It’s All About the Customer Lean6 Jack Rouch Acting Director for Internal Review March 30, 2004 #

DFAS Lean6 Definition Lean6 is our fact-based approach for improving our business processes and delivering best value to our customers. Leadership Council - January 16, 2004 1/2/2019 Page 2 of 29 #

Value Chain Value Chain Customer Inputs, Raw Assets / Core Channels Offering Inputs, Raw Assets / Core Channels Offering Inputs, Raw Inputs, Raw Assets / Core Assets / Core Priorities Priorities Channels Channels Offering Offering Competencies Priorities Priorities Material Material Material Material Competencies Competencies Competencies - 1/2/2019 Page 3 of 29 #

Assets, Core Competencies DFAS Value Chain Model Individual Inputs, Raw Materials Customers Channels Offerings Assets, Core Competencies Organizational Inputs, Raw Materials Customers Channels Offerings 1/2/2019 Page 4 of 29 #

Value Chain - Customers & Priorities Individual DFAS’ first-line payment recipients Active Duty Reserve/Guard Retirees Civilians Annuitants/Survivors Spouses/Families Contractors Garnishment Recipients Their Priorities: Timely & Accurate Payments and Payment Information Organizational Our partners in servicing our payment recipients Field Level (Wing, Base, Unit, Dept., etc.) Major Command Unified Command Pentagon/DoD (OSD, Comptroller, Services) Other Federal Agencies (DOE, DOJ, OMB, GAO, IG, VA, Treasury, etc.) State Agencies Congress Services Program & Finance Offices & FMs State & Local Tax Authorities Their Priorities: Everything Above, Plus: Timely and Accurate Business Intelligence Timely and Accurate Financial Statements Delivery of all of the Above at a Reasonable Price 1/2/2019 Page 5 of 29 #

Value Chain - Channels Individual Organizational Internet E-Mail Telephone Mail Hard Copies Face-to-Face Hotlines Newspaper/Media Individual Everything Above, Plus: Finance & Accounting Systems Client Executives/MSAs FSOs Dashboard GAO/IG Reports Contractors/Vendors Congress Organizational 1/2/2019 Page 6 of 29 #

Value Chain - Offerings Information & Payment Disbursing Collecting Billing Reporting Competence Communication (Notification, Feedback, Notice) Individual Everything Above, Plus: Decisions Auditable Products Analysis Competent Advice Recovery/Accountability Partnering to Deliver Needs/Requests IT Solutions Organizational 1/2/2019 Page 7 of 29 #

Value Chain - Inputs Individual Organizational Request for Payment/Reimbursement Entitlement Data Information Communication Contractor Support Employees Payment Events (Commitments, Obligations, Expenditures) Individual Feeder Systems/Data Information Technology Training Policies/Procedures Regulations/U.S. Code External Requirement Outside Knowledge Strategic/Operational Plans Business Enterprise Architecture Intellectual Capital Payment Events (Commitments, Obligations, Expenditures) Organizational 1/2/2019 Page 8 of 29 #

Value Chain - Assets/Core Competencies Unique Capability Intellectual Capital Now Future Intellectual Capital Business Intelligence 1/2/2019 Page 9 of 29 #

DFAS Strategic Targets Deliver Auditable Financial Statements for All Clients Implement Electronic Commerce for All Commercial Payments Processing Pay Service Members What They Are Entitled to by the Scheduled Pay Date Develop Corporate Capability to Deliver Customer Unique Business Intelligence Retain, Recruit and Train a Workforce Capable of Developing and Implementing DFAS Strategic Plan 1/2/2019 Page 10 of 29 #

Customer Priorities Core Competencies Related Strategic Targets Timely/Accurate Pay Timely/Accurate F/S Business Intelligence Related Strategic Targets Audited Financial Statements Electronic Commerce Service Pay Accurate/Timely Capability to Provide Business Intelligence Core Competencies Business Intelligence Intellectual Capital Related Strategic Targets Retain, Recruit, Train Employees Capability to Provide Business Intelligence 1/2/2019 Page 11 of 29 #

DFAS Lean6 Definition Lean6 is our fact-based approach for improving our business processes and delivering best value to our customers. Leadership Council - January 16, 2004 1/2/2019 Page 12 of 29 #

Lean 1/2/2019 Page 13 of 29 #

Lean Principles of Lean Identify which features create VALUE. Identify the sequence of activities to create the VALUE. Make the activities FLOW. Let the customers products or services through the process. PERFECT the process to achieve standardization and reduce variation. 1/2/2019 Page 14 of 29 #

Lean Definitions Value added Non-value added, but necessary Is the customer willing to pay extra for this activity? Does this activity add to our competitive advantage? Non-value added, but necessary Does regulation or law require this activity? Are company measurements or reporting requirements supported by this activity? Are risks, defects, and costs reduced by this activity? Does a Value Added activity require this step? Non-value added The previous questions cannot be answered with ‘Yes’. These activities are considered wasteful. 1/2/2019 Page 15 of 29 #

Lean 7 Deadly Wastes - Muda Transportation Overproduction Inventory Processing Motion Waiting Defects 1/2/2019 Page 16 of 29 #

Six Sigma 1/2/2019 Page 17 of 29 #

Six Sigma Six Sigma Six Sigma is a disciplined, data-driven approach and methodology for eliminating defects in a process. Six Sigma seeks to : Reduce variation/defects in a process Statistical measurement: = 3.4 defects per million opportunities UCL LCL 1/2/2019 Page 18 of 29 #

--Former GE chairman-- Six Sigma Six Sigma “Six Sigma quality is a disciplined method of eliminating virtually all defects from every one of the company’s products, processes, and transactions.” John F Welch --Former GE chairman-- 1/2/2019 Page 19 of 29 #

Six Sigma What is Six Sigma? Six Sigma pertains equally to measuring the quality of an accounting process as it does to measuring a manufacturing process. The quality associated with only 3.4 defects per million is the equivalent to 99.99966% perfection 1/2/2019 Page 20 of 29 #

Compare & Contrast Lean & Six Sigma Theory LEAN Remove Waste SIX SIGMA Reduce Variation Methodology 1. Identify Value 2. Identify Value Stream 3. Flow 4. Pull 5. Perfection 1. Define 2. Measure 3. Analyze 4. Improve 5. Control Focus Flow Focused Problem Focused Assumptions 1. Waste Removal with Improve Business Performance 2. Many Small Improvements are Better than Systems Analysis 1. A Problem Exists 2. Figures and Numbers are Valued 3. System Output Improves if Variation in all Processes is Reduced Primary Effect Reduced Flow Time Uniform Process Output 1/2/2019 Page 21 of 29 #

Six Sigma Compare & Contrast Lean & Six Sigma (cont) LEAN SIX SIGMA Secondary Effects LEAN 1. Less Variation 2. Uniform Output 3. Less Inventory 4. New Accounting System 5. Flow--Performance Measures for Managers 6. Improved Quality SIX SIGMA 1. Less Waste 2. Fast Throughput 3. Less Inventory 4. Fluctuation--Performance Measures for Managers 5. Improved Quality Criticisms Statistical or System Analysis is not Valued 1. System Interaction not Considered 2. Processes Improved Independently Ref: “How to Compare Six Sigma, Lean & Theory of Constraints” (Quality Progress, March 2002) 1/2/2019 Page 22 of 29 #

Development of DFAS Lean6 Six Sigma Lean 1/2/2019 Page 23 of 29 #

Specify value in the eyes of the customer Lean6 Principles Specify value in the eyes of the customer Identify value stream; eliminate waste and variation Make value flow at pull of customer Involve, align & empower employees Continuously improve knowledge in pursuit of perfection 1/2/2019 Page 24 of 29 #

Actions to implement Lean6: Implementation Actions to implement Lean6: Develop strategy & methodology Develop position descriptions for Black Belts (301/501/510 series) Recruit, hire & train Black Belts Develop policies & procedures for initiative (Governance Manual) Roles & responsibilities Types of projects Training plan Project reporting & validation Communications Briefings web/ePortal 1/2/2019 Page 25 of 29 #

Integrating Lean6 into the DFAS Culture How we Deliver Our Products and Services People Processes Systems Human Capital Strategy Lean 6 Portfolio Management 1/2/2019 Page 26 of 29 #

The Lean6 Process Identify Opportunities Achieve Prioritize Results Options Execute Plan Plan Project 1/2/2019 Page 27 of 29 #

Kaizen Event (Less than 1 week) Types of Projects Just Do It (1-2 days) Quickly identify and eliminate obvious muda Business Line controlled - no portfolio management Get started now Kaizen Event (Less than 1 week) Short, intensive project Small team - Greenbelts (Black Belt coached) Guidance and training to come Black Belt Led Project (Approximately 3 months) Address more complex problems Guided by a trained Blackbelt Subject to Portfolio Management Quality Council Review/Monitoring 1/2/2019 Page 28 of 29 #

Lean6 Roles All DFAS Employees Leadership Council Quality Council Project Sponsors Black Belts (Total 30) 100% to implement Lean6 Will receive Black Belt training, coaching, and project assignments to develop Black Belt credentials Green Belts (120-150) Will receive basic Lean6 training Will work on improvement projects ‘as needed’ basis Will remain in current positions Master Black Belts (future) Will manage the growing of the Lean6 program 1/2/2019 Page 29 of 29 #

Importance of understanding your organization’s Value Chain Major Takeaways Importance of understanding your organization’s Value Chain Benefits of Combined Lean and Six Sigma Approach Transforming the Culture 1/2/2019 Page 2 of 29 #