Utilizing Six Sigma and e-Auction Toolsin Electricity Contracting

California Manufacturers and Technology Association2004 Energy Conference

Roger D. Riley, Tyco Electronics

Company OverviewCompany Overview

One of five operating units of Tyco International (NYSE: TYC)

High quality electronic component manufacturer with many well-known brands:

AMP, Raychem, Power Systems, CoEv, Potter & Brumfield

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

Six SigmaSix Sigma

A rigorous, objective methodology focused on eliminating defects

Utilizes a well-defined DMAIC approach:– Define

– Measure

– Analyze

– Improve

– Control

Primary focuses:– Statistical analysis

– Evaluation of alternatives: No “sacred cows”

– Control of process after improvements: “Sustain the gains”

Electricity Contracting ProjectElectricity Contracting Project

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.

Team based approach

70,000+ lines of data

5 month schedule

C&E Matrix and FMEAC&E Matrix and FMEA

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

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)

Hedge Error

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Month/Year

% e

rro

r

% Difference

Target % Difference

Significant Hedge Process ImprovementSignificant Hedge Process Improvement

1stContract

2ndContract - Actual

CurrentContract - forward

SpotMkt.

Avg. = 15.28%

Avg. = 0.52%

Weighted Contract ScoringWeighted Contract Scoring

Evaluation of each supplier and each structure contract Analyzed for risks to Tyco Electronics Examples of evaluation criteria:

– Credits/Charges for over/under consumption

– Title transfer location

– Payment terms

– Audit provisions

– Creditworthiness

– Disputes / Force Majeure

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

Example Weighting FactorsExample Weighting Factors

Supplier #1 #2

Load Structure

Block Load

Following

Block Load Following

Total Score 873 839 875 833

% of Maximum

79% 80% 79% 79%

Weighting Factor

1.21 1.20 1.21 1.21

Difference does not seem large, however…..$50 is transformed to $60.50 (1.21) and $60.00 (1.20)

E-AuctionE-Auction

Efficient, cost-effective means of capturing executable pricing from multiple suppliers

Simultaneous assessment of multiple structures

Attempts to drive competition

Provides a repeatable process that “levels” the playing field for participants via transformation

Project ResultsProject Results

Process– Statistical “proof” of our hedge

– Documented, sustainable system for future contracting

– Independent, but cognizant, of “uncontrollable” factors