value fishbone optimize package size/quantity or bundle multiple orders direct ship vs. warehousing...

Value FishboneValue Fishbone

Optimize package size/quantity or bundle multiple orders

Direct ship vs. warehousing

Warehouse re-positioning review

Evaluate equipment positioning / repositioning costs

Breakdown supplier provided transportation costsInclude transportation costs in all bid evaluations + customs

Optimize mode of transportation and routes

Minimize customs fees with proper documentation

Evaluate end of product cycle inventory

Manage inventory levels in the whole supply chain

Consigned inventory

Establish and recover expedite fees for poor delivery

Evaluate customs related exposure on life cycle of parts

Minimize or eliminate all assessorial charges

Extend payment terms

Enforce contractual penalties

Look for areas where AA can sub-contract to suppliers

Identify supplier value added items beyond core offering

Develop suppliers in limited competition markets

Evaluate benefit for suppliers to lock in raw material costs

Use M/WBE sources whenever possible

Review dual sourcing in high risk areas

Consolidate suppliers

Expand surplus buying

Utilize value engineering

Simply and standardize product / services specifications

Review lease vs. buy decision

Utilize lean, Kaisen & Six Sigma

Source products/servicesat global prices

Expand PMA strategy in all areas

Analyze benefits of local/regional/national/ global contracts

Commodity/Product teams

JV PMA’s with airlines/suppliers

Source de-coupled supply chain components

Utilize integrated suppliers

Review royalty, warrants & stock option opportunities

Early Supplier Involvement

Repair developmentstrategy

Utilize “Aim & Drive”

Minimize logistics, transportation, customs costscosts and packaging cost

Power by the hour / variable pricing

Establish gain sharing withsuppliers

Weight reduction initiatives

Utilize should cost analysisto set target cost

Volume discount matrix in contract

Source material for suppliers Beyond economic repair strategy

Inventory Management Initiatives Transportation/Logistics/Customs Cost Management Tools

Negotiate future product upgrades/changes for free

Evaluate appropriate insurance needs

OtherInflation FightersSourcing Strategies

Provide accurate forecastto entire supply chain

Establish free return policyin excess inventory

Expand kitting optionsfrom suppliers

Utilize consolidatedwarehousing

Establish inventory poolswith other airlines & suppliers

Supplier managedInventory

Just in Time Inventory (“JIT”)

Establish supplier inventory pool vs,AA inventory

Establish productivity goals in contracts

Eliminate all clauses withautomatic inflators

Bid “evergreen” contracts

Leverage volume throughout AMR system

Establish contracts where none exists

Establish price via recurring bids/auctions

Utilize reverse auctions at1st & 2nd tier suppliers

Eliminate maverick buying

Extend or expand contracts in exchange for price reductions

Negotiate signing bonusesfor contracts

Expand web-based pricingtechnology (SmAArtBuy/AEX)

Establish consortium buying where applicable

Negotiation performanceguarantees

Acceleratesurplus sales

Expand warranty terms

Set warranty duration basedon load factor or hours ofoperation

Identify ways tobetter manage taxes

Maximize exchange rate/currency opportunities

Optimize delivery time & TAT requirements and recover expedite fees

Establish and recover expedite fees for non- compliance

Analyze total cost of ownership

Utilize alternate parts strategy

Map the supply chain for each commodity or service Leverage volume

across all supplier divisions

Review contract length to consider market conditions

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AMR Confidential & Proprietary

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Cost Management ToolsCost Management ToolsUtilize value engineering

Process of evaluating the value of each good and service relative to its cost in the design phase of a product life cycle. This process allows for possible alteration of the spec that could reduce costs without impairing functional suitability. (Same fit, form or function – including feed components.)

Utilize “Aim and Drive”

Methodology to work collaboratively with suppliers to find cost reduction opportunities within their product’s supply chain or process chain and drive those costs down.

Repair development strategy

Purchasing partners with engineering and suppliers to develop repairs, processes, procedures and optimize work scope to improve total cost of ownership.

Weight reduction initiatives

Perform a fuel burn analysis for each product purchased for the aircraft (fixed or movable) and evaluate lighter alternative products to determine potential cost reduction opportunities.

Power by the hour / variable pricing

Cost ratio basis for the complete maintenance of a product based on the amount of time in service. AA pays the supplier per flight hour of time that the part is operational or a boarded.


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Cost Management Tools (cont’d)Cost Management Tools (cont’d)

Negotiate future product upgrades/changes for freeFrom time to time suppliers upgrade their products to generate new revenue streams. Purchasing can lower AMR total cost of ownership by including future upgrades in the purchase price.

Source material for suppliers

Work with suppliers to negotiate or perform reverse auction for 2nd tier material in order to reduce AA’s cost.

Minimize logistics, transportation costs and packaging costs

Review the supplier’s planning and control of the flow and storage of raw materials and finished goods throughout the supply chain to drive out costs.

Utilize Lean, Kaisen & Six Sigma

Review these processes with suppliers to ensure they are as efficient as possible.

Review lease vs. buy decision

Work with financial analyst to look at both lease and/or buy options of equipment procurement.


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Establish gain sharing with suppliers

A practice where suppliers source or produce parts that have the same fit, form or function that costs less and share the productivity improvement with AA.

Early Supplier Involvement

A practice that brings together one or more selected suppliers with a buyer’s product design team early in the product development process The objective is to utilize the supplier’s expertise and experience in developing a product specification that is designed for effective and efficient product roll-out with a lower total cost of ownership.

Utilize should cost analysis to set target cost

Perform an analysis to determine cost components in each product or service along with appropriate profit margins (target cost). Purchasing uses this target cost to work with the suppliers to ensure that the combination of each component’s cost comes in at or below the target.


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Evaluate appropriate insurance needs

AA has a standard insurance requirement for suppliers. If this cost is driving suppliers costs higher, review requirement with AA’s insurance department to determine if the standard is required for the specific situation.

Beyond economic repair strategy

Develop threshold for repair versus buy based on the repair history of product along with purchase price and normal life of product.

Volume discount matrix in contract

Where possible, negotiate volume discounts utilizing a matrix in contract negotiations.


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Inventory Management InitiativesInventory Management Initiatives

Consigned inventory

A method of procurement in which a supplier maintains inventory on the premises of the purchaser. The purchaser’s obligation to pay for the goods begins when goods are drawn from the stock for use or sale.

Supplier managed inventory

Inventory management system that holds a supplier responsible for ensuring that stock is maintained at appropriate levels in the purchaser’s facility and for replenishing items when these levels drop.

Just In Time Inventory (“JIT”)

System in which materials are purchased, transported and processed “just in time” for their use in a subsequent stage of the manufacturing process. An operations management philosophy whose objectives are to reduce waste and cycle time. JIT should minimize inventory at all levels.

Manage inventory levels in the whole supply chain

Review inventory levels in the entire supply chain in order to determine appropriate figures and reduce or increase based on lead time, cost, etc.



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Inventory Management Initiatives Inventory Management Initiatives (cont’d)(cont’d)

Establish inventory pooling with other airlines and/or suppliers

Evaluate opportunities with other airlines and/or suppliers operating similar fleets for part sharing at common locations. This process is designed to reduce inventory levels and holding costs for each of the participating airlines.

Establish delivery time &TAT requirements and recover expedite fees

Ensure delivery times and turn around times are established at contract inception with normal delivery methods included. If supplier has to expedite shipment to meet these times, then expedite fees should be the suppliers’ responsibility.

Evaluate end of product life cycle inventory

Some products that American buys may have good residual value, another way to lower cost to compete or to generate revenue is to account and leverage the value of products at the end of American Airlines life cycle

Provide Accurate Forecast to Entire Supply Chain

Communicate demand throughout the supply chain adequately to reduce inventory increases at 2nd, 3rd and 4th tier suppliers also known as the “Bull Whip Effect”.

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Inventory Management Initiatives Inventory Management Initiatives (cont’d)(cont’d)

Establish free return policy on excess inventory

Negotiate with supplier to eliminate restocking charges.

Expand kitting options from suppliers

Evaluate opportunities and negotiate discounts for a supplier to bundle the necessary parts to perform a specific function/repair (BOM) by AA and sell these as a single “kit”. (Could include non-aircraft product.)

Utilize consolidated warehousing

Evaluate opportunities to move stored products from diverse locations to a central facility.

Establish supplier inventory pools vs. AA inventory

Negotiate with suppliers to create inventory pools to ensure immediate delivery of parts, reduce costs and avoid repair time for rotable parts.


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Transportation / Logistics / CustomsTransportation / Logistics / Customs

Direct ship vs warehousing

Review potential for shipping product directly to the desired location in order to minimize or eliminate warehousing costs.

Minimize customs fees with proper documentation

Ensure that suppliers are aware of the documentation required for the shipping required for a product in order to minimize customs fees. Contract should have provision for capturing fees for improper documents.

Breakdown supplier provided transportation costs in all bids

Compare supplier’s transportation costs and total cost of delivered product separately (product, transportation, customs) and compare to costs with AA handling the transportation and customs. Work with AA’s transportation group to assist in this process.

Establish and recover expedite fees for poor delivery

Suppliers must pay expedite fees if product is not ready in sufficient time to allow for normal delivery method.


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Transportation / Logistics / Customs Transportation / Logistics / Customs (cont’d)(cont’d)

Optimize mode of transportation and routes

Evaluate alternate modes of transportation (e.g., truckload, multi-stop truckload, less-than-truckload, intermodal, etc.) for a group of shipments taking into consideration size and frequency of shipments, handling requirements, transit times and costs. The optimal transportation mode is the mode that meets these requirements at the lowest possible cost. In the case of where a private fleet (i.e., company-owned trucks) is an option, alternate routing of the trucks is another variable that is considered. This should include backhaul opportunities.

Evaluate customs related exposure of life cycle of parts

All merchandise coming into the United States must clear Customs and is subject to a Customs duty unless specifically exempted by law. Clearance involves a number of steps: entry, inspection, appraisement, classification and liquidation. Based on AA’s operational needs an aircraft part could possibly be imported and exported from the U.S. numerous times within its life cycle. All of these factors should be evaluated when positioning parts and shipment and questions should be directed to the customs group.


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Establish and recover expedite fees for non-compliance

Shippers usually establish a set of minimum performance criteria (e.g., complete orders with on-time, damage-free shipments), that carriers must meet for their shipments. Along with these performance criterions, shippers usually include financial penalties that are applied to each shipment that is non-compliant, which are subtracted from the carrier’s freight bills prior to payment.

Optimize package size / quantity of bundle multiple orders

When AA purchases multiple products in the same period from a supplier that offers those products in a variety of package sizes, the optimal package size and quantity is calculated based on the transportation, handling (unloading and put away cost at the warehouse), inventory carrying and ordering costs of different combinations of package size, quantity and bundling of products.

Compare suppliers’ vs. AA’s transportation costs

AA usually has the option of having transportation costs included in the cost of products purchased from suppliers or paying for the transportation separately. If AA is able to determine the cost that the supplier is paying for the transportation portion of an invoice, then this cost can be compared to what AA would pay for the transportation and the lowest cost option selected.


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Evaluate equipment positioning / repositioning costs

Evaluate transportation/relocation costs when considering where to locate equipment or supplies.

Minimize or eliminate assessorial charges

There are a number of “additional” charges beyond the base rate for most types of transportation. While negotiating freight rates with carriers, it is possible to have these accessorial charges waived or reduced in return for committing a large volume of shipments to a given carrier. Some charges, such as wait time and demurrage can be minimized through good transportation management.

Warehouse repositioning review

The location of a company’s warehouses is usually based on numerous factors that affect total logistics costs including distance from suppliers to the warehouses (inbound transportation), distance from warehouses to customers (outbound transportation), real estate or leasing costs, labor costs and other operating costs such as utilities and insurance. Ensure that suppliers are choosing the least-cost alternative if they are relocating warehouse space.


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Sourcing StrategiesSourcing Strategies

Source products / services at global prices

Utilize existing suppliers who provide needs in the global marketplace, assist existing suppliers to develop into a global provider or find new suppliers in other areas of the world.

Expand PMA strategy in all areas

Identify opportunities to work with suppliers to obtain PMA authority for high cost OEM parts. (Parts Manufacturing Authority - PMA)

Analyze benefits of local/regional/national/global contracts

Research benefits of combining usage across multiple areas and/or breaking areas up to take advantage of regional expertise and/or pricing

Simplify and standardize product / services specifications

Through market analysis determine if AA’s requested specifications fall outside of the norm and work with the internal customer to determine if the costs associated with the “custom” product” is really required.


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Sourcing Strategies (cont’d)Sourcing Strategies (cont’d)

Expand surplus buying

Optimize opportunities for utilizing excess or surplus parts from various approved or known sources

Utilize M/WBE sources whenever possible

Search the Supplier Diversity database or request assistance to find suppliers that can be potential sources for AA’s needs.

Consolidate suppliers

Utilize the supplier optimization strategy to reduce the supply base where possible.

Utilize alternative parts strategy

When parts are needed, look at repair first, surplus, buying refurbished, PMA and then new if necessary (review chart on web site under Waterfall Chart).

Commodity/Product Teams

Cross functional teams that include purchasing employees and internal customers whose common denominator is the products/services with which the members are affiliated. A primary role is to determine and support the commodity strategies as they change and develop over time.


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Analyze total cost of ownership

Price, delivery, quality, supplier financial health and lower scrap rate must all be evaluated prior to making a sourcing decision. Contract length should be based on market conditions.

Map the supply chain for all commodities

Utilize supply chain maps for products/service sourcing strategy development.

JV PMA’s with other airlines/suppliers

Explore PMA opportunities with other airlines and leverage volume to develop potential joint ventures for PMA parts.

Utilize integrated suppliers

Explore opportunities to manage a service and the related products based on the principles of specialization and synergy. The intent is to leverage the expertise of the supplier and allow them to manage the inventory, procurement and order fulfillment processes.


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Source de-coupled supply chain components

Separate design from the manufacturing process to drive efficiencies in each of the areas separately.

Review dual sourcing in high risk areas

Review market analysis to determine if the supply base for a specific product or service is in jeopardy of failing. If so, then a strategy for dual sourcing may be appropriate.

Review royalty, warrants & stock option opportunities

Review when AA’s volume helps a supplier get established in a new line of business. AA gets the benefit as the supplier grows.



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Inflation FightersInflation Fighters

Establish productivity goals in contracts

Research those contracts where either there are escalators or no productivity clauses and negotiate them into a new agreement.

Eliminate all clauses with automatic inflators

Renegotiate contracts to eliminate any clause that could cause prices to rise over the course of the contract term.

Bid “evergreen” contracts

Determine which contracts are currently evergreen, do the market research and bid them to achieve more favorable terms and/or productivity improvements.

Leverage volume throughout AMR system

Identify opportunities where the combined volume of common goods and/or services could be leveraged to achieve lower prices.

Establish contracts where none exist

Research spend in each area and either establish a contract with the current supplier or move the business to another supplier where a contract exists.

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Inflation Fighters (cont’d)Inflation Fighters (cont’d)

Establish price via recurring bids/auctions

Bid or auction recurring services offered by multiple suppliers needed on a regular basis to take advantage of potential short term excess capacity.

Evaluate benefit for suppliers to lock in raw material costs

Review when raw material represents a large percentage of the total cost. Work with a finance rep. to analyze potential cost benefits of fixing these costs vs. allowing them to fluctuate with the market.

Utilize reverse auctions at 1st & 2nd tier suppliers

Encourage suppliers to utilize reverse auctions for subassemblies and parts used to produce what we purchase.

Eliminate maverick buying

Review POA and P-card spending to determine what areas are creating maverick spend, then create a plan to drive this spend through contracted sources.

Negotiate signing bonuses for contracts

Encourage suppliers to provide AA with a signing bonus (credit) to be used for future purchases, over and above contracted cost reductions, upon contract execution.



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Extend or expand contracts in exchange for price reductions

Renegotiate the term of an agreement in exchange for price concessions.

Leverage volume across all supplier divisions

Look at the parent company of suppliers to determine if additional leverage can be achieved.

Review contract length to consider market conditions

Long term contracts may not be the best if market conditions are changing rapidly. Leverage new equipment with after market spares and overall supplier spend, not only contract spend.

Expand web-based pricing technology

Actively search for ways to utilize SmAArtBuy, Aeroxchange and other technology tools.


Establish consortium buying where applicable

Identify opportunities where the combined volume of common goods and/or services could be leveraged to achieve lower prices.

Develop suppliers in limited competition markets

Review market analysis to determine if the lack of competition in a specific industry is such that little leverage is possible. If so, review he possibility of developing an additional supplier in this area.

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OtherOther

Set warranty duration based on load factor or hours of operation

Negotiate warranty guarantees with the suppliers based on product performance in relation to operational reliability/usage.

Expand warranty terms

Explore opportunities to increase the time that the supplier will warrant each product or service.

Accelerate surplus sales

Actively work to determine all potential surplus products and research all potential ways of eliminating the surplus (auction, exchange with other departments and/or airlines and utilizing dealers and brokers).

Negotiate performance guarantees

Negotiate minimum acceptable performance levels and assess penalties for failure to achieve these levels

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Other (cont’d)Other (cont’d)

Enforce contractual penalties

If the contract calls for liquidated damages or penalties of any sort, then these should be enforced to ensure future compliance.

Identify ways to better manage taxes

Research tax rules with internal Tax Department and supplier to determine most effective shipping process to reduce taxes where possible.

Maximize exchange rate/currency opportunities

Work with Treasury to monitor exchange rates in order to take advantage of fluctuations in currency (e.g. pay in local currencies).

Extend payment terms

Payment terms must be at least net 45 days, unless appropriate approval is secured.


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Other (cont’d)Other (cont’d)

Identify supplier value added items beyond core offering

Suppliers, in some cases, have significant resources available to them (Engineering, Design, Marketing, etc.). Purchasing should consider how to increase the value of the transaction to American, by evaluating products or services beyond the supplier offering

Look for areas where AA can subcontract to suppliers

Review potential for supplier to manage roles/processes where AA may not have resources or wants to utilize those resources elsewhere.


value fishbone optimize package size/quantity or bundle multiple orders direct ship vs. warehousing...

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