ZF Escalation Model

Supplier / Purchased parts

Supplier Management ZF Group | Materials Management

Internal
Agenda

1. Definition and escalation criteria

2. Escalation level 1

3. Escalation level 2

4. Escalation level 3

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01
Definition and escalation criteria

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Definition

Regulation of the escalation process and responsibilities for suppliers demonstrating an inability to meet ZF quality, delivery,
or product launch expectations.

The escalation model is to be applied groupwide, including ZF TRW Automotive Holdings Corp. and all of its affiliates by all
ZF locations and direct material suppliers to ZF and refers to external suppliers.

There are 3 escalation levels: EL1, EL2 and EL3 (see figure). Usually the escalation process is initiated with EL1. Upon good
cause shown, suppliers can be directly escalated to a higher escalation level or levels can be skipped.

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Escalation levels
ZF Escalation Model
• Top Management Focus
• Project structure at Supplier mandatory
Vice President Level • On-site presence mandatory
Corporate Level
EL3 • New business on hold (NBH) mandatory
• Potential phase out -> alterantive sourcing

• High Management Focus

Director Level • Project structure at Supplier mandatory
Divisional Level EL2 • New business on hold (NBH) possible
• Potential evaluation of sourcing alternatives

Senior Manager • Management Focus

Plant Level • Fix root causes
EL1 • Named coordinator on supplier site with
mandate to drive actions and take decisions

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Refining of escalation criteria in order to ensure fast upwards
escalation and focus on de-escalation
EL Escalation criteria Quality Escalation criteria Logistics
1 • A- or W-complaints out of target for over 3 months or more than • DPI <80% over 3months
one A-complaint per month • danger of airfreight or expedited freight within order horizon
• Unauthorized product- or process change, without pre- • Delivery plan is not confirmed at all or reduced by up to 20%
information, with negative impact on ZF.
• Installed capacity at supplier will fall below ZF demands and/or capacity
• No or inadequate response for more than one week (e.g. on 8D commitment within the next 9 months
reports)
• APQP fulfillment out of plan, impact on ZF milestones
• Non-compliance with mandatory ZF- or industry standards

2 • EL 1 status longer than 6 months or de-escalation criteria not • DPI <70% over 3 months, trend negative
fulfilled/not fulfillable • existing airfreight, one-time event, max. one week's demand
• Unauthorized product- or process change, without pre-information, • Delivery plan is not confirmed at all or reduced by up to 30%
with negative impact on ZF’s customer.
• Installed capacity at supplier will fall below ZF demands and/or capacity
• No or inadequate response for more than four weeks (e.g. on 8D commitment within the next 6 months
reports)
• APQP fulfillment out of plan with impact on ZF’s customer project
milestones

3 • EL 2 status longer than 3 months or de-escalation criteria not • DPI <50% over 3 months, trend negative
fulfilled/not fulfillable • Existing airfreight, repeated, over one week's demand
• Supplier’s management not committed or not capable to ensure • Delivery plan is not confirmed at all or reduced by up to 40%
ZF’s supply with required quality level
• Installed capacity at supplier will fall below ZF demands and/or capacity
• Supplier quality issues impacting product safety (life is in danger; commitment within the next 3 months
except PPAC issues)

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Escalation Model “Supplier / Purchased Parts”

Main reasons for escalation:

• Supply of defective parts (quality)
• Inadequate delivery reliability (quantity and/or timing)
• Lack of supplier production capacities endangering future supply
• Failure to implement corrective actions
• Insufficient collaboration in APQP, Supplier Readiness and launch

Other reasons might be possible.

Terms and Definitions:

APQP Advanced Product Quality Planning
DPI Delivery Performance Inbound
EL Escalation Level
NBH New Business Hold
ZAMS ZF Audit Management System

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02
Escalation level 1

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Escalation level 1 (EL1)

If the ZF plant has decided on the basis of available facts, to apply level EL1 to the supplier, then increased attention is
required in the incoming goods inspection of ZF.
The supplier will be informed officially in written form (EL1 escalation letter). Additionally the case is documented in ZAMS
(ZF-Audit Managements System), which is worldwide available in ZF.

The escalation team defines the following:

• Define affected ZF plant and supplier • Set short-term actions incl. due dates to ensure supply to
• Describe reason(s) for escalation ZF as well as to ZF customers, e.g. 100% goods leaving
inspection, examination of all products at affected ZF
• Parts affected
plant(s)
• Characteristics of the parts affected
• Define type and scope of documentation (to be
• Define required inspection & sorting activities: implemented by supplier)
• Type of inspection • Describe quantifiable and measurable (S.M.A.R.T.) de-
• Marking of certified product and shipment in escalation criteria (“exit criteria”)
accordance with QD83 • Define method of confirmation for the corrective actions
• Sorting process to be conducted by supplier, by ZF, (e.g.. GMMOG, line walk, run@rate, audits)
or an approved third party. • Specify additional documentation if required

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Escalation level 1 (EL1)

The supplier is required to submit the signed escalation checklist to ZF and to undertake all necessary actions to
graduate from the escalation as soon as possible.

The progress of escalation measures must be reported by the supplier to ZF at least weekly.

If the exit criteria are sustainably reached, the escalation leader, after consultation with the steering team, de-escalates
the supplier and terminates the escalation.

In general, the maximum period for a supplier to remain on EL1 is 6 months.

If the exit criteria are not reached or can foreseeably not be reached despite deployment of all defined actions, the
escalation leader must promptly escalate the case to a higher level

At the supplier, the responsibility for the escalation activities lies with the executive management, who is requested to take
direct ownership of the case. Furthermore, the supplier must define a formal project organization and identify an
escalation coordinator who has adequate decision-making power to effectively drive the requested improvements

Costs incurred by applying the Escalation Model have to be covered by the supplier.

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03
Escalation level 2

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Escalation level 2 (EL2)

If the verification required in level EL1 is not provided or is not provided on time, then the supplied ZF plant can introduce
escalation level 2.

The supplier will be informed officially in written form (EL2 escalation letter). Additionally the case is to be updated in ZAMS
(ZF-Audit Managements System), which is worldwide available in ZF.
The supplier is required to submit the signed escalation checklist to ZF and to undertake all necessary actions to graduate
from the escalation as soon as possible.

A face-to-face meeting must be realized at ZF, where the supplier is required present and commit to an effective action
plan. The progress of escalation measures must be reported by the supplier to ZF at least weekly.

Further actions in EL2:

• Optionally, the supplier’s status can be set to “New Business Hold” (NBH)
• Customer notification of supplier-driven issue
• Supplier certification body (registrar) notification of issue and ZF impact
• Partial shift of volume to mitigate supply risk

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Escalation level 2 (EL2)

If the exit criteria are sustainably reached, the escalation leader de-escalates the supplier to a lower level or ends the
escalation.

The maximum period for a supplier to remain on EL2 is 3 months, if no different decision is taken.

If the exit criteria are not reached or can foreseeably not be reached despite deployment of all defined actions, the
escalation leader must promptly escalate the case to EL3.

At the supplier, the responsibility for the escalation activities lies with the executive management, who is requested to take
direct ownership of the case. Furthermore, the supplier must define a formal project organization and identify an
escalation coordinator who has adequate decision-making power to effectively drive the requested improvements

Costs incurred by applying the Escalation Model have to be covered by the supplier.

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04
Escalation level 3

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Escalation level 3 (EL3)

If the verification required in level EL2 is not provided or is not provided on time, then the supplied ZF plant can introduce
escalation level 3.

The supplier will be informed officially in written form (EL3 escalation letter). Additionally the case is to be updated in ZAMS
(ZF-Audit Managements System), which is worldwide available in ZF.
The supplier is required to submit the signed escalation checklist to ZF and to undertake all necessary actions to graduate
from the escalation as soon as possible.

A face-to-face meeting with supplier’s top management must be realized at ZF, where the supplier is required present
and commit to an effective action plan. The progress of escalation measures must be reported by the supplier to the
escalation team daily.
The supplier’s status must be set to “New Business Hold” (NBH).

Further actions in EL3:

• Customer notification of supplier-driven issue
• Supplier certification body (registrar) notification of issue and ZF impact
• Partial shift of volume to mitigate supply risk
• Specification of a phase-out plan as applicable (Class Z, status P)
• Termination of supply contract

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Escalation level 3 (EL3)

If the exit criteria are sustainably reached, the escalation leader de-escalates the supplier to a lower level or ends the
escalation.

At the supplier, the responsibility for the escalation activities lies with the executive management, who is requested to take
direct ownership of the case. Furthermore, the supplier must define a formal project organization and identify an
escalation coordinator who has adequate decision-making power to effectively drive the requested improvements

Costs incurred by applying the Escalation Model have to be covered by the supplier.

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Supplier Management ZF Group | ZF Escalation Model Supplier / Purchased parts Internal © ZF Friedrichshafen AG 17