Contract savings may 10th 2004 by gm euro

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GM – FIAT WORLDWIDE PURCHASING

Contract Savings.ppt

2004 Contract Savings

Buyer/Manager Training

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• Contract Savings is a globally used system to track performance related to outside direct material

• System is not NEW in 2004 – the way it is used for performance tracking is new (e.g. as less as possible manual corrections/calculations outside the system)

• Changes in Volume are booked as performance

• System is designed in a way to track performance correctly, which it does, when everybody stick to some rules when cutting contracts in GPS

Introduction

The decission to use this system was done by global Top Management.Any complaints should be directly adressed the WWP Vice President, but shouldn’t be the topic for this training.

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• Missing 12 Month reference price prior to the current contract

• Retroactive price adjustments into the last year can’t be tracked by the system

• Wrong contracts amendments related to engineering changes (Design or Technical)

• Wrong input of replaced part information

Potential Errors

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• Contract Savings uses GPS Standard Blanket Contract output to value contract price changes based on finished parts, released by GPDS, GPSE or MatMax(manually created and less finished parts are not included !!!)

• System tracks Engineering and Purchasing savings activity

• Savings is detailed by part number/contract number on a monthly basis

• Tracks savings by Region, LBE, Commodity, Creativity Team, Buyer, Supplier, Plant, etc.

• System runs weekly and provides the variance of all contract changes vs the prior week

Contract savings

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• Basic part performance savings calculation:– Total part performance for contract line item

• Old price minus new price times volumes– Less any engineering changes– Difference is purchasing performance

• Note that there is no direct calculation for purchasing savings - it is what’s left after design/technical is subtracted out.

• Engineering changes were identified by the reason code and not content of Purchasing performance.It is essential to use the correct reason code for changes related to technical and design

€440

€500-(€60)

How are savings calculated

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• Where do they get this information?– New price: Price for part currently on contract line

item beginning with the month of the contract effective date

– Old price: price for part (or former part) one year before

– Volumes: per month per plant from GPS as captured from MGO * plant % of business

More about part performance savings

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€62

€70Aug 2001

Aug 2003

Aug 2002

Jan 2002

Jan 2003

• Every month, the system looks at the current price and goes back 12 months for the old price and multiplies it by that month’s volumes

• The yearly savings is the sum of those monthly savings from the price effective date to Dec. 31.

• The total savings for that price change is the sum of 12 months of savings.

How part performance worksan example

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Suppose the following:Old price: €70New price: €60, effective August 1, 2002New price: €62, effective October 1, 2002

Month Old price New price Mo. volumes Monthly savingsAugust €70 €60 10,000 100,000September €70 €60 10,000 100,000 October €70 €62 10,000 80,000 November €70 €62 10,000 80,000 December €70 €62 10,000 80,000

Total part performance savings of price change for 2002 440,000

The effect of this price increase will be discussed later.

In other words

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• When a part has been replaced, the old price should be the price of the former part.

• How does the system know what the old part is?– You tell it, by setting up a replaced part relationship in GPS– If it can’t find an old price, you get no savings

• How do you set up the relationship?– Use contract to contract wizard– Use action plan to contract wizard (when applying action

plan to contract)– For several parts to one, as in modules, do not use the

contract wizzard• RECOMMENDATION - When submitting contract for approval,

print out the part profile page for the manager to demonstrate relationship was established

• If it’s a brand-new part, not replacing an old one the system shouldn’t find an old price and no performance is calculated

Part replacement

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• The volumes are determined by– The legal business entity (LBE) selected for the contract– The plant, if specified– Plant % of business

• If the contract has default for the plant, the system will pull– All volumes for plants in that LBE or– If another contract for same part specifies a plant, then all

volumes for LBE other than that plant

• If a plant is specified, the system will pull volumes for that plant only.

Counting Volumes

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Price History example 1Reference price should be taken from contract 71X00, but due to the fact, that for the period June 2002 – March 2003 the contract is plant specific the reference price is taken from contract RHJ00, although the contract is already expired – contracts shouldn’t be plant specific for certain periods !!!

Result:Wrong reporting of purchasing performance (comparisson vs 0.111 for Jan-Mar 2004) !!!

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• What’s the difference?– “A” price

• Base Price • Any base material

– Total price • “A” price as defined above• All add-ons

• Example:• Base price €5.00• Copper base material €0.50

– A price for part €5.50• Packaging add-on €0.10• Freight add-on €0.05

– Total price for part €5.65

“A” price and total price

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• Why does it matter?– Depending on closeness of match with

part/plant/supplier, old price can be total price, weighted avg. total price, or weighted avg. A price

– When no old price available, system will calculate no savings

– If no old price, no savings– New price will be total price or A price, depending

on old price; system will try to match to old price– Therefore, make sure that the correct price

components are in the respective field (e g. add-on´s that are truly add-on´s into the add-on field, raw material into the raw material field, etc.)

“A” price and total price

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• All price changes caused by design or technical changes are subtracted out of part performance

• How does system know what to subtract out for design?– You tell it, by giving the contract amendment the correct a

reason code of and sending the contract to output.– Engineering Changes with different effective dates need to

be put into GPS with different amendments(e.g. temporary price increases 1st increase, 2nd decrease or 2 increases with 2 different effective dates)

Engineering Performance Savings

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Engineering Performance Savings example 1For subject pn 12796081 from supplier INA , there's a contract change issued date 03/02/2004 (CW06) with Amendment Reason "Engineering Change" and related E2=199390

In our Variance Report from CW07, this contract change leads to a commercial penalty of -50.210 Eur.

After my review, I found out that reason for this negative performance is that price increase step of 0.23 Eur effective Aug04, and mentioned in contract change internal notes,is missing in the corresponding GPS Engineering Change Table.

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Engineering Performance Savings example 2-Temporary Price Increase with only 1 amendment-

1 amendment creates 1 entry in the engineering change table, which is not reflecting the contract (decrease 07-Sep-2003 not reflected in the engineering change table !!!)

Result:Wrong reporting of purchasing performance !!!

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Engineering Performance Savings example 2-Correct Picture in the engineering Change Table (requires 2 amendments)-

2 amendment create 2 entries in the engineering change table, which is reflecting the contract (increase 01-Jul-2003 and decrease 07-Sep-2003 reflected in the engineering change table !!!)

Result:Correct reporting of purchasing performance !!!

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Suppose the following:Old price: €70New price: €60, effective Aug 1, 2002New price: €62, effective Oct 1, 2002 (design change)

For December: Total part performance +€8 less engineering changes (€2) = purchasing performance of

€10

€62

€70

Aug 2001

Aug 2003

Aug 2002 €60

Dec

Oct 2003

Oct

Price reduction of €10

Design price increase of €2

Dec

Back to our part performance example(a picture is worth)

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• Eng. change of +€2, effective October 2001• Old price for total part performance is total price of part on

December 2001 €70• New price for total part performance is total price of part on

December 2002 €62• Total part performance savings: €70-62 = €8• Old price for eng. change performance is A price of part on

December 2002 before change was made €60• New price for eng. change performance is A price of part on

December 2002 €62• Eng. change performance: €60 - 62 = (€2)• Purchasing performance: €8 - (€2) = €10

– This captures the reduction in the base price from €70 to €60 prior to the engineering change

For those who want 1.000 words

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• What if I make a mistake?– Once you have outputted an engineering change contract, that

price difference is automatically applied against savings.– Code the amendment to correct the error as engineering change

also. “Clerical error” as a code is counted as purchasing and this will distort the savings.

– Attach the part to the tree and look at the “Engineering Change Performance” leaf to see total changes.

• How do I correctly insert my purchasing performance?– If a design change and price reduction occur in the same day, do

two price periods, with the first price for one day, to split them out.

• Example:– Engineering change, effective July 31 +€5– Purchasing price reduction, eff August 1 - €2– When you split it out, you will get full purchasing credit.– If you net the two on one date, the +€3 will be counted as

engineering.

More about engineering changes

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• Reason Codes for TECHNICAL

105 - Supplier Suggestion Engineering Change104 - Engineering Changes Cost Reduction Proposal35 - Supplier Suggestions (avoid to use in GME!!!)

• Reason Codes for DESIGN•

51 - Engineering Changes (Low APV)52 - Engineering Changes (High APV)98 - Government Mandated Engineering Changes103 - Priceable Features/Added content99 - Price Change - Pre SOP (Major)100 - Price Change - Pre SOP (MCE)

Ammendment reason codes

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• What if I make a mistake?– Once you have outputted an engineering change contract, that

price difference is automatically applied against savings.– Code the amendment to correct the error as engineering change

also. “Clerical error” as a code is counted as purchasing and this will distort the savings.

– Attach the part to the tree and look at the “Engineering Change Performance” leaf to see total changes.

• How do I correctly insert my purchasing performance?– If a design change and price reduction occur in the same day, do

two price periods, with the first price for one day, to split them out.

• Example:– Engineering change, effective July 31 +€5– Purchasing price reduction, eff August 1 - €2– When you split it out, you will get full purchasing credit.– If you net the two on one date, the +€3 will be counted as

engineering.

More about engineering changes

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• What do I need to remember about my contracts?

– Please remember what ever you put into the system will drive your Purchasing performance.

– Use the wizard to establish a part relationship between old and new parts.

– When doing an engineering changes contract, put pure design price changes and any purchasing reductions in separate periods.

– Correct engineering change errors with another engineering change amendment, and purchasing errors with purchasing amendments.

– Put packaging, etc., as add-on´s rather than in the A price.– Call your financial commodity analyst if you have questions.

Summary

YOUR CORRECT INPUT IN GPS WILL DRIEVE THE PURCHASING

PERFORMANCE AMOUNT THAT IS RECOGNIZED BY CS

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The Three C’sRecommendations to capture your savings

correctly

Engineering Change Ammendments

1) Carryover pricing

2) Change in price due to design

3) Correction of

a) engineering price or

b) effective date

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• When you do an engineering change amendment, you specify an engineering change identifier (ECI) or the E² # that goes with the change.

• This little number determines whether or not you get hit in purchasing for a design change.

• Improper use of ECI´s causes inaccurate calculation of purchasing savings.

• Each ECI used for the same part number must be unique for each separate design impact or correction.

• Keep the three C’s in mind, and keep your savings.

ECI’s

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1) Carryover pricing

• The rule: If you need to break with business process and put a part on contract at carryover pricing (no price change pending final negotiated price), make a distinction between that ECI and the ECI used in the next amendment for the final design price impact.

• Example - good P/N 21584759– Carryover price: €12.50 ECI: JT691-CO– New amendment: €13.75 ECI: JT691

• Result: The impact goes to design.• Example - bad P/N 21584759

– Carryover price: €12.50 ECI: JT691– New amendment: €13.75 ECI: JT691

• Result: The impact goes to purchasing.

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• The rule: If there is just one price change and one effective date for the E² - put it on contract as before.

• Example P/N 21584759– New amendment: €13.75 ECI: JT691

• Result: The impact goes to engineering.• Other rule: If the E² has several price changes at different effective

dates, you must distinguish each use and do separate amendments.

• Example - good P/N 21584759 – One amendment: €13.75, eff 8/12/01 ECI: JT691-1– Other amendment: €13.90, eff 10/15/01 ECI: JT691-2

• Result: The impact goes to engineering. • Example - bad P/N 21584759

– One amendment: €13.75, eff 8/12/01 ECI: JT691– Same amendment: €13.90, eff 10/15/01

• Result: The second impact goes to purchasing

2) Change to price

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• The rule: Corrections to design price - do eng change amendment and distinguish the ECI

• Example - good P/N 21584759– Original design price: €17.35 ECI: JT691– Corrected price: €13.75 ECI: JT691-1

• Result: The correction goes to engineering to net against the original impact.

• Example - bad P/N 21584759– Original design price: €17.35 ECI: JT691– Corrected price: €13.75 ECI: JT691(or none)

• Result: The correction goes to purchasing.

3a) Corrections in price

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• The rule: Corrections to design effective date - do eng change amendment and CALL YOUR Fin. Coordinators*.

• Example - good P/N 21584759– Original amendment: €13.75, eff 10/12/01 ECI: JT691– Corrected amendment: €13.75, eff 12/10/01 ECI: JT691-1

and call analyst about change

• Result: In this case, the analyst must manually change the date in the engineering change table of the part for the system to correctly calculate.

• Example - bad P/N 21584759– Original amendment: €13.75, eff 10/12/01 ECI: JT691– Corrected amendment: €13.75, eff 12/10/01 ECI: JT691-1

and didn’t call analyst

• Result: The system will apply the initial date against the price change, generating incorrect savings for a period.

* See final slide for names, if you are unsure who that is.

3b) Corrections in effective date

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• Different part numbers: If an E² has a million parts on it, you can use the same ECI for each. Just don’t duplicate it for the same part number.

• Different amendments: If possible do a separate amendment for each E². Where this is not possible, count the E²´s together, take one of them as E² number and make a remark in the notes about the other netted E²´s (same effective date)

• Different LBE’s: To state the obvious - if you are applying the same E² change to different LBE contracts, you must not make each ECI separate. It’s the same price impact for each contract.Deviating from this more than one entry is going to be created in the engineering change table by GPS, which impacts the purchasing performance (refer to example “BAD” next slide)!!!

• Different part numbers again: Part relationships are good. Lack of part relationships are bad. Wizards are good - they will magically keep your savings.

ECI’s and You – Other important issues

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Example “BAD” for different LBE’s – amended separately

For each contract a separate amendment was made, the resulting 3 entries in the table wrongly effect purchasing performance

To avoid this:Do not change the engineering change identifier for the same contract change for different plants/LBEs !!!If GPS is requesting you for a different ECI never put a blank in front !!!

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• Estimated prices– If a price changes to an estimated price during the life cycle of a

part, savings/on-cost will be counted for both contract changesa) from old price to estimated price.b) from estimated price to new price.

– Whenever you introduce estimated prices into contract, Always indicate the price as X.111 in addition the usage of the “estimated price”-flag in GPS is mandatory.

– For a new parts the cost impact at and after SOP will determine the related material performance (Design or Commercial).

• Technical Savings– Always use for contract change reason code “Engineering Changes

Cost Reduction Proposal” or “Supplier Suggestions Engineering Change”.

– NEVER use amendment reason “Supplier Suggestion” for amending a contract in GME.

2004 – WWP Budget Issues

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Summary 1• Cut contract without time holes in order to keep savings, e.g. if you have a Duns Number change for part x, and the old contract expires Ocotber 25, 2004, then start the new contract effective October 26 (and not January 1, 2005)• An existing part gets a new part number; in order to keep potential savings from old to new part number, always use in GPS the “contract to contract wizzard” or the “action plan to contract wizzard”• Aprice + Add on = Total Price variances are counted against the purchasing performance; Freight cost, packaging cost, should always be part of the Add On (included in Total Price)• If you have made an mistake while cutting a contract, change the contract and use always the same amendment reason category as before as well as the same effective dates (if they were correct !!!) a) Engineering Change amendment: use again amendment reason “Engineering Change High/low APV” and change your mistake b) Purchasing performance relevant amendments (all other amendment

reasons in GPS): use also the same amendment reason code asbefore and correct the mistake; using “Clerical error” also counts topurchasing performance

• Always split Purchasing and Engineering Performance; Use – as explained – different amendment reasons and /or effective dates

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Summary 2• How to handle Engineering Changes Rules: a) Normal procedure: amendment reason “Engineering change ...”; introduce E²-number, description and approved E² part cost; b) When changing/making multiple contracts for a part for the same

E²-number (e.g. multiple changes, mistakes while introducing theE² into contract etc.), always make every amendment UNIQUE

For example:First amendment: E² JT69Change to that E² (mistake etc) JT691-1Another change to the same E² in contract JT691-2c) If changing wrongly introduced E²´s with multiple effective dates

and the mistake is in the effective dates, please infrom F&ITANYWAY!!!!!!

IMPORTANT: If you are not sure about how to change a contract correctly, give your Financial Analyst a call before you change them. Correcting a mess duplicates/multiplies work for everybody!!!

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Contacts F&IT

CHEMICAL:Ralph Seibert 891-63007ELECTRICAL:Frank Göbel 891-60780METALLIC:José Maria Sanchez 8930-9142

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BACKUP-1

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Results of Contract Savings:Reports on Supply Power (every week) – all buyers releasedhttps://www.gmsupplypower.com/apps/supplypower/NASApp/spgwa/GWAServlet

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• To secure a 12 month price history:cut contracts min. effective 12 month prior to SOP of the part,all changes before the price is the final SOP price should be amended with the reason code “Engineering Change…”ORtake SOP price (correct or estimated one) and make this price valid in the contract effective already 12 month earlier (Create a “flat line” before SOP!)

• Always use “Engineering Codes” for Engineering Changes, all other changes count as purchasing performance

• Changing a mistake: always use the same Amendment Reason Category as when making the mistake. When changing a mistake when using an Eng. Change Amendment reason, make the E² Identifier unique (e.g. JT-691; then JT 691-1 etc)

Biggest TAKE AWAYS from this Training

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Important: Changed contracting routine asap!!!(improves dramatically the quality of the automatic performance measuring + NO additional work for buyers

1) Price History (CS needs 12 month price history)• Create new contracts always effective 12 months prior to the SOP year of parts/Program even if there is no volume forecast for the starting month;• Therefore: Whenever a buyer cuts a contract for a part the first time (no part replacement), she/he needs to think about the planned SOP for the project/carline this part belongs to and cut the contract effective 12 months earlier to that date. If later savings will be introduced effective with SOP the necessary 12 month history is available!

2) Create “Flat Line” with SOP• When checking correctness of contracts before/at SOP, create a “Flat Line” of the price retroactive for 12 months (valid for both: estimated and fixed price • having no pricesteps 12 months before SOP ensures that no performance is calculated at all and that all pricesteps to be introduced after SOP are calculated automatically correct through Contract Savings• Important: a) No wrong/too high payments are given to the supplier; Reasons: Prototypes are not paid against GPS Contracts; After PPAP usually the preproduction part prices at least do have that price level; in some cases much higher b) No Internal Audit Issue as process wise a Bulletin is prepared to cover this; GM is in no way overpaying suppliers!

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Important: Changed contracting routine - ongoing 3) Retroactive Price changes in GPS A) Avoid implementation of retroactive price changes into the last year in GPS for Commercial amendment reasons (both: saving/price increase); Reason:

a) Contract savings currently shows the performance for the last year, not the current year. b) Problems of payments from and to suppliers in EFSSC and Poland c) Timing issues with the creation of the financial forecast to Zurich

If retroactive price changes (savings/oncost using a Commercial amendment reason in GPS) still need to be implemented you can do it 2 ways:

a) Change prices back max to Jan 1 of current year + issue Manual Order• Cut contracts with changed prices retroactive effective Jan 1 of the current year• Issue a Manual Order (CN/DN) for the in GPS not changed period in the last year; Calculation: Price change x delivered volume of that period in the last year. Where to get the delivered volume? Contact your Financial Analyst.• Manual Orders to be issued by Staff in Rüsselsheim – high experience of doing that and easier from Rüsselsheim to push these orders through the organizationb) In exceptions still change contracts retroactively into the last year but at the same time (or even upfront) send Email to your WWP Finance Analyst which parts you have changed retroactively + effective when.This ensures that Commercial performance will correctly show up in the next Line Chart (issue will be manually calculated by WWP Finance)

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• Implementation planned for Q3 2004• Calculation of savings for parts, cancelled by

GPDS• 12 month history, may be not necessary

when a complete new part is contracted (3-6 month price history with consumption would be OK)

• Retroactive price changes into the last year

Upcoming Improvements with CS 5.0

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Thank You !!!

Education

Contract savings may 10th 2004 by gm euro