Supply Chain Management: Approaches and Practices from Air Products and Chemicals, Inc George Diehl VSB Center for Business Analytics

Air Products Overview $10 B Gases (80%) and Specialty Chemicals (20%) company Chemical industry safety leader Operations in more than 30 countries 55% of sales revenue outside the U.S. 20,000 employees worldwide; 4500 at Allentown PA, Global HQ AMR’s “Top 25 Supply Chains”-Honorable Mention in 2008

ANATOMY of INDUSTRIAL GAS SUPPLY AIR SEPARATION 78% NITROGEN 21% OXYGEN 1% ARGON GAS PIPELINE TO CUSTOMERS LIQUEFACTION GAS TO CUSTOMER OPERATION CYLINDERS LIQUID STORAGE CRYOGENIC TANKER CUSTOMER LIQUID STORAGE AND VAPORIZER

Some Questions To Start… Which traditional functions make up the supply chain? What are some of the issues with cross-functional work? How are they addressed? How do you know that the supply chain is working? And which parts are not What are some ways to “benchmark” supply chain performance against “best in class”?

Simple Supply Chain Process Customer Place Order Take Delivery Pay Bill Sales Win Business Define Reqts Customer Service Set Up Account Input Order Send Invoice Apply Cash Production Bill as speaker – reinforce cross-functional nature of processes. In the process awareness presentation / webcast, we use this process example, which is essentially the heart of the Order-to-Cash process. We stress that SAP will impact this process in 3 key ways … NEXT: Impact #1 – Functions are more interdependent The first impact area is … Commit Inventory Load Product Schedule Delivery Deliver Product Logistics / Distribution

CEO Quote to Shareholders… …Historically, we have had a very strong functional focus in selling, operations, engineering, etc., with a good track record of continuous improvement. But what we found is that the greatest improvement comes where these functional organizations interface. As a result, we have taken a process viewpoint and redesigned how we do much of our business. Point- Are we already on the road and have just not realized it???

Supply Chains Integrate Cross-Functional Processes Business Process: An organized group of cross-functional activities that together provide value for the customer. Input(s) >> Activities >> Output(s) Focus on efficiency and effectiveness Well-designed processes can be patented and/or become a source of competitive advantage—outsource too

PROCESS / FUNCTION BALANCE Limits on Functional Improvement Balanced Integration Of Function and Process Within/Across Businesses “Predictably Positive Experiences” + Revenue, Productivity, and Asset Management Improvement Increased Customer Satisfaction (Cycle Time, Accuracy) Process Fills In the “White Spaces” Customers

Building block approach Source connects to supplier Plan Source Deliver Make Deliver Deliver Source Make Source Make Deliver Source Return Return Return Return Return Return Return Return Customer’s Customer Suppliers’ Supplier Supplier Our Company Customer Internal or External Internal or External SCOR Model Building block approach Source connects to supplier Deliver connects to customer Not all companies have make We can model as far up or down the supply chain as we view important (not limited to two tiers) Customers and / or suppliers can be internal or external Building Block Approach Processes Metrics Best Practice Technology 21 4

Air Products Process Model Let’s spend a minute at an even higher level, looking at Air Products as a complete business enterprise. This shows the 14 global work processes that describe what we do as a Company. You probably can’t read all of the text here, and I don’t intend to go over this in detail. The key point is this: You work in the Supply Chain, which is really at the heart of Air Products business activity. You have detailed knowledge about our products and our customers. As you complete the integrated ERP training program, you will be able to apply your existing knowledge of products and customers in new ways using the power of the SAP system and our new common work processes.

Key Sub-Processes MAKE Schedule production Issue materials to shop floor Produce materials Package materials FINANCE Accounting / Tax Transactions Treasury mgmt External reporting Decision support INFORMATION Plan Computing Infrastructure Understand Client Needs Build Solutions Deliver and Manage Services ENVIRONMENT Permitting Compliance Issue Identification Employee Health & Safety GOVERNANCE Manage corporate risk Manage disclosure and audit Manage shareholder rights & relations ALIGN Planning & Commitment process Mergers & Acquisitions Growth management BUILD Project definition Design Construct Commission & Startup SELL Find and Win Opportunities Manage Customer Experience Let’s spend a minute at an even higher level, looking at Air Products as a complete business enterprise. This shows the 14 global work processes that describe what we do as a Company. You probably can’t read all of the text here, and I don’t intend to go over this in detail. The key point is this: You work in the Supply Chain, which is really at the heart of Air Products business activity. You have detailed knowledge about our products and our customers. As you complete the integrated ERP training program, you will be able to apply your existing knowledge of products and customers in new ways using the power of the SAP system and our new common work processes. INNOVATE Idea management Project impact analysis R&D Portfolio mgmt Offering Development & Introduction PLAN Demand planning Supply planning Balancing Network design Master data mgmt SOURCE Market Analysis Solicit Bids / Negotiate Award Agreements Monitor Performance Pay Suppliers FULFILL Order Management Logistics & Delivery Invoicing Credit & Collection Cash Application PEOPLE Source global talent Develop Work Culture/Environment Deliver Manager / Employee Services Reward Results

How do you know that your supply chain processes are performing well and where they are not?

Air Products Approach to Supply Chain To: Improve Visibility, Velocity, Simplicity By: Driving Operational Innovation Focused On: What Simplify Standardize Shorten Share How Educate Execute Improve Measure So That We: Improve productivity by 3X by FY20XX Create competitive advantage through our Supply Chain Increase customer loyalty scores; earn higher margins for shareholders

Top 5 KPIs: Key Gauges of Supply Chain Performance Cash to Cash Cycle Time Customer Master Data Quality Demand Forecast Accuracy Complaints Closed by Target Date Perfect Order Fulfillment 5

Tracking Key KPI's To Help Integrate Supply Chain Processes Cash to Cash Cycle Time P&L Impact Net Hard Benefits Customer Master Data Accuracy Production Master Data Accuracy Workbook Rejection Rate Inventory Days of Supply Demand Forecast Accuracy Faultless Invoices Days Payable Owed % Orders Received On Time to Demand Production Plan Adherence Inventory Accuracy Complaints Closed by Target Date Average Terms Days Past Terms Perfect Order Fulfillment Days Sales Outstanding 5

Supply Chain KPI’s as Leading Indicators % Complaints Closed by Target Date Improve Reliability Improve Responsive- ness Customer Loyalty Perfect Order Fulfillment Master Data Quality Demand Forecast Accuracy Cash to Cash Cycle Time Reduce Net Assets Increase Profit Operating Return on Net Assets (ORONA)

Supply Chain KPI’s as Leading Indicators % Complaints Closed by Target Date Improve Reliability Improve Responsive- ness AMR Research shows that companies with better demand forecast accuracy have … Customer Loyalty 17% better perfect order ratings … Perfect Order Fulfillment Master Data Quality Demand Forecast Accuracy Cash to Cash Cycle Time Reduce Net Assets Increase Profit Operating Return on Net Assets (ORONA) 15% less inventory … and 35% shorter cash-to-cash cycle times Source: AMR Research Report - February 2004

AP’s Key Results First year: set goal and doubled the historical amount of P&L productivity Year 2 & 3: set goal and exceeded it by more than tripling the historical amount of P&L productivity Four Growth Platform Businesses increased from 25 to 50% of total revenues Customer Loyalty scores for “secure customers” are 15% higher than prior to new process/SAP ORONA hit year 3 goal; double digit growth 4 yrs Stock went from historical $40’s to $105.

Keys to Success Give Your Processes Visibility Clarify Cross-Functional Teamwork-Start with “Swim-lanes” and/or “Gives & Gets”, and then Share Common Measures Identify and Adopt External Best Practices Provide “Context” for Your Performance Indicators, and Measure Cycle Time, Accuracy, Customer Perspectives, Linked to Financial Performance Establish Targets and Review at least Monthly.

George Diehl VSB-Center for Business Analytics Thank You George Diehl VSB-Center for Business Analytics