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 large-
size 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-over-
year 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.

4
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.

5
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-than-
engaged 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 supplier-
level 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 bar-
coded 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 mid-
management 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 web-
based 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 off-
site 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:

11
 FEATURE BENEFIT

Transactional control with enhanced Disallows outside entry without

security administrator approval

Enhanced integration and messaging Lowers total transaction cost for entire
layer 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

12