work process improvement business analysis business case

Work Process ImprovementBusiness Analysis

Business Case

04/20/23 - 2 -

Work Process Improvement Analysis - Final Presentation Confidential

Business Case Purpose

• To show how improvement opportunities result in financial improvement

• To estimate, the magnitude and range of potential improvements

• To provide a basis for Results Delivery resource focus

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Business Case Approach and Assumptions

• Financial information gathered from 1991 annual results or 1992 information (annualized)

• Benefits are quantified conservatively by design

• Benefits are presented on a pre-tax basis

• Benefits are in millions of US dollars; local currencies are translated at average YTD rates (1992)

• Corporate cost of capital (global) assumed to be 10%

• Benefits have not been adjusted for equity method accounting treatment

Our objective is to over achieve

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The Data Gathering is Complete - Business Case SupportsTransition to the Project Design and Implementation

Business Objective

AnalysisObjectives

CriticalBusinessFactors

FindingsTasksChange ProgramDesign

Opportunities& BusinessCase

Business Objectives• 15% /yr NIAT growth for each of the

next 5 years

• Debt to capital ratio of Š 50%

• Generate cash flow of $350 - $400 million for construction / inventory program

• Increase operating profit margin to 18% similar to best competitors

• Significantly increase sales effectiveness and achieve sales volume growth of 1 1/2 to 2 x GDP

Critical Success Factors• Well communicated and understood globally

integrated vision and strategy aligned with functional business objectives which meaningfully translate Praxair's overall strategy into efficient execution

• Leadership committed to change and willing to drive the process

• Sales and marketing organizations motivated to focus on customers through strategically rationalized market segmentation and appropriate compensation drivers

• Willingness to benchmark best practices of others and ability to integrate into our operations

• Base compensation program which rewards behaviors that clearly support the Praxair long-term strategic intent while supporting short-term financial criteria

• Work processes which are streamlined to remove all non-value-adding steps and to maximize responsiveness to our customers

• Information systems which provide the value added performance information necessary to maximize management decision-making effectiveness

Analysis Objectives• Establish degree of leadership's commitment to

change

• Review and leverage past efforts and current initiatives

• Build global organization momentum through worldwide employee participation and involvement

• Identify primary cost drivers

• Gain consensus around the current state of the business ("as-is" model)

• Identify and analyze business processes for streamlining and elimination of non-essentials

• Evaluate effectiveness of internal service interfaces

• Benchmark selected process performance against industry and non-industry criteria

• Assess information reporting effectiveness

• Build a business case to evaluate the impact of potential changes

• Jointly create an implementation plan to drive and sustain "step-level" change

Analysis Activities

• Executive interviews

• Focus interviews

• Cost driver decomposition

• Initiatives review

• "Brown paper" process flows

• "Day-in-life-of" studies

• Customer satisfaction survey

• Market segmentation study

• Reports rationalization study

• Information systems support requirements analysis

• Targeted area probes

• Best practices benchmarking

• Opportunity identification

• Business case development

• Joint project design

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The Numbers Show Us Lagging Our Competition…

18%

17%

16%

15%

14%

13%

12%

11%

10%

9%

21%

20%

19%

18%

17%

16%

15%

14%

13%

12%

8.5%

8%

7.5%

7%

6.5%

6%

5.5%

5%

4.5%

4%Return

On CapitalOperating

MarginReturn

On Sales

Air Products

B.O.C.AGAXXXX

Air Products

AGA

B.O.C.

XXXXX

XXXX

Air Products

AGAB.O.C.

04/20/23 - 6 -


…and The Markets Reflect It

21

20

19

18

17

16

15

14

Price / EarningsRatio

Praxair Air Products

Source: 16/11/92 Wall Street Journal

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Our Goals Present Major Challenges

$ 278

$

138

15%

10%

56.8%

50%

1992 1997

1992 1997

1992 1997

NIAT

ROC

Debt / Capital

$ 139 mm Earnings

$ 135 mm Earnings

6.75% Improvement or Debt reduced to $ 1,357 mm

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Business Case Methodology

Validate findings with XXXX Joint Team Members

Establish Consistent

Assumptions

Review All Calculations and

Assumptionsfor Accuracy

Business CaseBusiness Case

AnalysisDiagnostics/Studies

Financial Analysis Customer/

MarketStudies

DILO's

OpportunityCharts

DistributionMaps

BrownPapers

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Benefits Can Be Categorized As Follows

Financial Intangible

"Hard"

Order ofMagnitude

$

*

* Not quantifiable using current measures / estimates only

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“Hard” Benefits Summary

Merchant Products $ 32 $ 98 $ 27 - $ 64•Tank/Truck Utilization

• Days' Sales Outstanding• Distribution Process Efficiency

Packaged Gas 24 - 26 14 38 - 54• Cylinder Utilization

• Non-value Added Act's. Parent/subs• Distribution Processes Efficiency

On-Site 13 - 15 11 • Improve Design Process

• Procurement

Financial Services 6 - 7• Reduce close cycle time

• Reduce non value added work

Information Systems 11• Reduce non value added work

• Rationalize initiatives

Total “Hard” Benefits $ 86 - $ 91 $ 123 $ 65 - $ 118

Rev / MgnImprovement

CostReduction

CashFlowU.S. $ (mm)

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Benefits Summary - Merchant Products

Plant Admin. Effectiveness $ 6 $ –

Invoicing & Collection 5 51

Scheduling & Delivery 8 –

Asset Management 13 47

Sales & Marketing Improvement – – $ 27 - $ 64

$ 32 $ 98 $ 27 - $ 64

CostReduction


CashFlowU.S. $ (mm)

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Benefits Summary - Packaged Gas

Order Receipt & Processing $ 1 $ --

Invoicing & Collection 1 1

Scheduling & Delivery 10 - 12 --

Asset Management 2 13

North American Infrastructure 10 --

Sales & Marketing Improvement -- -- $ 38 - $ 54

Total Packaged Gas $ 24 - 26 $ 14 $ 38 - $ 54

CostReduction


CashFlow

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Global On-Site Benefits

Global Procurement $ 7 - 9 $ 11• Equipment lifecycle cost• Surplus asset utilization• Optimum global sourcing

Business Acquisition / Project Mgmt. 6 –• Reduce engineering rework• Reduce construction costs• Reduce startup costs

Total On-Site $ 13 - $ 15 $ 11

CostReduction

CashFlowU.S. $ (mm)

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Global Financial Services Benefits

• Reduce financial close cycle• Improve transaction processing

– Brasil $ 3– Europe 1 - 2– North America 2

Total Financial Services $ 6 - 7

CostReductionU.S. $ (mm)

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Global Information Systems Benefits

• Reduce non-value added activityin I.S. staff worldwide– Brasil $ 4– North America 6

• Rationalize I.S. initiatives on aglobal basis– North America 1– Europe

Total Information Systems $ 11

CostReductionU.S. $ (mm)

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“Hard” Benefits Summary — North America

Merchant Products• Plant Admin. Effectiveness $ 6 $ —• Invoicing and Collection 4 44• Scheduling and Delivery 7 —• Asset Management 11 37• Marketing and Sales — — $ 15 - $ 39

$ 28 $ 81 $ 15 - $ 39

Packaged Gas• Asset Management 2 11• N. American Infrastructure 10 —• Marketing and Sales — — $ 7 - $ 11

13 11 $ 7 - $ 11On-Site• Global Procurement 7 - 9 11• Business Acquisition Project Mgmt. 6 —

Financial Services 1 - 2 —

Information Systems 7 — $ 62 - 65 $ 103 $ 22 - $ 50

CostReduction


CashFlowU.S. $ (mm)

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“Hard” Benefits Summary - Europe

Packaged Gas• Days' sales outstanding – 1• Scheduling & Delivery 4 - 6 –• Asset Management – 2• Marketing & Sales – – $ 11 - $

14 $ 4 - 6 $ 3 $ 11 - $

14

Financial Services• Non-value added activity 2 –

Information Systems• Non-value added activity 1

$ 7 - 9 $ 3 $ 11 - $ 14

CostReduction


CashFlowU.S. $ (mm)

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“Hard” Benefits Summary - Brasil

Merchant Products• Invoicing and Collection $ 1 $ 7• Scheduling and Delivery 1 –• Asset Utilization 2 10• Marketing and Sales – – $ 12 - $

25$ 4 $ 17 $ 12 - $

25Packaged Gas• Order receipt and processing 1• Invoicing and collection 1• Scheduling and Delivery 5• Marketing and Sales $ 29

$ 7 0 $ 29Financial Services• Non-value added activity 3 –

Information Systems• Non-value added activity 3

$ 17 $ 17 $ 41 - $ 54

CostReduction


CashFlowU.S. $ (mm)

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Higher Earnings Drive Shareholder Value Gains . . .

Note: Price/ Earnings ratio at 16/11/92

Increase In Shareholder Value - (Low):

$ 56 mm (Increased Earnings) x 16 (PE Ratio) = $ 901 mm

Increase In Shareholder Value - (High):

$60 mm (Increased Earnings) x 16 (PE Ratio) = $ 952 mm

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. . . And the Joint Project Can Increase Shareholder Value by $900 to $950 Million

$ 1.0

$ 1.5

$ 2.0

$ 2.5

$ 3.0

$ 3.5

Current Shareholder Value

FutureShareholder Value

(Low)

FutureShareholder Value

(High)

$ Billions$2.1 B

$3.0 B

Future Shareholder Value - High 59.5 (Increased Earnings) x 16 (P/E Ratio) = $1,464 mm

Future Shareholder Value - Low 56.5 (Increased Earnings) x 16 (P/E Ratio) = $1,384 mm

Stock Price of $16.25 on November 16, 1992 x 130 mm Shares Outstanding = $ 2.1B

$ 901 mm$ 952 mm

$3.1 B

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Investment

Professional Fees $ 21.1

Expenses 9.0(estimated at 35%)

Investment in Gemini $ 30.1

XXXX FT Resources 5.6

XXXXX PT Resources 2.8

Total Investment $ 38.5

U.S. $ (mm)

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Benefits Payback

Cumulative Benefits $ 65.0 $ 140.0 $ 208.5 (Run rate)

Investment 10.6 21.2 30.1

Cumulative ROI

1993 1994 1995

613 % 660 % 692 %

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Non-Quantified Benefits

• Global Marketing Focus — On-Site

• Benefits from initiatives currently "stalled"

• Reduced operations costs from start-up problems --- On-site

• Cost reductions from streamlined Danbury organization

• Costs associated with an improved financial planning and budgeting process

• Improved margins from an effective management reporting system

• Reduced cycle time in the engineering design process

• Improving work processes beyond "best internal practice" benchmarks

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Intangible Benefits

• Improved focus on the customer

• A motivated work force

• Better global linkage between regional business units

• Improved image in the marketplace

• Clearer roles, responsibilities, accountabilities and authority levels

• Enhanced teamwork across the "silos" of the organization

• Development of a consistent, unifying XXXX culture

• Mechanism to establish leadership in emerging markets

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Early Wins

Merchant Products 11 30 13 27

Packaged Gas 5 7 11 4

On-Site 4 4 6 6

Financial Services 1 – 4 –

Information Systems 3 – 4 _

24 41 38 37

Total 1993

Cumulative $ 65$ 65

U.S. $ (mm)1994

CR CF1993

CR CF

$ 140$ 140

Merchant Products

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Plant Administration Effectiveness

North America (U.S.)

• Reduce non value added activity instaff functions and ancillary groups $ 6.0 --

Total Plant Admin. Effectiveness $ 6.0 $ --

U.S. $ (mm)Cost

ReductionCashFlow

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Invoicing & Collection

North America

• Reduce DSO from 49 to 38 in U.S. $ 3.7 $ 36.6• Reduce DSO from 60 to 45 in Canada 0.6 6.2

Brasil

• Reduce past due A/R from 23 to 15 days 0.8 7.7

Total Invoicing & Collection $ 5.1 $ 50.5

U.S. $ (mm)Cost

ReductionCashFlow

Note: Canada and Brasil benefits include all businessesNote: Canada and Brasil benefits include all businesses

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Scheduling and Delivery

North America• Eliminate excess resources in 5.3 –

transportation function (US)

• Reduce non-value added activity (Canada) 1.0 –

6.3 –

Brasil• Reduce non-value added activity 1.3 –

Total Scheduling & Delivery $ 7.6 $ –

U.S. $ (mm)Cost

ReductionCashFlow

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Asset Utilization and Management

North America

• Improve vehicle utilization on $ 4.7 $ 18.2tractors and trailers (U.S.)

• Improve vehicle utilization on 0.6 1.5tractors and trailers (Canada)

• Reduce tank inventory (U.S.) 1.3 12.5• Reduce tank inventory (Canada) 0.5 4.9• Reduce maintenance cost (U.S.) 4.5 –• Reduce maintenance cost (Canada) 0.3 –

11.9 37.1

Brasil

• Reduce maintenance cost 0.4 –Improve vehicle utilization 0.7 6.9Reduce tank inventory 0.3 3.0

1.4 9.9

Total Asset Management $ 13.3 $ 47.0

U.S. $ (mm)Cost

ReductionCashFlow

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Marketing and Sales ImprovementsDrive Major Benefits to the Bottom Line

North America

• Increase in sales (9%) $ 44.8 $ 17.9 • Increase in margin (3%)

21.5

Brasil

• Increase in sales (5%) 14.08.4 • Increase in margin (7%)

16.6

Total Margin Improvement $ 58.8 $ 64.4

U.S. $ (mm)Revenue

EnhancementMargin

Improvement

Packaged Gas

04/20/23 - 33 -


Order Receipt & Processing - Packaged Gas

Brasil

• Reduce redundancy in processes (20%) $ 0.4 --

Europe

• Non value added activity (Belgium) 0.4 --

Total Order Receipt & Processing $ 0.8 $ --

U.S. $ (mm)Cost

ReductionCashFlow

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Invoicing & Collection - Packaged Gas

Brasil• Reduce cost of invoicing customer $ 0.8 $ --

Europe• Reduce Days' Sales Outstanding (Spain) -- 0.6

- Invoicing- Collection- Terms

Total Invoicing & Collection $ 0.8 $ 0.6

U.S. $ (mm)Cost

ReductionCashFlow

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Scheduling & Delivery - Packaged Gas

North America

• Reduce non value-added activity $ 0.3 --between subsidiaries and parent

Brasil

• Improve efficiency of scheduling and 5.8 --routing process

Europe

• Non value-added activity in loading 2.4 - 3.3 --and delivery (Italy)

• Non value-added activity in schedulingand routing (Spain) 1.7 - 2.5 --

Total Scheduling & Delivery $ 10.2 - 11.9 $ --

U.S. $ (mm)Cost

ReductionCashFlow

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Asset Utilization & Management - Packaged Gas

North America• Reduce non value-added transactions $ 0.5 --

between subsidiaries and parent• Reduce excess working stocks in Canada (15%) 0.4 4.3• Eliminate excess hard goods offerings/

standardize product lines (25%) 0.5 5.1• Reduce excess working stocks in US (10%) 0.1 1.4

Total, North America $ 1.5 $ 10.8Europe

• Cylinder control and tracking (Belgium) $ -- $ 0.5• Cylinder control and tracking (Italy) -- 1.1• Cylinder rental income (Italy) -- 1.0

Total, Europe $ 0 $ 2.6

Total Asset Management $ 1.5 $ 13.4

U.S. $ (mm)Cost

ReductionCashFlow

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Overlaps in the Canadian Infrastructure canbe Streamlined to Improve Financial Performance

Sales (8 subs + Medigas) $ 158.5

Overhead Costs $ 44.0

% of Sales 27.8 %

Best in Group ("Internal") 17.0 %

Gap 10.8 %

Annualized Sales $ 158.5

Potential Benefit $ 17.0

Joint Commitment $ 10.9(reduce to

20.8%)

(mm)1992 Annualized (7/92 YTD)

• Reduce / Leverage duplicate functions between Corporate and subsidiaries

• Rationalize areas of geographic duplication and overlap

• Improve hand-offs between central distribution points and subsidiary locations

--- Key Opportunities ---

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Improving & Marketing and Sales Tools and EffectivenessWill Drop $54 mm to the Bottom Line

North America

• Increase in sales (12%) $ 19.0 $ 7.6 • Increase in margin (2%)

3.5

Brasil


20.6

Europe


9.0

Total Margin Improvement $ 45.4 $ 54.1

U.S. $ (mm)Revenue

EnhancementMargin

Improvement

Other Major Areas

04/20/23 - 40 -


Next Steps

Begin implementation onNovember 23, 1992

work process improvement business analysis business case

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