The Quality Imperative. Bruce Bomphrey Automotive Industry Solutions IBM EMEA

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1 The Quality Imperative Bruce Bomphrey Automotive Industry Solutions IBM EMEA

2 The quality and cost perspective continues to be a significant issue for automobile manufacturers, suppliers and other channel participants. In the aftermarket it affects brand image, warranty and litigation costs Hyundai challenges the leaders in Initial Quality 1 Toyota problems per hundred vehicles Honda/Hyundai 102 problems per hundred vehicle Industry Average 116 problems per hundred vehicles Near parity exists between domestic brands and European brands in initial Product quality Brand Image (Value) impacted by long term quality problems 2 Traditional leaders below Industry Average in Problems per 100 vehicles: Audi, Mercedes-Benz, Volvo High volume brands significantly beat the Industry Average Toyota, Honda, Subaru, Chevrolet, Mercury Warranty Costs are at all time high and escalating 3, warranty costs exceeded $12B in the US alone (2-3% of revenue) Exceeding $700 Per New Light Vehicle Retailed Over 100 million warranty claims processed in US during 2003 Suppliers and Supplier Recovery are open switches ~10,000 Claims/Lawsuits annually (costs = $???????) 4 Effects all global companies

3 Warranties continue to lengthen 3 Eight Vehicle Manufacturers offer Power Train coverage of 70,000 mile or more Four offer 100,000 mile coverage Manufacturer Power Train Coverage Chrysler Group 7years / 70,000 miles Hyundai 10 years / 100,000miles Infiniti 6years / 70,000 miles Isuzu 7 years / 75,000 miles Kia 10 years / 100,000miles Lexus 6 years / 70,000 miles Mitsubishi 10 years / 100,000 miles Suzuki 10 years / 100,000 miles

4 As do vehicle recalls 6 More recalls expected but smaller in scope. Manufacturer Component Failure Impact (# units) General Motors Steering 750,000 Nissan NA Engine 276,000 Infiniti Brakes 24,300 Buick Fuel Line 94,000 Volvo Brakes 36,000 Mazda Fuel Tank 56,700 Dodge Instrument Panel 27,600 Suzuki Engine 197,000 But there is always the big one 7. Ford potential recall door latches in F 150, Expedition, etc. 4.1 Million vehicles Cost estimate > $500 Million USD Ford dismissed opportunity to act

5 The cost, legal and regulatory exposure for major automotive and heavy vehicle manufacturers has increased to the point where OEMs must act It is estimated that each day a vehicle manufacturer delays a recall campaign or other action to alleviate a known defect costs approximately $1 million per day. 9 The average amount of time it takes a manufacturer to discover a defect and employ actions to fix it is in excess of 200 days 10. Just a 10% decrease in the "detect time" of a single defect could save a major manufacturer over $20 million. and who owns the responsibility?

6 The Pain continues to grow. Warranty costs exceed US manufacturer profitability by 400% Domestic OEM profit per vehicle = $174 USD 8 Warranty Cost per vehicle = $700 USD TREAD Act and FASB requirements are increasing visibility (and they are evolving) NHTSA s TREAD Act requires Vehicle Manufacturers to more comprehensively track and report product safety and quality issues to the Federal Government civil and criminal penalties and extra territorial implications public information FASB FIN 45 requires US manufacturers to disclose details on product warranty costs and warranty reserves

7 The quality landscape 8. *Representative Model Not intended to be all inclusive BE: Body Engineering EN: Engineering CA: Crash Analysis PD: Product Development PS: Procurement and Supply SQ: Supplier Quality PQ: Product Quality CS: Customer Service DS: Dealer Service GC: General Counsel/Legal WA: Warranty Administration RA: Regulatory (NHTSA) DL: Dealer MS: Marketing and Sales BA: Body Assembly MA: Manufacturing CM: Component Manufacturer UN: Unions CA PS PQ CM BA UN SQ Quality MA EN PD DL DS WA BE MS RA GC Structured and unstructured data 10% to 90% text

8 and it s not getting easier Frequent Model Introductions Decreased product development cycles Decreased product test cycles Increasing Product Complexity Especially in the EE space (highly visible to consumers) Time Intensive Root Cause Diagnosis/Analysis Awash with data Silos in extended enterprise (at OEM and Suppliers) Component and Platform Re-Use grows Unknowingly failures are designed in Increasing Regulatory Pressure and Oversight Parts Traceability mandates Recyclability and ELV (End of Life Vehicle)

9 .and, vehicle manufacturers seek to push the financial risk for warranty down the automotive supply chain to component suppliers from 5% historically to 45% or $5.4B of the projected warranty cost of $14B by as early as These suppliers provide 65% of the physical content of a light vehicle. 12

10 A perspective. Saving 10% on the warranty cost per vehicle would enhance profitability on a 200,000 unit product & would save: $14,000,000 USD Damaged brand, causing a lost of sales of 20%* on a 200,000 unit production would result in a loss of revenue of: >$1,200,000,000 USD One tenth of one percent market share in US = $350M *Explorer sales fell 22.4% as a result of Ford/Firestone issues

11 What is Quality Early Warning? Quality Early warning is the use of data to detect problems in product quality as early as possible using all available data sources. These include many sources that in the past may have been below management s radar. Dealers Enterprise Federal Government EWS Business Context Other Dealer Call Centers Field Investigators Executives EW Analysis NHTSA (TREAD) Ind. Repair Svcs. Survey Sources Engineering Suppliers Telematics Sources Engineering Vehicle

12 The IBM/SAS Early Warning Solution Framework The framework allows customization of a solution that exactly meets the customer s needs Industry focused data models Data Warehouse Architecture Extract, Transformation, and Load capabilities Text Mining Solution Customer reports and Ad hoc querying

13 The IBM/SAS Quality EWS Architecture Framework Business Intelligence Architecture integrates warranty records, quality data, and other relevant information into one common database. Repair Call Center Text Mining Data Mining End Users VOC Field Reports Legal Claims Vehicle Tech Support Bill of Materials Extract Transform Load Early Warning Data Warehouse Extract Transform Load Data Marts ed Alerts Campaign Performance Gov t Reports Mapped Data Problem Detection Adhoc Queries Text Query Deviation Reporting Predictive Modeling Source Systems Adapters Metadata Repository End Users

14 IBM and SAS are uniquely qualified to assist in the creation of a Quality Early Warning System We understand Auto Industry environment and systems Design, through manufacturing & support Differences in the kind & sources of data in various systems Ways to harmonise the terminology and structure the database Methods to correlate the data based upon deep industry knowledge Develop business rules used to identify trends early in the process Our current projects in this area are at the worlds largest OEMs and a Tier 1 supplier Leverage industry-leading data mining and early warning techniques Provide tactical approach quickly with strategic construct Follow a phased approach predicated on early payback

15 Acknowledgements 1 J.D. Power 2004 IQS Study 2 J.D. Power 2003 Dependability Study 3 Warranty Week 04/ Alliance of Automobile Manufacturers 5 Automotive News Data Center 01/ NHTSA Detroit News and Free Press 5/02/ AMR 04/ IBM 10 AIAG Auto-Tech AIAG/AMR Industry Study AMR report, 04/26/2004 Pouring the right Foundation for Early Warning

16 Thank you! Bruce Bomphrey

Automotive Industry Overview

Automotive Industry Overview April 2009 Edition Please Direct All Inquires to: Please Direct All Inquires to: Julie A. Enzweiler Automotive Research Director 859.905.4940 Julie.Enzweiler@nielsen.com Brand