

Re

Con

Pa

rts

Norbert NustererVice President

New and ReCon Parts



Global Logistics


Manufacturing



Damodar MuleyDirector - Information

Technology

Larry Griffin Director - Purchasing


6 Sigma and Quality Systems

Matt LeddyDirector - Human

Resources

Kevin WestersonExecutive Director Research,

Technology and Engineering

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RegionalParts Leaders


Ne

w a

nd

Re

Con

Pa

rtsNorbert Nusterer




Global Logistics


Manufacturing




6 Sigma and Quality Systems

Milind MadaniGM - India

Jeferson CassolaGM SouthnAmerica

Kevin WestersonExecutive Director Research,

Technology and Engineering

Marc GotohGM - China


Aftermarket Share of Purchases

Part Numbers: 75%+ 25%

Production + NRP NRP Only

Spend: 6%

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Underlying Complexity Trend

Each bar is 1 year of engine production 2013: Supported 171 different engine models 2020: Expect to support 370 different engine models


Demand Growth 2013-2015

Midrange (15 L) 7-10% p.a.

Parts demand as % of plant demand varies dramatically

34


Opportunities


Remanufacturing

ReCon Registered trademark for Cummins reman 1,500 different engine models 1,300 ReCon components Increasingly regional product strategies

Differentiated product versus new parts Equivalent or better quality Identical warranty Lower price driving superior value

35


Part LifecycleProduction Spend Aftermarket Spend

LOW VOLUME

Service Lifespan(30 years +)

Production Lifespan (10-15 years)

Legacy PartsErratic DemandSupply

Disruption

Stopping supply of a part should follow the change control process with an agreed transition plan

Visit NRP Booth for more on Low Volume


Expectations from Aftermarket Supply

Agile and Responsive Supply base Lower Lead time Flexibility to expedite orders Quick response times on PPAP requests

Communication Communicate with NRP Materials during supply constraint (Equal

weightage during allocation) Advance notification when part is phased out of production

Collaboration Collaboration on value engineering for service parts Resolve delivery issues to NRP (achieve over 95% OTD) Proactive problem identification in all situations

36


Expectations from Aftermarket Supply

Help CMI achieve cost leadership late in life Build low volume capability/focus Collaborate on erratic demand Low MOQ Pricing in line with production for higher volume service parts

System Integration Set up and use iSCM, CQMS (Quality) EDI

Comply with Aftermarket packaging standards


Where we need your support

Support Cummins aftermarkets needs during sourcing process and LTAs Aftermarket/ReCon exclusivity Service parts costing

Supplier selection implies support for a 30+ year lifecycle TCO equation changes radically during service-only period

Help improve ReCon product competitiveness Reduce replacement component costs Cummins right to remanufacture Re-engineering product for aftermarket

37


New and ReCon Purchasing Organization

Key Contacts:Ben Mcgibbon Sourcing

Warren Duffett Global Logistics Materials

Supplier Audience Q & A

EBU Supplier Conference Presentation

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