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Infor Distribution Essentials eSpend Indirect Materials Management System CASE STUDY

About Our Client Our client is a world business leader in mobile electronics, transportation components and systems technology. The company’s two business sectors— Dynamics, Propulsion, Thermal & Interior and Electrical, Electronics, & Safety— provide comprehensive product solutions to complex customer needs. For example, its integrated systems and modules are designed to help simplify vehicle manufacturers' processes and meet the demands of today's high-tech vehicles. In addition, this client is a large and diversified supplier of automotive parts. Our client is a Fortune 500 manufacturing firm positioned in the automotive manufacturing market place, with global operations located in: the United States, France, Japan, and Brazil. With sales in excess of $26 Billion and more than 160 manufacturing related facilities, this client has embarked on an indirect materials outsourcing journey aimed at improving their core focus and reducing their costs to support manufacturing. Client Fast Facts









Revenue $28.8 billion EBITDA $1.47 billion Approximately 190,000 employees 171 wholly owned manufacturing sites 42 joint ventures 53 customer centers and sales offices 34 technical centers Presence in 41 countries on six continents

About Indirect Materials Management (IMM) Recent economic conditions, coupled with increased global competition, have challenged all companies to reevaluate internal operations cost. This activity has resulted in a common goal: Do more with less on all fronts and focus remaining resources on activities central to the core value objectives of the company. In manufacturing, purchases of indirect material (material in support of, but not contained within the final manufactured product) can be as high as 35-40 percent of the total purchases made to support the organization. In the past, indirect material was viewed as a minimal component of total operating cost and offered little, if any, room for increased profitability. Many manufacturing firms are now reevaluating their approach to the management and controls of indirect spend. Indirect Materials Management (IMM) is a fast-growing business model that provides outsourced systems and service sets designed to control the flow of 2

material in support of any manufacturing process. Its entire focus is to improve the control, flow, cost of support, and MRO material, while allowing medium and largesize manufacturers to reallocate headcount and sharpen internal focus on objectives related to the company’s core mission. The typical IMM agreement positions a materials management firm as a facilitator for all indirect materials transactional requirements, both from a systems perspective and a support staffing perspective. Generally, these agreements exclude the materials management firm from taking title to the goods. Instead, inventory carrying is supported by the existing primary supply structure that services the plant.

Return on Investment For a Manufacturer buying $1 Billion in indirect materials, costs can run $10 Million annually to manage this inventory internally. This same manufacturer can save $50 to $100 Million by implementing IMM systems or outsourcing. IMM results in potential reductions of Inventory 15-35%, price 5-10%, and internal labor reductions 15-25%.

Two Critical Components: hss Materials Management Solutions and eSpend About hss Materials Management Solutions hss Materials Management LLC was founded in 1999 by three leaders in distribution and commodity management to provide services for procurement, logistics and inventory related to indirect materials. hss differentiates its technology solution by offering a services model for the “last mile” of indirect materials/commodity management for manufacturing. The competition provides only technology. This model was designed to provide manufacturers with a service provider focused on the management of their indirect spend—allowing the client to focus attention on activities that complement the design and manufacturing of the delivered product. Today, hss supports 12 of our client’s manufacturing plants by providing a service set that includes crib transaction entry and analysis, local execution of a plan for every part, crib systems training and implementation, systems development and design consultation, material flow stratification and implementation, process reconciliation services, business analytics design and delivery, employee 3

supervisory services, technical product plant support, cost savings initiative creation and administration, and general indirect material consultative services defined on a project by project basis. Working with 20 unique customer locations, hss manages more than $80 Million in spend and has delivered 11% year-overyear hard cost improvements to our client’s bottom line. The hss staff works directly in its client’s facilities, collaborating with employees holding high-level plant positions in Manufacturing, Purchasing / Logistics, Operations, Plant Maintenance and Systems support. By working in this manner, hss gains clear insight as to the definition of new best business practices relative to material flow, part planning, and systems functionality development or enhancement. eSpend History More than one year ago, hss and Infor Distribution Essentials teamed to redesign the technology in use by hss for the support of our client’s facilities. Seven separate facilities were all under a third party materials management agreement with hss. Although our client was using an overall ERP system from a leading provider, the software platform in use provided a web-based collaborative platform—which lacked the deep functionality specific to a transaction-intensive, distribution-centric operation. The initial design and development work included Infor Distribution’s sx.Enterprise ERP as the backbone of the eSpend solution. Additional modules were added to provide specific functionality to the indirect materials management functions. In addition, modules were added that were required to reduce cost and increase efficiency of the tool crib management operation. This development centered around three specific areas: Tool Notice/Catalog Manager; Spend to Budget iCenter; and Enhancements to sx.Enterprise specific to an IMM operation. Several other BizLinx products completed the eSpend suite of products: Commerce Connect – to create a supplier connectivity hub; eBuy – to be used by Suppliers who can’t accept/respond to EDI; and eSource – used as a reverse auctioning system.

Our Client and Indirect Material Management: Pre-hss and eSpend To adequately understand the major change in discipline surrounding indirect material with our client, it is critical to realize their starting point. In 1998, our client decided to begin the process of outsourcing their control of indirect material. This initiative was centered on relieving the internal organization of the ancillary cost and required attention surrounding the management of this area in support of the manufacturing process.

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The Supply Chain Prior to this change, our client—like many other manufacturing organizations—had rationalized their indirect supply channel through commodity management-based supply. This methodology reduced the numbers of total suppliers by as much as 80% by selecting commodity managers and allowing them to acquire / supply all of the second tier material that was related to their core areas of product knowledge and technical discipline. These stratified supply channels were charged with lowering total cost of supply through technical cost savings programs, price improvement metrics and overall improved supply chain logistics functions. Commodity managers in this environment were directed and supported through our client’s purchasing organization. Each commodity manager would set their own agendas and expectations to work within each facility and in support of the engineering and maintenance staffs. The floor level support of products was left up to each responsible commodity manager. This resulted in an inconsistent approach and inconsistent performance. The commodity management companies had no direct crib responsibility, due in large part to the UAW ownership of that particular job and its inherent responsibility set. This would create tension and confusion in areas that would cross over each organization’s objectives, i.e., consigned inventory management. Indirect Internal Controls Prior to the third party materials management concept, our client supported the flow of indirect material with 100% of their internal resources. This included the use of an archaic corporate purchasing and inventory control system that was primarily designed to handle the systems demands from a production perspective—which in many cases contradicted the goals and operational objectives required of indirect material. Crib requisitions were initiated on paper cards that simply provided handwritten details about the required part and the quantity needed to satisfy the impending factory floor maintenance service call. Crib attendants would key all of the critical data from the card, pull the material from the shelf, and hand the components out of the window. There was no bar-code automation, and no user-level data captured at the point of disbursement. The commodity-managed supply chains had limited, or sometimes zero, visibility of inventory on-hand. The company responded to PO demand signals generated from manual order creation at the site. It was also challenged to properly manage inventory levels and stock outs due to a lack of system visibility and usage feedback.

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Monthly performance reporting was haphazardly developed and deployed. The system did not offer robust, detailed and timely delivery of the spend and budget metrics that were used to measure the performance of each plant and department. It was not uncommon for the reporting to be delivered very late in the next month resulting in an, “after the fact” culture that was consistently reminded of poor performance—with little, if any, time to effectively improve it. A chasm existed between the goals and objectives of the manufacturing leadership and the purchasing and procurement staffs. A consistent approach from purchasing was often derailed by a counter agenda held by the more influential manufacturing teams. This created a downstream inconsistency that challenged supplier communications and the delivery of strong direction in search of a common approach and consistent results. Decisions regarding spare parts for new programs, tooling and machinery were made without much engagement from the supply chain. These decisions included stocking requirements, expected price, expected usage and alternative products— and were typically made in a vacuum, with inconsistent engagement of the commodity manager. A five-part paper form facilitated detailing and approving the setup of new spare components. This form was often stuck in queue without any visibility of who or what was causing the delay. The long-term effect of a less-thanengaged organization and supply channel was the proliferation of excess and obsolete inventory and/or the lack of available spare parts needed to support the ramp-up of the new tooling—both of which were costing the client millions of dollars annually.

Vision for Change Facing many threats to profitability and overall global competitiveness, our client sought a solution to address these and other problems surrounding indirect material. One of their first key decisions was to alter the line of responsibility for indirect material and shift its primary ownership from a purchasing structure to a manufacturing-based indirect material team. This team consisted of former manufacturing staff members who were charged with improving the organizational approach to indirect material supply chain management. They would utilize the pricing and blanket negotiation services that could be performed by purchasing, but work directly to guide the commodity managers on a daily basis. The team was successful in gaining corporate acceptance for a plan to outsource many of the daily site-level activities for which this new group would be responsible. This resulted in the transfer of several purchasing, logistics, and crib supervisory positions, in addition to the management of indirect material flow from our client’s payroll and responsibility to that of hss Materials Management Solutions (hss). 6

First Steps to Improvement hss began to manage indirect material needs of the plant by deploying the proper management and staff structure—from supervision of the crib to the support of engineering and maintenance. Once this structure was solidified, hss began to build a system that would provide the supply chain a common look into the indirect material needs of the facility. This system became the transaction tracker and demand signal generator. Basically, this simple browser-based system became the window to material movements, billing, demand, and historic usage in support of site and supplierlevel users. Common System, Common Process In addition to the inherent cost reduction that outsourcing this activity generated, it became clear one of the greatest returns resulting from this change was the operational improvement the third party management company delivered. Through standardization, hss was able to provide suppliers with a common footprint upon which to conduct their business in support of the program. The system became the gateway, enabling the pursuit of common objectives and metrics. Simple and unique record sets were created and used to facilitate varying levels of supplier back-end integration with the system. It took approximately three years for the model to outgrow the simple systems design provided by the current technology developer. Key transactional data was being missed. The system was designed originally to be a flat tracker of receipts and disbursements of consigned crib material. It was quickly expected to provide solid inventory and transaction management supported through a complete general ledger structure, with the capability to support integration and messaging from and to a variety of disparate supplier systems. Our client was pushing the system beyond its vision and ability to be redeveloped. The need to provide a full point solution and integrate with a host of enterprise applications was clear. hss had to make a change—and when the decision to change systems was fully agreed upon, hss turned to Infor Distribution Essentials (formerly NxTrend Technology) to develop a system whose foundation was based on 25 years of distribution, transaction and supply chain management experience—making Infor Distribution Essentials the leader in its field. Answer = eSpend eSpend was implemented with a key point of balance in mind: strong transactional integrity vs. ease of use (Figure 1, page 8). One of the first areas of improvement that eSpend offered was the increased control and confidence built around a true transactional / general ledger structure. This has provided our client with an auditable trail in support of all transactions affecting indirect material. 7

Improved Crib Management The crib was one of the first areas for advanced automation. hss launched the eSpend crib manager, which supports wireless device inputs to allow for barcoded crib automation. This has allowed the crib attendants to be more mobile and accurate as they work in and about the crib facility. Additionally, the crib manager was implemented to enhance the choice of inventory control methodology and improve the accuracy of crib inventories. Within the crib functionality is a full repair tracking module that provides visibility to repairable cores as they move through the loop of evaluation. These repaired spares are considered as a component of available balance on hand, and are displayed as such to avoid the purchase of new material over that which is under evaluation for repair or has been repaired at a lower cost. Catalog Control and Collaboration hss launched the catalog manager module that provides internet-based collaboration and approval for the setup and supply chain justifications for the creation of new spare parts inventory. This module is positioned in the center of the supply chain with its primary function designed to connect all plant level engineering and maintenance teams with their original equipment manufacturers and their respective supply partners. Email notification is utilized to enable the communication for required assistance with machine item planning documents that are created by the system. These documents are accessed and updated by all players in the indirect material work chain and stand as the documentation and justification trail for the establishment of new stocked items in the crib facility. hss acts as the gatekeeper for the flow of this information and upon completion approves and submits the item to the crib catalog. Through automation, the initial order signals for the agreed balance-on-hand information are created and sent to the supplier. All other critical component level data is delivered and attached to the item’s permanent record. Prior to the launch of this system, a five-part paper form was utilized to acquire the critical data requirements. The new system has increased the speed at which this information can be collected from many different suppliers and has reduced overall operational costs. It has also provided a database record of all decisions made to increase inventory in support of production. This creates an ability to recall and support decisions made in the past with facts and data—ultimately leading to improved decision making in the future.

Detailed Spend Tracking and Analytics Each requisition or purchase of material through spot-buy tracks the user data to the line level. This has been done to support the summarized spend to budget metrics that are calculated and delivered to the mid-management and above levels daily. Tracking at this level has been an effective tool in changing the culture of 8

control and spend management. When users of the material are made visible via strong tracking, the management of such usage becomes simplified and more strongly adopted. hss has experienced significant cultural change relative to plant adherence to budgetary constraints, largely due to the following: • • •

Easily consumed reporting outputs Accurate and timely reporting outputs Line level detail providing users name and department

For hss, eSpend also supports a catalog of more than 150,000 sku’s connected to approximately 28 unique supply partners. Through robust messaging and integration, the system connects suppliers at various levels of sophistication. Disbursements, receipts, advanced shipping notices and spot-buys are all communicated through eSpend to the suppliers and our client. This integration support provides full transactional tracking and email signaling in the event of failure. This has allowed hss to pull ancillary suppliers into the supply chain without the need for increased staff to provide manual support and intervention.

Figure 1. Key Concept diagram of the eSpend modules. All designed to fully integrate with existing ERP systems in place as well as outward facing connections for commodity managers and trading partners.

Why eSpend? Indirect Materials Management is the next frontier for cost control. It is no longer considered a cost of manufacturing that need not be managed. For all manufacturers and distributors who are focusing on indirect material as a means to remain globally competitive, eSpend creates cultural change while dramatically reducing both time and money from the procurement process. Unlike our competitors, we offer technology and deep domain expertise to help customers 9

recover real dollars associated with the cost and time spent acquiring and managing their indirect materials inventory. Infor Global Solutions can offer the eSpend technology directly to manufacturers, to distributors looking for a solution to offer customers and to IMM firms looking for technology to support their offering. In the case of our client, global competitive pressure forced the company to review internally all areas of the organization. Its indirect materials management was chosen as a target for substantial improvement in bottom line performance— through outsourcing, enhanced systems and automation. The success of delivering significant return to any client willing to off-load their procurement and materials management requirements is highly dependent on the suite of applications facilitating the execution of the program. The Infor BizLinx eSpend suite of applications covers the following four critical areas: Catalog Manager – module that facilitates the collaboration among supply partners in support of machine-level planning for the procurement and stocking of critical spare parts (Figure 2, page 11). The catalog contains the list of products that are sourced and disbursed as part of the indirect material needs. It maintains detailed product information, including pricing and replenishment data. It also tracks warranty information on products. One of the key pieces of information contained in the catalog is its impact on the manufacturing process and service level needed to maintain/replace inventory. The Catalog Manager supports the process of add/change/delete of items on the manufacturing floor with a database approval routing and notification system. Crib Manager - an inventory management system that treats each individual crib as a store, tracks each disbursement of product and also tracks inventory when products are received and stocked in the crib. The system can track both managed and consigned inventory and maintains a perpetual inventory on all the crib products. Each disbursement of the product is associated to a specific division, department, machine, machinist or work orders necessary for managing the indirect spend. Crib Manager will support wireless devices and has the capability to track and send usage information in a batch mode or real-time mode. The usage information is sent back to the commodity manager or primary supply chain for future replenishment and billing. The system can also return data to an accounting system for payable and general ledger reconciliation. The system supports spot buys and has basic tools to create a suggested replenishment order. Budget Manager – system to define an entity, i.e., division, department, machine or machinist, and allocate a budget. One can even define the budget period. Each disbursement of the product from the crib is allocated as the actual spend against the specified entity. On a daily basis, the Budget Manager portal will display the Actual vs. Budget, Estimated vs. Budget, and alert where the actual or the 10

estimated spend is over budget. The portal will support custom metric requirements and allow the user to drill down to the actual line item details. Message Manager - allows the capability to integrate eSpend with other internal systems like back office accounting for payables, general ledger, and asset management software. It also facilitates connectivity to the different back office systems of the commodity manager or primary supply chain. The message manager supports multiple connectivity protocols like ftp, smtp, http and also supports a translator, allowing the translation of messages from one format to another, ensuring system to system connectivity between all the disparate systems. Other eSpend Solution Components iCenter delivers accurate and consistent reporting metric, enabling midmanagement of spend reduction initiatives. eSource Center focuses on reducing costs associated with commodity suppliers via a collaborative, web-based sourcing solution. eBuy Center connects the “un-connectable suppliers” through email and webbased applications as a purchase order delivery and acknowledgement system. Commerce Connect utilizes a flexible connectivity toolset based on Sonic MQ. IMM Enterprise offers distribution business rules to manage transactions at the hub level.

Our Client: Results and Lessons Learned eSpend technology is designed to support an off-site centralized parts distribution center, so our client has vision to move all six of its crib facilities offsite by the end of Q1 2005. In addition, eSpend supports all unmonitored inventories and necessary fill and bill considerations, i.e., point of use inventory, two bin systems and consigned inventory. Our client now has fully integrated indirect spend management reporting tools, increased inventory visibility and control, and predictive metrics to help manage spend behavior. In addition, the company has experienced the following features and benefits:

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FEATURE

BENEFIT

Transactional control with enhanced security

Disallows outside entry without administrator approval

Enhanced integration and messaging layer

Lowers total transaction cost for entire supply chain

Bar code driven disbursement control

Allows inventory to be tracked and managed down to the using employee level

Self-serve KIOSK interface

Facilitates decentralized demand filled from centralized supply facilities, i.e., warehouses

Fully automated new part setup module Creates a more cohesive workplace, as (eTool Notice) integrating engineering, groups now operate in a single work crib and supplier staff chain and interface

Figure 2. This picture shows the streamlined process that has replaced the old paper based system. This system has dramatically lowered cost structures and increased collaboration between customer and supply chain partner. Suppliers and customers can now directly communicate through internet collaboration and activities are automatically tracked and monitored via email notifications

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