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STREAMLINING FOR SUCCESS: THE LEAN SUPPLY CHAIN

A white paper on the benefits of implementing a lean supply chain

Contents

EXECUTIVE SUMMARY ................................................................................ 1 THE PRESSURES ON SUPPLIERS ........................................................... 2 Streamlining to Stay in the Race ......................................................... 2 STRATEGIES FOR SURVIVAL IN TOUGH TIMES .......................... 2 Flexibility: A Requisite for Success ...................................................... 3 Managing Cash Begins with Managing Inventory .............................. 3 Reduce Inventory, Increase the Bottom Line .................................... 4 Communication: The Key to a Responsive Supply Chain................. 4 Aiming for World Class Performance ................................................. 5 LEAN MANUFACTURING: Streamlining for Success .................... 5 The Fundamentals of Lean ..................................................................... 5 How QAD Enables Lean Performance .............................................. 6 QAD's Vision: Six Weeks to Six Hours .............................................. 8 The Most Complete Solution Available .............................................. 9 QAD Solution Advantages ...................................................................10 Independent Research Confirms QAD Value ..................................10 WHAT CUSTOMERS SAY ..........................................................................11 APPENDIXES ....................................................................................................11 A: The QAD Lean Supply Chain: An Overview ............................11 B: QAD Solution Inventory Replenishment ..................................16 Method Options C: A Lean Glossary ................................................................................17

©2003 QAD Inc. All rights reserved

White Paper: Streamlining for Success: The Lean Supply Chain

EXECUTIVE SUMMARY

For automotive suppliers, these are extremely challenging times. The economy is tight, globalization and consolidation are rapidly reshaping the automotive industry as a whole, and their customers, the OEMs, are continuously pressing for more services at less cost. In these tough times, the suppliers who survive and succeed will be those who pay close attention to four fundamentals: flexibility, cash management, inventory management and communication. To stay successful in the face of rapid change and shifting customer demands, organizational flexibility is essential. To withstand the pressures of a tight economy and shrinking margins, maintaining and improving cash flow is a pressing need. Typically, automotive suppliers have a significant amount of capital tied up in direct material inventory. Increasing supply chain efficiency and reducing inventory levels are essential to eliminating waste and improving cash flow. World-class manufacturers typically maintain low inventory levels, and accomplish this through the use of technology and a finely tuned inventory replenishment system. Fast, effective communication, within the organization and with trading partners, is a required complement to an efficient inventory replenishment system. Electronic communication now makes near real-time connectivity possible at every level of the supply chain. When flexibility and speed are requisites for success, it's the lean organizations that lead the race. World-class manufacturing organizations know the value of staying trim and focusing on the lean fundamentals: eliminating waste, simplifying processes, and continuously improving. By pursuing lean strategies - optimizing inventory and streamlining manufacturing processes - they are able to reduce inefficiencies and costs in their production processes and improve customer responsiveness. QAD has solutions to enable those lean strategies. The QAD Lean Supply Chain Solution trims time and cost from every step of the replenishment process and includes partner connectivity and financial settlement as part of its holistic approach to supply chain management. By offering choices at every step, QAD makes it easy to share information in ways that meet the needs and capabilities of a wide range of customers and trading partners. The convergence of QAD's solution and the fruition of industry interoperability efforts will significantly reduce the time it takes to communicate information within supply chains from the present six weeks to six hours. This will further enable build-to-order and JIT manufacturing and allow changes in customer demand to be quickly communicated through supply chains.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

THE PRESSURES ON SUPPLIERS

Changes in the automotive industry are rapidly raising the competitive bar for automotive suppliers. In a tightening economy, pressured by OEMs to reduce costs, expand responsibilities and speed up operations, suppliers face tough challenges. Despite the recent period of unprecedented volume expansion and the fact that suppliers now provide more than half of the average vehicle value, few automotive suppliers are prospering. In fact, most are getting by on razor-slim margins. Relentless cost reductions imposed by OEMs are now an industry given. Figures from the Center for Automotive Research (CAR) indicate that average parts prices have been declining for at least six years. Suppliers are hard-pressed to cope with their increased responsibilities and respond to the OEMs' cost reduction demands while still maintaining shareholder value. As the impact ripples down the supply chain tiers, suppliers at every level are under pressure to continuously improve their operational efficiency. For the past decade, OEMs have been striving to shore up their own profit margins by pressing suppliers for lower prices and broader services. As a part of this trend, OEMs are increasingly outsourcing manufacturing and supply chain services to systems integrators. STREAMLINING TO STAY IN THE RACE With the current volatility in the automotive industry, surviving and prospering as a supplier will be a formidable challenge. Those who want to stay in the race will need to take fast action to drive down costs, streamline operations and reduce the variability in their processes. As OEMs outsource modular assembly and supply chain responsibility to integrators, competitive pressures are dictating that automotive manufacturers adopt continuous improvement initiatives such as lean manufacturing and Six Sigma. In this harsh environment, suppliers who want to survive and succeed need solutions that are flexible and tailored to their needs. They need solutions that will help them trim waste from their operations, communicate effectively with their trading partners, respond with agility to customer demands, and keep a step ahead of rapid industry change. The chairman and CEO of BBK, Ltd., B.N. Bahadur, suggests four fundamental "Rules for Troubled Times." Good advice for any company in today's economy, they certainly resonate for suppliers trying to survive and succeed in the challenging automotive industry. They are: · · Be Flexible. Have access to solutions that will allow you to respond quickly to changes in the marketplace. Manage Cash. Cash conservation and management are critical.

STRATEGIES FOR SURVIVAL IN TOUGH TIMES

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

·

Manage Inventory. One of the easiest and fastest ways to increase cash flow is to reduce inventory. Improving the system for tracking inventory and responding to customer needs can significantly reduce inventory on hand and free dollars tied up in direct material within the company and extended supply chain. Communicate. A system for rapid communication with suppliers and customers is key to responding to customer's changing needs while maintaining low inventory.

·

The sum of success in these four critical areas is financial and operational predictability, an invaluable asset in otherwise unpredictable times. FLExIBILITY: A REquISITE FOR SuCCESS In today's volatile, fast-evolving automotive industry, organizations that cannot adapt quickly to changing demands will soon be forced out of the competitive race. Flexibility is a requisite for success. Automotive manufacturers need to be able to match communication methods to trading partner's capabilities and choose the most effective inventory management solution, depending on material type or business need. MANAGING CASH BEGINS wITH MANAGING INvENTORY For most automotive suppliers, direct material costs represent a significant investment in inventory - typically 50 to 60 percent of their total costs. Reducing inventory is one of the fastest ways to improve cash flow, and ultimately the bottom line. Inventory reduction is possible only if changes in demand can be communicated rapidly down the supply chain. Otherwise, inventory is simply displaced, rather than eliminated. An AMR Research study of the automotive supply chain recently confirmed that: · Inventory as a percentage of revenue is increasing. · Inventory is increasing faster at the supplier level than at the OEM level. · Successful suppliers win by using information technology tools and managing inventory efficiently. The study indicated a clear correlation between low inventory and strong performance: The firms the study judged to be weaker performers had up to 60 days of inventory on hand, while the stronger performers held less than 10 days of inventory.

INVENTORY DAYS OF SUPPLY TIER AUTOMOTIVE

80 60 40 20 0

85% advantage!

Weaker Performers

Stronger Performers

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

Stronger performers accomplished the cash-to-cash cycle ten times faster than their weaker competitors.

100 80 60 40 20 0 Weaker Performers Stronger Performers 1/10 the time! CASH-TO-CASH CYCLE TIME TIER AUTOMOTIVE

The study also indicated that the strong performers, those with the shortest cashto-cash cycle times, use 40% more packaged software applications and e-business connections than their weaker competitors. REduCE INvENTORY, INCREASE THE BOTTOM LINE For enterprises that succeed in reducing inventory levels, the potential cost saving is enormous. AMR Research estimates excess inventory costs in the auto industry at $700 billion. Respected automotive industry analyst Kevin Prouty says, "The hidden agenda for manufacturers is inventory costs. The closer they get to build-to-order, the more they can keep inventory costs down. And making inventory vanish can give a huge boost to the bottom line." COMMuNICATION: THE kEY TO A RESpONSIvE SuppLY CHAIN A major opportunity for improvement in the auto industry lies in shortening the response time, throughout the supply chain, to customer changes in demand. In the volatile, rapidly changing automotive industry, enhanced electronic communication and a more responsive, integrated supply chain are essential. To optimize supply chain performance, communication must reach beyond the company to include the extended enterprise. When manufacturers in all tiers of the supply chain have 100% partner connectivity, the automotive industry will be much more responsive and agile. Until recently, this goal has appeared to be out of reach. Traditional Electronic Data Interchange (EDI) is typically most cost-effective for large manufacturers who need to respond efficiently and integrate large volumes of customer and supplier data. It is generally not either cost-effective or practical for smaller automotive manufacturers. However, today's Web-based applications make it possible for automotive manufacturers of all sizes to connect and communicate. Coupling EDI with Webbased inventory applications makes 100% partner connectivity an attainable goal.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

AIMING FOR wORLd-CLASS pERFORMANCE IndustryWeek polled 3,006 manufacturing companies to find out what it takes to achieve world-class manufacturing performance. Respondents said world-class manufacturers: · · · Embrace lean practices that streamline their internal processes and eliminate waste. Demonstrate a greater propensity to communicate electronically with their supply chain partners. use technology to drive improvements, specifically using lean enabling technology to streamline internal processes and help eliminate waste.

Of the world-class plants polled, 41.5% extensively implement new information technologies to streamline production processes and reduce inventory levels. World-class manufacturers know that the right technology can be a key competitive differentiator. The concept of lean operations and Just-In-Time (JIT) production was introduced to the automotive industry through the Toyota Production System. These interconnected concepts describe a process in which waste is eliminated by reducing inventory holding costs and continuously improving to maintain production quality. Integrating and synchronizing the entire supply chain and manufacturing process are key goals of lean manufacturing. This requires a more efficient use of logistics, increased flexibility and reduced variability. The automotive industry as a whole is progressing toward an even more efficient model by striving to manufacture vehicles only when ordered by end consumers. The motivation behind this effort is to increase customer satisfaction and make strides toward a "leaner" business model over time. This goal will be most effectively achieved if customer demand can be the signal that pulls product through the supply chain. Today, many automotive suppliers are re-examining their manufacturing philosophies in response to uncertainties in customer demand, more complex variations in product mix, the high cost associated with carrying inventory, and growing variability in customer order patterns. THE FuNdAMENTALS OF LEAN: Lean philosophy emphasizes eliminating waste, simplifying processes, and continuous improvement. Lean is about doing more with less: less time, effort, space and money. Lean strategies allow manufacturers to systematically and continuously eliminate the waste that results from inefficient processes, which can include inventory, over production, waiting, transportation, motion, over processing, and defective products. Optimizing inventory and streamlining manufacturing processes are two commonly deployed lean manufacturing strategies because automotive manufacturers realize that cumbersome business processes have added inefficiencies, costs and weeks to the industry's mass production business model.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

LEAN MANUFACTURING: STREAMLINING FOR SUCCESS

Lean enablers are the tools that make the strategies work for lean planning and execution, JIT sequencing, consignment inventory, Vendor-Managed Inventory

LEAN PHILOSOPHY · Elimination of Waste · Continuous Improvement · Simplicity LEAN MANUFACTURING STRATEGIES · Optimize Inventory · Streamline Manufacturing Processes

LEAN ENABLERS · Lean Planning & Execution · JIT Sequencing · Consignment Inventory · Vendor-Managed Inventory · 100% Partner Connectivity · Warehousing

(VMI), 100% partner connectivity and warehousing. HOw qAd ENABLES LEAN pERFORMANCE The QAD Lean Supply Chain Solution allows automotive manufacturers to take advantage of more efficient techniques for streamlining manufacturing processes and reducing waste within the enterprise and across the entire supply chain. This complete, integrated lean supply chain system for the automotive industry provides 100% partner connectivity and enables key lean manufacturing strategies, including optimizing inventory and streamlining manufacturing processes. Because no single method is right for all manufacturing processes and material types, QAD's flexible solution provides a full range of options for efficient management of the entire replenishment process, from contract through financial settlement. In addition to being able to process standard schedules and discrete purchase orders, the QAD solution components are: Lean Manufacturing The QAD Lean Manufacturing module enables both lean planning and execution processes. Efficient response to fluctuating customer demand requires real-time analysis and the monitoring of lean parameters based on actual demand, future requirements and the state of readiness of the extended supply chain. Lean Manufacturing synchronizes manufacturing processes with the extended supply chain and responds to changes in demand and supply, allowing automotive manufacturers in real-time to monitor customer demand, alert, and adjust lean manufacturing and supply chain parameters when changes occur. Lean Manufacturing sends kanban signals within the plant or to suppliers via EDI or through the Internet to downstream operations. Kanban signals and Internet visualization facilitate lean by making accurate inventory replenishment information immediately visible, thereby reducing information lead-time

©2003 QAD Inc. All rights reserved

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White Paper: Streamlining for Success: The Lean Supply Chain

and eliminating waste in the flow of material from suppliers to customers. The QAD Lean Manufacturing module allows suppliers to manage fluctuating customer demand and complex variation in product mix, facilitates supplier collaboration, and minimizes inventory carrying costs. JIT Sequencing The Just-In-Time Sequencing module allows for components and subsystems to be produced and delivered in the exact sequence and time frame that products are being manufactured on the assembly line. JIT Sequencing integrates the basic planning processes of ERP with the demand from the customer. Planning horizons used in MRP are measured in months, weeks and days, whereas planning in a JIT environment is measured in hours or minutes. JIT Sequencing makes it possible to schedule and manufacture unique product configurations on an item-by-item basis, allowing manufacturers to meet customer specifications while keeping production stocks to an absolute minimum. Consignment Inventory QAD's consignment functionality allows inventory ownership to be recognized at the point of consumption with suppliers or customers. This makes processing less costly because inventory is received from suppliers as consigned goods, without actual transfer of title. The supplier maintains the consigned goods as finished goods inventory until a notice is generated that the inventory has been used. When a customer does not take title to material until it is actually used in manufacturing, raw material and purchased parts inventories are, in effect, eliminated. As a result, inventory turns increase and the use of capital assets is maximized. Supplier visualization (Sv) Supplier Visualization facilitates vendor-managed inventory (VMI), a method through which the supplier is responsible for maintaining agreed upon inventory levels, by sending minimum/maximum inventory data via the Web. SV also facilitates 100% partner connectivity by allowing suppliers to access inventory information. Suppliers are able to track inventory from the customer's Web site as in near real-time and can be automatically alerted by a page or e-mail when inventory drops or rises beyond agreed upon levels. When the customer gives the supplier access to more real-time information, administrative costs and inventory levels can be reduced. When SV is used in conjunction with Consignment Inventory, raw materials and purchased parts inventories are, in effect, eliminated. EdI ECommerce The EDI ECommerce module enables 100% partner connectivity when used in conjunction with SV. EDI ECommerce is a globally deployable solution that streamlines the interpretation and integration of EDI documents between trading partners. It imports and exports EDI and XML messages between customers and suppliers and enables users to accept, analyze, condition, edit, audit and even reprocess EDI- or XML-formatted documents quickly and efficiently. By speeding

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

the transfer of business information, EDI helps facilitate JIT manufacturing. warehouse Management Warehousing is offered through QAD's AIM solution and supports increased inventory visibility and accuracy with better space utilization. Advanced inventory replenishment, put-away picking logic and radio-frequency (RF) scheduling of warehouse staff is also included as a part of the AIM solution. Inventory carrying costs are reduced through reductions to inventory levels and shipping errors and higher space utilization.

EDI

Replenishment/Build Signals

Minimum/Maximum Kanban Schedules Broadcast Production Sequence

Suppliers

Discrete Purchase Order

Enterprise

Shipping and Receiving Signals

Advance Ship Notice (ASN) Receiving Advice/Consumption Notification

Payment Signals

Evaluated Receipt Settlement (ERS) Invoice

Visualization

The QAD Lean Supply Chain Solution with Complete Options for Replenishment, Connectivity and Financial Signals

qAd'S vISION: SIx wEEkS TO SIx HOuRS An Automotive Industry Action Group (AIAG) study determined it takes demand information approximately one week to travel from each tier to the next in the supply chain. So a six-tier supply chain would require roughly six weeks for information to flow from the first tier to the last. In some cases, the practice of freezing schedules lengthens this process even further. Because so much of the supply chain beyond Tier 1 still communicates information manually, the speed of information flowing through the supply chain is slowed, and most suppliers are using information that is not up-to-date. Over time, automotive manufacturers' lean initiatives will converge with industry efforts such as AIAG's current interoperability effort to provide open interoperability standards and architecture for software providers in automating the supply chain. This will benefit the automotive community by allowing suppliers to select one tool, the

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

tool of their choice, for communicating inventory information with all customers. QAD initiated and is leading this effort at the AIAG. QAD's solution will adopt and deliver AIAG standards. The convergence of lean initiatives and interoperability efforts will significantly reduce the time it takes to communicate information to trading partners. In just a few years, interoperability and the latest lean supply chain solutions will cut the time it takes for information to flow through the supply chain from six weeks to six hours. This will further enable build-to-order and JIT manufacturing. Additionally, changes in customer demand will be quickly communicated through the supply chain. THE MOST COMpLETE SOLuTION AvAILABLE The QAD Lean Supply Chain Solution supports the entire inventory management process, eliminating waste and streamlining processes throughout the entire supply chain. Each box in the diagram below represents a critical step in inventory and Business Intelligence

Planning Release

Product Planning (Repetitive + Discrete)

Release

B 2 B E Shipping Schedules C O M M EDI Alerts/Web Browser ASN E R C E Supplier Perform. SMI Supply Replenishment Management e-Kanban Schedules

Lean Manufacturing

B 2 B E C VMI Shipping Perform. O M M E R C E Shipping Schedules Broadcast Signals Kanban

JIT Sequencing

e-Kanban Schedules

Demand Replenishment Management

Execution

XML

Shop Floor Activity

Warehouse Consigned

Warehouse Consigned

Receiving Scan & Trace

Process Monitoring

Shipping Scan & Trace

ASN

Suppliers

Enterprise Financial

Customers

supply chain management within the complete QAD solution. Purple boxes indicate QAD solutions; gray boxes indicate third party products that complement the QAD solution.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

More detailed information about how these QAD solutions support each inventory management process can be found in Appendix A. A description of the replenishment method options supported by the QAD solution can be found in Appendix B. qAd SOLuTION AdvANTAGES: Alerts and simulation capability To collaborate with the extended supply chain and respond effectively to changes in demand, suppliers need a solution that can monitor customer demand, alert, and adjust the lean manufacturing parameters in real-time when changes occur. Fluctuating customer demand requires real-time analysis of different scenarios based on actual demand, future requirements and the state of readiness of the extended supply chain. 100% partner connectivity To succeed in today's environment, organizations must be able to share information at a revolutionary pace. The key is to eliminate the delays inherent in traditional EDI, phone, fax or e-mail communications and make information available to everyone simultaneously, enabling 100% partner connectivity throughout the automotive supply chain. Coupling EDI with Webbased inventory visibility applications can give manufacturers 100% electronic connectivity with their trading partners and enable near real-time collaboration and alerting with their supply chain. Options that make collaboration easy The QAD solution makes it possible to collaborate near real-time with all suppliers, large and small, without any manual effort or paperwork. QAD solutions support traditional EDI, XML, Web visualization and alerting for exception-based management. The fully integrated QAD Lean Supply Chain solution includes all the options necessary for inventory replenishment and partner connectivity and the critically important financial settlement options required in the automotive industry. Cost and time savings In addition to providing a broader offering than other solutions, the QAD integrated solution has time and cost advantages. Choosing an integrated inventory replenishment solution eliminates the need to implement individual solutions for specific processes and reduces the cost of upgrades. A unique advantage of the QAD Lean Supply Chain Solution is that additions and upgrades will always be integrated with QAD's base ERP solution, MFG/PRO. INdEpENdENT RESEARCH CONFIRMS qAd vALuE In a study completed in January 2003, the META Group examined the value propositions of the leading manufacturing software vendors based on information gathered from more than 200 of the vendors' customer companies. Their results confirmed that QAD provides: · ·

©2003 QAD Inc. All rights reserved

Lowest cost of ownership Fastest time to implement

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White Paper: Streamlining for Success: The Lean Supply Chain

WHAT CUSTOMERS SAY:

·

Highest value

To find out more about QAD Inc. and its automotive solutions visit www.qad.com or call 888-641-4141. "We have received multiple benefits from the QAD product suite. It has helped streamline our month-end reporting time from 15 days to 2-3 days. Our inventory control process improved dramatically, with inventory turns increasing 47% from 33.6 to 49.5 and inventory accuracy improving by about 25%. Between EDI ECommerce and Supply Visualization, we will achieve 100% connectivity with our trading partners. "Our investment in QAD has more than paid off." - LowellJohannsen CascadeEngineering

"We significantly reduced raw material inventory, trimmed total annual inventory carrying costs by more than $180,000, and cut down on parts outages and premium freight costs - since implementing supply visualization software a year ago..." APPENDIX A: THE QAD LEAN SUPPLY CHAIN: AN OVERVIEW THE qAd LEAN SuppLY CHAIN SOLuTION SuppORTS: · All inventory replenishment methods (discrete purchase orders, schedules, VMI, kanban and JIT sequencing) · Consignment inventory · Warehouse management · Shipping and receiving, scan and trace · Customer and supplier performance monitoring · Shop floor activity · Process monitoring · 100% partner connectivity · Business intelligence · Financial settlement Thefollowingprovidesanarrativeforthegraphiconpage9: INvENTORY REpLENISHMENT OpTIONS FOR CuSTOMERS ANd SuppLIERS With QAD solutions enabling interactive supply chain management, the enterprise - MikeThibideau Webasto-NorthAmerica

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

has fast, easy, direct access to customer requirements. Customer forecasts (releases) for both repetitive and discrete requirements flow directly into production planning. The enterprise can also receive a shipping schedule, broadcast, kanban, or an inventory minimum/maximum signal. Shipping instructions can be received via traditional EDI, XML or through a Web browser through B2B ecommerce. QAD solutions adapt easily to customer requirements. Production sequence, kanban, shipping and minimum/maximum and discrete purchase order information can be received via EDI or the Web and processed into demand management, but customers without electronic capability can still use manual methods such as paper and fax. EDI and Web shipping information received through B2B ecommerce is passed to demand management for processing and shipping, while material requirements are sent to supply replenishment management. Supplier forecasts (releases) are generated from production planning. The enterprise may also send more detailed instructions to suppliers in the form of shipping schedules and broadcast, kanban or inventory minimum/maximum signals. These shipping execution instructions can be sent to suppliers electronically either via EDI (through a file that is eventually integrated into the enterprise's application) or visually, through a Web browser and B2B ecommerce. In general, production sequence, kanban, shipping schedules, and minimum/maximum data are sent via traditional EDI, XML, or the Web and processed from supplier management. Supplier management calculates the inventory required from vendors. The enterprise can send shipping instructions to suppliers via paper, fax and email. EDI and Web shipping information received from supply replenishment management is sent through B2B ecommerce to suppliers. The data are then processed by the supplier according to the agreed-upon inventory shipment method (i.e. sequence, kanban, minimum/maximum, etc.), and material requirements are sent to supply replenishment management to determine the impact on material requirements from suppliers. Schedules Shipping schedules and releases from customers are brought into demand management. Customers typically provide 10 days of shipping requirements, sending an updated version each day. Processing customer schedules is part of Release Management in MFG/PRO. Supplier shipping schedules and releases are generated in supply replenishment management. Creating supplier schedules is a part of PROPLUS. vendor Managed Inventory (vMI) - Minimum/Maximum Sending minimum/maximum inventory data via the Web facilitates what is known in the industry as VMI, a system in which the supplier is responsible for maintaining agreed-upon inventory levels. When the customer gives the supplier access to more real time information, the supplier can reduce administrative costs, and possibly inventory levels. Minimum/maximum inventory processing is done either on the customer's inventory visibility application or via MFG/PRO. Supplier minimum/maximum inventory information is sent to the Web. Inventory

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

information can be retrieved by suppliers via B2B ecommerce. Information can be updated to B2B ecommerce in near real-time. Alerts in the form of a pages or emails from the Web are sent to suppliers when inventory levels fall outside minimum/maximum requirements. Minimum/maximum inventory is displayed on Supply Visualization, which is part of MFGx.net. Lean Manufacturing (kanban and e-kanban) To support lean planning, inventory shipments are dynamically optimized to follow the rhythm of customer demand. kanban, or pull signals received by a customer via EDI or the Web, can be brought into lean planning and demand management so that inventory is built as the customer needs product. Processing customer kanban signals is a part of base MFG/PRO and Lean Manufacturing. Kanban, or pull signals, are sent to the supplier via EDI or the Web. Lean planning allows inventory shipments to be dynamically optimized to meet the rhythm of demand. Kanban and e-Kanban is a part of Lean Manufacturing and Kanban Visualization. JIT Sequencing Based on a sequencing signal the customer sends via broadcast or EDI, parts can be built and packed into a truck in the order required by the customer. This process is referred to as In Line Vehicle Sequencing (ILVS). ILVS minimizes the amount of finished stock a supplier is required to carry and permits the OEM to reduce its purchased component and work-in-process inventories by delivering products in the exact sequence and at the specific time required on the assembly line. While typical planning horizons are measured in months, weeks and days, the planning performed in a JIT environment is typically measured in hours and minutes. In addition, the ability to schedule and manufacture unique product configurations on an item-by-item basis allows OEMs to produce vehicles that meet customers' feature and option demands and still keep production stocks to an absolute minimum. Processing customer EDI sequence schedules is a part of PROPLUS; processing broadcast signals is a part of JIT Sequencing. CONSIGNEd INvENTORY Consigned inventory supports the management of consigned goods at customer locations so that inventory can be shipped to customers without actual transfer of title. The enterprise maintains the consigned goods as finished goods inventory until the customer gives notice that the inventory has been used. Consumption triggers the creation of an invoice for the customer and the finished goods inventory is relieved on the enterprise's books. OEMs have been using consigned inventory processes, also referred to as "Pay on Production" or "Pay as Built," for many years. Processing consigned inventory is an additional module of MFG/PRO. Consigned inventory allows the enterprise to have the supplier maintain consigned goods as finished goods inventory until a notice generated by the enterprise indicates that the inventory has been used. A receipt is then generated, triggering the vouchering

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

process within accounts payable and enabling the use of ERS in financial settlement to streamline payments processing. This notice can be generated based on either the movement of the material from the consigned location to an "active" stock location or as part of actual floor consumption. The inventory is noted as available, but is not included on the balance sheet until it is transferred to an in-process stock location or consumed. Consigned inventory for suppliers is an additional module of MFG/PRO. wAREHOuSE MANAGEMENT Warehouse management supports increased inventory visibility and accuracy with better space utilization. Advanced inventory replenishment, put-away picking logic and radio-frequency (RF) scheduling of warehouse staff are also included in warehouse management. Warehouse processing for customers and suppliers is part of the QAD AIM solution. SHIppING ANd RECEIvING, SCAN ANd TRACE Supporting the shipment process involves sending Advance Shipment Notices (ASN) and scanning and tracing. ASNs can be sent to the customer via traditional EDI, XML or entered via the Web. ASNs allow customers to view in-transit shipments. If ASNs are sent via traditional EDI or XML, they are generated from a shipping transaction. When ASNs are entered and sent electronically, they are passed through B2B ecommerce to the customer for retrieval. Processing customer shipments /ASNs is a part of base MFG/PRO. ASNs can also be received from the supplier via traditional EDI, XML or via the Web. ASNs allow customers to view in-transit shipments. If ASNs are sent via traditional EDI or XML, they are generated from Supply Replenishment Management. When ASNs are entered and sent electronically from the supplier, they are passed from B2B ecommerce to the enterprise for retrieval. Supplier shipments are received in MFG/PRO. Scan and trace generates and scans bar code shipping labels and traces inventory transaction history, including how many parts were made, what day the parts were made, etc. Scanning is a third party provided product and tracing is a part of MFG/ PRO. SHIppING ANd SuppLIER pERFORMANCE Shipping and Supplier performance enables users to monitor how well a shipping department meets customer requested ship dates and quantities by comparing planned to actual ship dates and quantities. Users can measure performance based on whichever date best suits their business practices: line-item performance date, due date, or required date. Shipping performance data can be collected for a wide variety of shipment types, including discrete and scheduled sales orders, return material authorizations, distribution orders and material orders. Adding reason codes to each performance transaction record is also an option. For additional tracking, users can specify categories for all shipment line items. Supplier performance allows a supplier's report card to be generated on request, weighing each supplier event against the standards set. Shipping and supplier performance are a part of PROPLUS. SHOp FLOOR ACTIvITY

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

Shop floor activity reports scrap, reject, rework, labor and materials. Shop floor activity is part of MFG/PRO. pROCESS MONITORING Process monitoring involves direct machine reading and monitoring and reporting devices including Process Logic Controller (PLC), Poka Yoke, JIG, and testing equipment. A third-party provider provides process monitoring capability. B2B ECOMMERCE (100% pARTNER CONNECTIvITY) Partner connectivity and trading partner data synchronization begins with B2B ecommerce. The enterprise can connect and share information with partners (both customers and suppliers) via traditional EDI, XML or the Web. Alerts that notify partners of critical inventory levels and other key information are triggered from the Web via QAD's inventory visibility application. B2B ecommerce provides for multiple ways to connect all suppliers, regardless of size. B2B ecommerce partner connectivity is performed through EDI ECommerce, MFGx.net (Supply and Kanban Visualization) and Desktop2. An EDI translator is a third-party provided product and not included in B2B ecommerce. BuSINESS INTELLIGENCE Business intelligence is used for gathering, storing, analyzing, and accessing data to help enterprise users make better business decisions. ENTERpRISE FINANCIAL SETTLEMENT wITH CuSTOMERS ANd SuppLIERS Evaluated Receipt Settlement (ERS) ERS is used in accounts payables to create a vendor's voucher, on the receipt of a purchase order, without receiving an invoice from the vendor. Financial processing automatically records liabilities to the supplier based on quantities received. ERS processing is part of standard MFG/PRO. Accounts Receivable Self-Billing Some suppliers either do not send invoices or have customers who disregard invoices and send their own remittance advice documents, called "self-bills." A self-billing document, detailing shipments received and amounts due, reflects any deductions for defective or damaged parts or other credits and includes purchase order numbers, kanban numbers, release authorization numbers, and evaluated receipt settlement payment references. Payment, reflecting the self-bill amount and any agreed-upon corrections from previous self-bills, may accompany the self-bill or be remitted later. Self-billing is a part of PROPLUS. Retro-Billing Retro-billing, common among automotive suppliers, is a practice that applies to many commodity-driven markets where the cost of raw materials, not the process cost, causes prices to fluctuate. The purpose of Retro-billing is to invoice a customer for price changes on items that have already been shipped and invoiced at a different price. It provides control and flexibility in changing the price of items already shipped, by enabling price changes by individual line item in a scheduled order instead of by invoice.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

This is required when contracts between customers and the enterprise permit price changes in response to changes in the cost of a particular component that the enterprise uses (e.g. circuit boards) or commodity (e.g. copper or precious metals). It APPENDIX B: QAD SOLUTION INVENTORY REPLENISHMENT METHOD OPTIONS

Replenishment Method

Schedules

when to use

· Use to communicate scheduling information via traditional EDI, Web or paper. · This functionality is standard in MFG/PRO.

Limitations

· Unable to show current supplier inventory levels. · A different replenishment method should be used if inventory levels or scheduling information need to be communicated real-time. Typically, schedules are only sent once a day. · High demand/volatility. · Suppliers may have a tendency to ship to the maximum, which can increase inventory costs. · Inventory may not follow actual customer production needs because there is no direct interaction with the manufacturing cycle. · Requires a supplier with a solid vendor rating and mutual trust between customer and supplier, because the supplier has full control of inventory management.

vendor Managed Inventory using Minimum and Maximum

· Use for low-cost, high-volume parts. · When VMI is used, ownership is placed on the supplier to manage customer inventory. · Minimum/Maximum information can be communicated via the Web. · This functionality is part of MFGx.net.

e-kANBAN

· Used with parts that have a predictable lead-time and the amount made or consumed is within the replenishment lead-time. · Provides a near real-time pull signal in response to actual production requirements. · Does not push inventory and administrative effort requirements down the supply chain. · Kanban signals may be electronic or made visible on the Web. · This functionality is part of QAD's Lean Manufacturing module and KANBAN Visualization. · Used when part delivery needs to be JIT and in the build sequence requested by the customer. · Does not push inventory and administrative effort required down the supply chain. · Customer build sequence can be communicated via EDI or a production broadcast signal. · Part of customer sequence schedules in MFG/PRO and JIT Sequencing. · Use for parts with infrequent demand such as aftermarket parts, dealer direct, emergency replacements and pilot parts. · Use when price needs to be negotiated each time an order is placed. · This functionality is a part of base MFG/PRO.

· Requires understanding and commitment to lean manufacturing. · The freight cost of shipping needs to be weighed more frequently against the cost of carrying excess inventory. · Does not work well with parts that have seasonal demand or a predictable source of supply.

Sequencing

· Bulk or non-vehicle specific parts. · Requires core competency in sequencing and associated technology to deliver using this method of replenishment.

discrete purchase Orders

· Not effective for parts that have frequent demand or need to be available in a discrete quantity on a discrete day.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

can also be required when there is a dispute about a purchase order price that, upon resolution of the disagreement, needs to be re-invoiced with an agreed upon price. Typically, a retro-bill is applied for a range of effective dates. The result of the retrobilling effort is an invoice supported by a report detailing all shipments from effective start date through end date, with both the detail and the cumulative amount for all the shipments to which the incremental price difference applies. Retro-Billing is a part of Release Management in MFG/PRO. Note on all methods: 1. Communicating inventory information either electronically or visually does not compensate for poor MRP planning or production scheduling. Accurate production schedules, bill of materials, scrap reporting, and inventory receiving are a must before any inventory management procedure is selected. In addition, reporting inventory levels on a frequent basis is required. 2. While providing inventory visualization via the Web is a fast way to begin electronically connecting a supplier network, in the long term it is essential that inventory data is sent electronically from the enterprise and automatically integrated into the supplier's back-office systems. Electronically connected supply chains will be the most responsive. 3. Alerts supplied by inventory visualization solutions provide customers and suppliers with a method to manage inventory by exception. 4. Visualization tools enable better customer/supplier collaboration. Build-To-Order: Building and delivering a product based on a customer-specific order. Pull is an important concept of Build-To-Order. Continuous Improvement: Continuous Improvement is striving for perfection by continually removing successive layers of Waste, as they are discovered. It is generally accepted that a complete transformation process from mass production to Lean Manufacturing takes years. Perfection is zero waste, and progress can't be benchmarked against competitors' levels of waste, but requires striving for world-class performance. Every part, Every Interval (EpEI): The concept of EPEI interval is key to lean manufacturing. The EPEI is the time it takes to run through every regular part produced in a process Knowing the EPEI helps determine the manufacturing lot size and supermarket quantities for each part produced in a manufacturing process, as well as the number of kanban cards in the replenishment loop. Flow: After identifying the Value Stream for a product, the objective is to make the product value creation flow without obstacles. Enabling flow without interruption, detours, backflows, waiting and scrap is no easy matter and presents a constant challenge. The focus is on avoiding batch and queue between different steps in the process flow. There are many Lean Manufacturing methodologies and tools available for creating Flow, such as Single Minute Exchange of Dies to reduce changeover time, Poka-yoke and 5S. The end target is to enable Single-Piece Flow, meaning producing and delivering only one product at a time, to reduce Work-In-Process materials. Empirical studies show that creating Flow has the added benefits of improved quality

APPENDIX C: A LEAN GLOSSARY

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

and responsiveness, reduced lead time, and reduced space requirements. Just-In-Time (JIT): The concept of reducing inventories by working closely with suppliers to coordinate delivery of the right materials, in the right quantity, just in time for use in the next step in the manufacturing process/supply chain. kaizen: The Japanese word for Continuous Improvement. kanban: A method of JIT production that uses standard containers or lot sizes with a single card attached to each. It is a Pull system in which work centers use a card to signal that they wish to withdraw parts from feeding operations or suppliers. The Japanese word kanban, loosely translated, means card, billboard or sign. Lean Manufacturing: Lean Manufacturing, the most prevalent manufacturing strategy in the automotive industry, provides a way to do more with less - less human effort, less equipment, less time and less space - while coming closer and closer to providing customers with exactly what they want. Muda: The Japanese word for Waste. pacemaker process: Any process along a value stream that sets the pace for the entire stream. pitch: The time needed in a production area to make one container of products. For example, if Takt Time equals 30 seconds and pack size is 20 pieces, pitch equals 10 pieces. poka Yoke: Commonly referred to as Error-Proofing or Mistake-Proofing. The aim of Poka Yoke is to design devices that prevent mistakes from becoming defects by giving the earliest possible warning to enable response to abnormalities. Poka Yoke devices are not control devices, like thermostats, that take action every time, but rather they sense abnormalities and take action only when an abnormality is identified. pull: An essential part of any Build-To-Order strategy. Having set up the framework for Flow, the next step is to only produce what the customer needs. Pull means that no one upstream should produce goods or services until the customer downstream asks for it. push: The production of items required by a given schedule planned in advance. Pushbased manufacturing is associated with producing products for which there is no demand. Repetitive Manufacturing: Building the same product over and over again. Repetitive manufacturing, in contrast to Build-To-Order, does not involve building customerspecific products. However, It can be implemented with Lean Manufacturing strategies as well as Push-based manufacturing. Specify value: What does and does not create value is to be specified from the customer's perspective, and not from the perspective of individual companies, functions and departments.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

Supermarket: In lean manufacturing terms, a supermarket is a tightly managed amount of inventory within the value stream to allow for a pull system. Supermarkets, often called inventory buffers, can contain either finished items or work-in-process. They are used to handle finished goods inventories being replenished from a continuous flow pacemaker process, between a continuous flow process and other manufacturing processes that are shared by other value streams, and for incoming parts and material being pulled from supplier locations. Supply Chain Execution (SCE): A subset of Supply Chain Management, this is a framework of execution-oriented applications that enable the efficient procurement and supply of goods, services and information across enterprise boundaries to meet customer-specific demand. In its broadest sense, Supply Chain Execution includes manufacturing execution systems, warehouse management systems and other execution systems within the enterprise, as well as throughout the supply chain. Supply Chain Management (SCM): A business strategy to improve shareholder and customer value by optimizing the flow of products, services and related information from source to customer. Supply Chain Management encompasses the processes of creating and fulfilling the market's demand for goods and services, and involves a trading partner community engaged in a common goal of satisfying the end customer. Supply Chain planning (SCp): A subset of Supply Chain Management, this is the process of coordinating assets to optimize the delivery of goods, services and information from supplier to customer, balancing supply and demand. A Supply Chain Planning suite overlays a transactional system to provide planning, what-if scenario analysis capabilities and real-time demand commitments. Taiichi Ohno: Born in 1912, he developed the Toyota Production System using the quintessence of Japanese reasoning. He was an excellent originator of new ideas in the industrial world with a unique management style. His Japanese production system made planning for the manufacture of automobiles the most modern process in the world. Takt Time: Takt time, an important lean concept, represents the customer demand rate and is used to synchronize the rate of production with the rate of sales. Toyota production System (TpS): The manufacturing strategy of Toyota, widely regarded as the first implementation of Lean Manufacturing. value Stream: It requires identifying all steps necessary to design, order and produce the product across the whole value stream, to highlight non-value adding waste. The whole Value Stream covers processes from ordering raw materials to delivery of the finished product to the final customer. When mapping, focus should be horizontal across systems and departments, from order to delivery, not vertical in the departmental silo. It is necessary to manage whole Value Streams for specific products. In general, it is useful to divide activities into three categories: value Adding Activity: Those activities that, in the eyes of the end customer,

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

make a product more valuable. A value adding activity is simple to define; it results in something the customer would pay for. Non-value Adding Activity: Those activities that, in the eyes of the end customer, do not make a product more valuable and are not necessary, even under present circumstances. These activities are clearly "Waste" and should therefore be the target of immediate or short-term removal. Necessary Non-value Adding Activity: Those activities that, in the eyes of the end customer, do not make a product more valuable, but are necessary unless the existing supply process is radically changed. This type of Waste is more difficult to remove in the short term and should be a target for longerterm radical change. value Stream Mapping: Identifying all the specific activities occurring along a Value Stream for a product or product family. waste: Lean Manufacturing is a continuous attack on Waste. The seven Wastes in Lean Manufacturing are: overproduction, defects, unnecessary inventory, inappropriate processing, excessive transportation, waiting and unnecessary motion.

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©2003 QAD Inc. All rights reserved White Paper: Streamlining for Success: The Lean Supply Chain

Copyright ©2003 QAD Inc. All rights reserved. Item #73-1936A. QAD is a trademark of QAD Inc. All other product or company names appearing in this publication are used for identification purposes only and may be trademarks of their respective owners. This white paper is for informational purposes only. QAD Inc. makes no warranties, express or implied, in this document.

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