1. Utilizing Six Sigma and e-Auction Tools in Electricity Contracting California Manufacturers and Technology Association 2004 Energy Conference Roger D. Riley, Tyco Electronics

2. Company Overview n One of five operating units of Tyco International (NYSE: TYC) n High quality electronic component manufacturer with many well-known brands: AMP, Raychem, Power Systems, CoEv, Potter & Brumfield n Direct Access eligible facilities in CA: –Former Raychem operations –All located in S.F. Bay Area: Menlo Park, Redwood City, Fremont –10 accounts total including transmission, primary and secondary

3. Six Sigma n A rigorous, objective methodology focused on eliminating defects n Utilizes a well-defined DMAIC approach: –Define –Measure –Analyze –Improve –Control n Primary focuses: –Statistical analysis –Evaluation of alternatives: No sacred cows –Control of process after improvements: Sustain the gains

4. Electricity Contracting Project n Business problem definition: As a direct access electricity customer, we must hedge and subsequently contract for our electrical energy requirements. For the period of 5/03 to 4/04, the hedge was incorrect resulting in significant additional costs. These additional costs were incurred as the result of an incorrect hedge and subsequent sales of excess energy at a loss. n Team based approach n 70,000+ lines of data n 5 month schedule

5. C&E Matrix and FMEA n Cause and Effect Matrix –Hedging (cause) and associated costs (effect) of demand and consumption matching are critical to the success of the process –Hedging is focused on reducing/eliminating scrap (excess energy sold at a loss) –Hedging process is also focused on controlling risk Risk of exposure to spot market pricing volatility (matching demand to consumption) Value at Risk (VAR): How much opportunity is left on the table as part of hedge n Failure Modes and Effects Analysis (FMEA) looks at future variables affecting the hedge and performs a Monte Carlo analysis on those variables: –Usage above or below hedge quantity –Spot market pricing: Net cost after sale (within plausible limits)

6. Significant Hedge Process Improvement 1st Contract 2nd Contract - Actual Current Contract - forward Spot Mkt. Avg. = 15.28% Avg. = 0.52%

7. Weighted Contract Scoring n Evaluation of each supplier and each structure contract n Analyzed for risks to Tyco Electronics n Examples of evaluation criteria: –Credits/Charges for over/under consumption –Title transfer location –Payment terms –Audit provisions –Creditworthiness –Disputes / Force Majeure n Each supplier and contract structure was assigned a weighting factor for e- Auction –Pricing from each supplier is not the same as they represent differential risk to Tyco Electronics –Weighting ultimately transforms each submitted price into an equivalent

8. Example Weighting Factors Supplier#1#2 Load Structure BlockLoad Following BlockLoad Following Total Score873839875833 % of Maximum 79%80%79% Weighting Factor 1.211.201.21 Difference does not seem large, however…..$50 is transformed to $60.50 (1.21) and $60.00 (1.20)

9. E-Auction n Efficient, cost-effective means of capturing executable pricing from multiple suppliers n Simultaneous assessment of multiple structures n Attempts to drive competition n Provides a repeatable process that levels the playing field for participants via transformation

10. Project Results n Process –Statistical proof of our hedge –Documented, sustainable system for future contracting –Independent, but cognizant, of uncontrollable factors