Sourcing 1997

SOURCING

During the 1996 negotiations, the Union raised numerous concerns about the Corporation's sourcing actions and their impact on employment opportunities. To that end, the Corporation will work with and assist the Union at both the Local and International levels to preserve jobs, replace jobs which may be lost by outsourcing action and to create jobs for Protected employees and laid off employees. It is an objective of the Corporation to grow the business and to continue to rely upon its employees and facilities as the source of its products. During the life of the current Agreement, the Corporation will advise, in writing, the Union members of the Sourcing Committee of the Labor Policy Board meeting results relative to sourcing recommendations, including the number of potential jobs affected. Additionally, data regarding incoming and outgoing work will be given to the International Union in a quarterly meeting. (The Corporation will provide inquiry access to the International Union through the use of a computer terminal.) In this manner, the parties can judge the success of mutual efforts toward improved job security. The Corporation agrees to incorporate the procedures and structure outlined herein when making sourcing determinations during the current Agreement.

The rationale for sourcing actions will consider the criteria of quality, technology, cost, timing, statutory requirements, occupational and related environmental health and safety issues, the impact on long‑term job stability, the degree to which the Corporation's resources can be allocated to further capital expenditures, the overall financial stability of affected facilities, and the impact on related facilities. Other factors considered by the Corporation before a final sourcing decision is made will include the effect on employment, and job and income security costs, on both a short and long‑term basis. Such criteria shall give equal weight to the full impact of a sourcing action on General Motors‑UAW represented employment levels and the job and income security of General Motors‑UAW represented employees. The National parties will jointly further develop the above criteria to be used to address sourcing issues. In developing this criteria transfer pricing profits will not be considered in making sourcing decisions. Only appropriate return on investment and burden will be considered.

Following the development of the sourcing criteria, the National Sourcing Committee may form Joint Task Forces to ensure full implementation of such criteria throughout the Corporation and, on an as needed basis, to address any specific sourcing areas of concern identified by the Union. Pertinent criteria will be applied consistently in comparisons of internal and external supply capability. The International Union and where appropriate the local union will be provided full and timely access to all appropriate data, including financial information, that is pertinent to evaluate product competitiveness and contemplated sourcing. The Union agrees to keep all such information confidential until the Corporation consents to its

release. Further, in this regard, the plant Chairperson will designate in writing those Union representatives who will have access to the quote package and related information.

If the Local Committee cannot resolve a sourcing issue, it may file a grievance at the second step of the grievance procedure.

In addition, the following specific commitments have been made to address sourcing‑related job security concerns of UAW members:

1. Insourcing

The Local JOBS Committee will discuss the practicality of insourcing, in whole or in part, work previously outsourced or new work which the Committee identifies as that which might be performed competitively within the location based on the criteria outlined above. To assist in this process, the International Union will be furnished a complete master file of commodities which will be used to generate a list of parts similar to those currently manufactured at the location that have been (1) outsourced from that location or (2) are currently manufactured by non‑GM/UAW suppliers for General Motors. This list will be updated and expanded to include supplier expiration dates, supplier location (city and state), annual volume, and Union affiliation if known and will be furnished quarterly or as otherwise agreed by the National Parties. Thereafter, the parties will initiate efforts to insource particular work consistent with the aforementioned criteria to create prospects for growth and to provide jobs for Protected employees and employees on layoff.

If it is established that certain work can be performed competitively judged by the above criteria, management will adopt the Committee's proposal and barring unique or unforeseen circumstances, bring the work in‑house. The Union shall thereafter obtain any necessary approval or ratification within 30 days of the decision to bring the work in‑house.

2. Outsourcing

Outsourcing as used herein means the Corporation's sourcing of work from GM/UAW locations, including work connected with current, new or redesigned vehicles, fabricated parts, powertrain, and component products.

When the quoting process begins, the local Union at the affected location(s) will review and have access to the entire request for quotation package for this work along with cost book information. Upon receipt of this package at the plant, the Chairperson and the Personnel Director will indicate on the accompanying notice (Notice of Potential Outsourcing) that the information

has been received. This notice will include a description of the work involved and will be mailed to the Vice President and Director of the General Motors Department of the UAW, and the Vice President of Personnel, North American Operations.

Following receipt of the request for quotation package (or in the infrequent instances where a quote package is not utilized), the local parties will have the opportunity to jointly develop a plan to perform the work competitively, judged by the criteria listed earlier in this Appendix. The local Union will be provided full and timely access to all appropriate data, including financial information that is pertinent to evaluate product competitiveness and the potential sourcing action. Prior to submission of the initial quote response, the information contained therein will be reviewed by the local parties.

At the close of the quoting process, the local parties will be advised in writing of the most favorable quote response which best meets customer requirements and the terms and conditions contained therein. If this quote response is other than the one submitted by the affected location(s), a written notice will be issued to the Chairperson which includes the reason for the potential outsourcing, the quote price from the affected location, if applicable, the terms and conditions of the most favorable quote response, the potential jobs impact, and the anticipated impact date. Thereafter, the local parties will be given an additional 30 days, or longer when possible, to meet the terms and conditions of the quote response referenced above. A copy of this notice will be sent to the Vice President of Personnel North American Operations, and the Vice President and Director of the General Motors Department of the UAW.

If it is established that the work can be performed competitively, judged by the criteria listed earlier in this Appendix, Management will, barring unique and unforeseen circumstances, keep the work in‑house. The Union shall thereafter obtain any necessary approvals or ratification within 30 days of the decision to keep the work in‑house.

The sourcing authority will not enter into a contractual relationship with a non‑GM‑UAW supplier until such time as the designated management representative of the impacted location provides written verification that the above notification procedure and discussion by the JOBS Committee, has taken place.

Additionally, International Union input will be sought by the Corporation and its Groups and Divisions as early as possible in the outsourcing decision-making process in order to allow for more thorough discussion and to permit the parties to better assess the impact of outsourcing on the long‑term job stability of employees and the financial viability of given Corporate locations.

The Corporation agrees to a full disclosure to the International Union of the procedures utilized in sourcing activities.

3. Future Product Sourcing

International Union input to early sourcing decisions will be sought by the Corporation's Groups and Divisions. In that regard, the International Union will be notified in writing by the appropriate Group or Division upon "Bubble Up Initiation Approval" to proceed with a new or redesigned vehicle, or a new engine or transmission. A comparable step for some components and subsystems is "Concept Initiation."

Semi‑annually, as a part of quarterly meetings referred to earlier in this Appendix, a confidential review will be held concerning future product programs which will identify new or redesigned vehicles, subsystems, or component parts. These semi‑annual meetings will be attended by the Vice President of Personnel, North American Operations, and the Vice President and Director of the General Motors Department of the UAW, both of whom may also be requested to attend additional meetings, if deemed appropriate by the National Parties. In reviewing future product programs, representatives from various Corporate disciplines: e.g., Marketing, Engineering, and Product Planning, may be invited to attend.

Following the notification, the members of the National Committee shall have responsibility for overseeing the interface with individual vehicle platforms and the powertrain division. The union representative for each car and truck group, Powertrain, Delphi Automotive Systems, and the Metal Fabricating Division will work with members of their respective organizations so as to gain information and knowledge and to provide input into sourcing discussions and sourcing determinations for those organizations.

When there is a need for a Union representative as specified above to interface with a component division relative to sourcing discussions at their organization, the contact should be made through the divisional industrial relations contact for that component division.

The Corporation agrees not to use the results of such discussions to obtain more attractive contract terms from outside suppliers in lieu of keeping the work in‑house.

If requested, higher level meetings or discussions on these matters will be scheduled.

1996 NATIONAL AGREEMENT

PURPOSE

I. The purpose of Appendix L is to provide a procedure and structure for the Corporation and the Union at all levels to be used when making sourcing determinations during the current Agreement. The procedure and structure contained in the language are designed specifically to protect and enhance UAW/GM employees' job security. This must be accomplished through proper evaluation and consideration of all factors involved in the sourcing of work before such decisions are made.

A. Keeping the purpose of the Sourcing Agreement in the forefront is vital when considering the propriety of any sourcing action (insourcing, outsourcing or future product sourcing).

SCOPE OF APPLICATION

I. The commitments, procedures, structure, etc. contained in Appendix L apply to all sourcing actions and determinations regarding GM/UAW facilities. (Insourcing, Outsourcing and Future Product Sourcing.)

A. This would include any sourcing action or decision on work connected with any current, new or redesigned vehicles, subsystems, fabricated parts, powertrains and component products.

APPENDIX L CHRONOLOGY

I. Appendix L has five (5) basic sections which address the contractual relationship between the parties with regard to sourcing. These sections are listed below in the order in which they appear in the Agreement. (Note: This Educational Outline will cover these sections in the same order.)

¨ The opening paragraphs containing the Corporation's commitments, the criteria to be used in making sourcing decisions, protection and access to information and the reference to the proper processing of grievances.

¨ Insourcing

¨ Outsourcing

¨ Future Product Sourcing

¨ Closing paragraph reaffirming the commitments and the purpose of the Appendix.

CORPORATION COMMITMENTS

I. General Motors made a number of commitments to the Union during national bargaining and these are reflected in the Agreement.

A. In response to the Union's concerns about the Corporation's sourcing actions and their impact on employment opportunities, the Corporation committed to work with the Union at both the Local and International levels to:

¨ Preserve jobs

¨ Replace jobs lost by outsourcing actions

¨ Create jobs for Protected employees and laid off employees

¨ Grow the business

¨ Continue to rely upon UAW/GM employees and facilities as the source of the Corporation's products.

EXPLANATION: The scope of these commitments is obviously much broader than simply dealing with outsourcing. Local unions must keep management focused on their obligations to "preserve jobs, replace jobs, create jobs, and to grow the business. " This is especially true when they are asking us to work with them to improve operational effectiveness.

Preserve jobs: the joint parties obligation is to work together to retain work being considered for outsourcing action.

Replace jobs: when joint efforts to retain work fail for any reason, the impacted jobs should be replaced by insourcing suitable replacement work.

Create jobs: plants with Protected employees and laid off employees have additional responsibilities to insource work.

Grow the Business: grow employment opportunities at all locations.

"Continue to rely. " the Corporation's first obligation is to its UAW represented employees and facilities rather than to the outside vendors.

B. The Corporation agreed to incorporate the procedures and the structure outlined in Appendix L when making sourcing determinations during the term of the Agreement.

EXPLANATION: The commitments, decision making criteria, procedures, etc. in Appendix L were agreed to by the Corporation in national bargaining. Plants, Groups, Divisions, or other GM activities such as Engineering or World Wide Purchasing do not have the authority to decide not to comply because they are "too cumbersome",

"don't fit their Business Plan", "not consistent with their core business philosophy, " or any other such excuses.

C. The rationale for sourcing actions will consider several criteria:

¨ Quality, technology, cost, timing, statutory requirements and occupational and related environmental health and safety issues.

¨ Impact on long term job stability.

¨ The degree to which the Corporation's resources can be allocated to further capital expenditures, the overall financial stability of affected facilities, and the impact on related facilities.

¨ The effect on employment, and job and income security costs, on both a short and long term basis.

1. These criteria must give equal weight to the full impact of a sourcing action on UAW/GM represented employment levels and the job and income security of UAW/GM employees.

2. Transfer pricing profits are specifically excluded from

consideration in making sourcing decisions.

3. Only appropriate return on investment and burden can be

considered.

EXPLANATION: When evaluating potential sourcing actions many factors must be considered. The Corporation has agreed that both short and long term job security costs must be considered. In addition, equal weight must be given to the impact on job and income security of UAW/GM employees.

The International Union's position on costing for sourcing decisions, titled "The Cost to Manufacture versus the Cost of Acquisition" is included at the rear of this educational outline. In brief, the principle to be followed when comparing the in‑house cost versus the outside, is that the in‑house cost analysis (cost to manufacture) should only include elements of cost that are directly affected by whether or not we make the part(s). If an element of cost would remain if the part were purchased, it should not be included. Conversely, the cost to purchase (cost of acquisition) should include the seller's price and all in‑house costs that would continue to be incurred if the part were to be purchased.

EXPLANATION: Management's contractual obligation is to notify the Union at the beginning of the process, before any involvement by outside vendors. It is a violation, of the Agreement to conclude an outsourcing decision prior to complying with all notification requirements, including the separate letter regarding the 150 day period, and engaging in genuine joint efforts to retain the work. (See Document 127 which can be found on page 9 of this Outline.)

D. This notice will include a description of the work involved and will be mailed to the Vice President and Director of the General Motors Department of the UAW, and the Vice President of Personnel, North American Operations.

EXPLANATION: The notification form, should contain all pertinent information such as: Impacted locations, Product Name, Model and Year, Description of the Work, Sourcing Authority, Part Numbers, Annual Volumes, Projected Skilled and Non‑Skilled Employee Impact, etc.

In addition, the "R. F. Q. Response Due Date" shown should provide the local patties with adequate time to properly address the contemplated outsourcing. This date, determined by Purchasing, is not a contractual requirement The purpose of the process is to work together to improve operations and retain the work, not to respond to artificial deadlines.

E. Following receipt of the request for quotation package (or in the infrequent instances where a quote package is not utilized), the local parties will have the opportunity to jointly develop a plan to perform the work competitively, judged by the criteria listed earlier in this Appendix.

EXPLANATION: Local unions should take advantage of this new and earlier notification process by discussing the work in question with local management The intent of such discussions is to work jointly to develop a strategy to retain the work. Instances where a request for quote package is not provided should be very rare. If the quote package is not provided, local unions should insist on an explanation for such an omission. If the local suspects that the reason offered is not legitimate, it should contact the UAW‑GM Department sourcing staff at once.

The responsibility for making a proposal is a joint responsibility of the local JOBS committee. The opening sentences of Appendix L reflect the Corporation's commitment to work with the Union to accomplish the objectives set forth in this Appendix. .

(See Document 120 which can be found on page 7 of this Outline.)

F. The Local Union will be provided full and timely access to all appropriate data, including financial information that is pertinent to evaluate product competitiveness and the potential sourcing action.

EXPLANATION: The Union agreed that information furnished by the Corporation regarding sourcing and the discussions in connection with such information may require that the Union keep the information confidential until the Corporation consents to its' release. The Agreement does not anticipate that the company will deny information to the Union on the basis that it is confidential. Rather, it provides that the Union will keep such information confidential.

Failure to provide appropriate information in a timely fashion could impact the time limits described in the Appendix L procedure. It is the position of the International Union that the Appendix L time limits (150 day period) do not start until all appropriate information required by the Agreement has been made available to the Union.

G. Prior to submission of the initial quote response, the information contained therein will be reviewed by the local parties.

EXPLANATION: Before submitting the initial quote response to the purchasing activity, the local parties are to review the jointly prepared response. The purpose of this review is to eliminate any misunderstandings and to ensure the best possible response.

H. At the close of the quoting process, the local parties will be advised in writing of the most favorable quote response which best meets the customer requirements and the terms and conditions contained therein. If this quote response is other than the one submitted by the affected location(s), a written notice will be issued to the Chairperson which includes the reason for the potential outsourcing, the quote price from the affected location, if applicable, the terms and conditions of the most favorable quote response, the potential jobs impact, and the anticipated impact date. Thereafter, the parties will be given an additional 30 days, or longer when possible, to meet the terms and conditions of the quote response referenced above.

EXPLANATION: The local patties are to be advised in writing of the most favorable quote response. If the most favorable response is from other than the affected location(s), the Appendix L notice is re‑issued to the Chairperson. The notice must include all terms and conditions of the most favorable quote response (price, quality, technology, etc.), the potential employee impact and the anticipated impact date.

The local parties are given an additional 30 days following receipt of

this notification to meet the terms of the most favorable response. This

30 day period is for the local parties only . Outside vendors are specifically excluded from this part of the Appendix L process.

Management does NOT have the right to go back to any outside vendor for a more favorable response or bid!

The local parties need only to match the most favorable response, not improve upon it.

I. A copy of this notice will be sent to the Vice President of Personnel North American Operations, and the Vice President and Director of the General Motors Department of the UAW.

J. If it is established that the work can be performed competitively, judged by

the criteria listed earlier in this Appendix, Management will, barring unique

and unforeseen circumstances, keep the work in‑house.

EXPLANATION: Prior to the 1990 Agreement, management retained the right to determine whether or not they would accept the Committee's proposal(s) to retain the work in question. This could have occurred even if the local JOBS Committee put forth a better proposal than the outside supplier!

In 1990, the provisions of Appendix L, as compared to Document 89 in previous Agreements, removes management's unilateral (Paragraph 8) rights in this regard. The Agreement now requires that if the potential outsourcing can be performed competitively, judged by the jointly developed criteria management will adopt the committee's proposal and keep the work in‑house.

¨ Exceptions to this requirement could only occur in "unique or unforeseen circumstances."

The International Union's position on costing for sourcing decisions (including outsourcing) titled "The Cost to Manufacture versus the Cost of Acquisition" is included at the rear of the education outline.

K. The Union shall thereafter obtain any necessary approvals or ratification within 30 days of the decision to keep the work in‑house.

EXPLANATION: Changes made in a Local Seniority Agreement, Shift Preference or any other local agreements that were ratified initially, will require ratification by the local union membership and may require approval by the International Union and the Corporation.

¨ Changes in the local rules for implementing Paragraph 71 for example, are purely a local matter and would not require the approval of the International Union and the Corporation.

¨ Contact your General Motors Department Servicing Representative for any clarification you may need regarding which agreements require a ratification or approval by the International Union and the Corporation.

It is recommended that in the event local discussions result in an understanding to retain work, the local union insist there be a management commitment in writing that the work will not be outsourced.

L. The sourcing authority will not enter into a contractual relationship with a non‑GM‑UAW supplier until such time as the designated management representative of the impacted location provides written verification that the above notification procedure and discussion by the JOBS Committee has taken place.

EXPLANATION: The Agreement clearly prohibits management from entering into a contractual relationship with an outside supplier before they have complied with all of the terms of the notification procedures and time limits (the 150 day period.) It is a violation of the express language and the intent of Appendix L for the sourcing authority to even indicate to a supplier that "the work will be theirs as soon as the Appendix L time limits expire". For management to be beyond contemplation before they have complied with these terms is improper and should be challenged. Any prematurely acquired contract with an outside vendor should be treated as though it did not exist.

M. Additionally, International Union input will be sought by the Corporation and its Groups and Divisions as early as possible in the outsourcing decision making process in order to allow for more thorough discussion and to permit the parties to better assess the impact of outsourcing on the long‑term job stability of employees and the financial viability of given Corporate locations.

EXPLANATION: This paragraph defines the purpose and intent of the notification of contemplated outsourcing to the Union. The Corporation is not to simply go through the mechanics of providing notification 150 days before they plan on signing a contract with an outside supplier. Rather, as described in the opening paragraph of Appendix L, management should be approaching the Union long before any decisions need to be made in a sincere effort to provide job security for their employees. Management, where possible, should be seeking union input before a request for quotation package is developed.

N. The Corporation agrees to a full disclosure to the International Union of the procedure utilized in sourcing activities.

EXPLANATION: The Corporation utilizes various procedures for sourcing determinations such as their Competitive Analysis Guide, NAO Sourcing Policy, World Wide Purchasing Policies, etc. In many respects these policies are inconsistent with Appendix L. In all cases Appendix L must govern.

FUTURE PRODUCT SOURCING

I. This section was new to the Sourcing language in 1990 and provides greater opportunity to place future product work into UAW/GM plants.

A. International Union input to early sourcing decisions will be sought by the Corporation's Groups and Divisions. In that regard, the International Union will be notified in writing by the appropriate Group or Division upon " Bubble Up Initiation Approval " to proceed with a new or redesigned vehicle, or a new engine or transmission. A comparable step for some components and subsystems is "Concept Initiation."

EXPLANATION., The Corporation has agreed to be pro‑active in seeking early International Union input on future product sourcing decisions. This will include notifying the International Union in writing at the point that "Bubble Up Initiation Approval" or "Concept Initiation" is given by the Group or Division.

¨ This notification is required in all instances involving new or redesigned vehicles or a new engine or transmission. This notice is also required at a similar point in the product development process (“Concept Initiation”) for those components and subsystems that do not receive "Bubble Up Initiation Approval."

B. Semi‑annually, as a part of quarterly meetings referred to earlier in this Appendix, a confidential review will be held concerning future product programs which will identify new or redesigned vehicles, subsystems, or component parts. These semi‑annual meetings will be attended by the Vice President of Personnel, North American Operations and the Vice President and Director of the General Motors Department of the UAW, both of whom may also be requested to attend additional meetings, if deemed appropriate by the National Parties. In reviewing future product programs, representatives from various Corporate disciplines, e.g. Marketing, Engineering, and Product Planning, may be invited to attend.

EXPLANATION: This new language for the 1996 Agreement provides for semi‑annual meetings to review Future Product Planning. It also expands the involvement to include the GM Vice‑President of Personnel for NAO and the Vice President and Director of the UA W/GM Department

C. Following the notification, the members of the National Committee shall have the responsibility for overseeing the interface with individual vehicle platforms and the powertrain division. The union representative for each car and truck group, Powertrain, Delphi Automotive Systems, and the Metal Fab Division will work with members of their respective organizations so as to

gain information and knowledge and to provide input into sourcing discussions and sourcing determinations for those organizations.

EXPLANATION: In 1993 bargaining, the Corporation agreed to the establishment of UA W future product sourcing representatives at the Car and Truck Divisions, Powertrain, and Delphi at the group level. These representatives are responsible to report to the International Union. In 1996, a representative was added at Metal Fab.

The purpose of the written notification and the addition of the sourcing representatives is to have input into sourcing discussions and determinations to advantage every opportunity to use internal resources.

NOTE: See pages 22 through 25 of this Educational Outline which explains the Corporation's commitments regarding sourcing. These commitments apply to future product sourcing as well.

D. When there is a need for a Union platform representative as specified above to interface with a component division relative to sourcing discussions at their organization, the contact should be made through the divisional industrial relations contact for that component division.

EXPLANATION. Due to the number of component divisions and the complex management structures, contacts at the Divisional Labor Relations level will be assigned to provide the UA W future product sourcing representatives, described above, assistance in reaching the appropriate management personnel in that division.

E. The Corporation agrees not to use the results of such discussions to obtain more attractive contract terms from outside suppliers in lieu of keeping the work in‑house.

EXPLANATION. This is self‑explanatory. It is a violation of the Agreement to "whipsaw" the UA W against outside suppliers. This type of conduct on management's part should be immediately challenged,

F. If requested, higher level meetings or discussions on these matters will be scheduled.

EXPLANATION: The Corporation has agreed to "higher level" meetings and discussions in recognition of the fact that there are circumstances and issues which arise from time to time that require high levels of authority to address and resolve.

G. The implementation of this process should provide the parties with the mechanism to take advantage of every opportunity to use internal resources and to create jobs for Protected employees.

EXPLANATION: This sentence states the purpose and goal of the Future Product Sourcing section of Appendix L. If approached properly and in good faith, this aspect of the sourcing relationship between the parties provides the greatest opportunity.

Participant Manual

Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Financial Tools and Techniques for Sourcing Decisions

Participant Manual

Section 7 – Cost To Manufacture vs. Cost Of Acquisition

7.1 SECTION INTRODUCTION

Section Objectives: After completing this section, participants will be able to:

• Describe the cost to manufacture versus the cost of acquisition process.

• Describe the cost considerations using the current cost system.

Selected Topics: 7.1 Section Introduction

7.2 Cost to Manufacture vs. Cost of Acquisition

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

7.2 COST TO MANUFACTURE VS. COST OF ACQUISITION

Traditionally the cost to manufacture versus the cost of acquisition has been referred to as make versus buy analysis. As the scope of the sourcing decisions expand, more accurate terminology would be to refer to the process as cost to manufacture versus the cost of acquisition. Competitive analysis should not be used for making sourcing decisions.

Manufacturers are often faced with the decision of whether to manufacture or acquire from an outside source the parts and subassemblies. The decision should be based on both quantitative and non‑quantitative factors. More generally, the choice may not be fundamentally whether to manufacture or acquire; it is how best to use available facilities. These factors should also be considered for insourcing of parts and sub‑assemblies.

Several factors that should be considered include:

0 JOBS Bank Cost

0 Layoff Costs

0 Underutilized Facilities

0 Costs Associated with Outside Purchasing

0 etc.

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Cost To Manufacture By definition, "adjusted factory cost" is the GM designation for total factory cost that excludes depreciation on existing investments and existing special tool charges.

The economic evaluation method described in Section 5 should be used as a technique for decision making. Discounted cash flow/return on investment (DCF/R0l) is not to be confused with return on investment. DCF/R0l is the internal rate of return generated by a particular project or investment. Return on investment is the net profit divided into the total assets of the business.

The overall impact to the Corporation should be considered and not solely the impact on the individual purchasing G M Unit. There should be analysis done by both the buying and allied supplying units as to the profitability to the Corporation and not that of the individual units. Transfer pricing cannot be used as the method for sourcing decisions.

Key Assumptions Most fixed costs will remain fixed whether the part is

manufactured or not

When there is idle facilities or unused capacity, an

appropriate approach would be to add production or

insource to absorb a portion of the fixed costs.

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Quantitative Factors That Should Be Considered Include:

¨ Cost to manufacture

¨ Unused capacity

¨ Cost that will remain as a result of releasing the business (idle facility costs)

¨ Future investment costs

¨ Quality

¨ Responsiveness

¨ Profitability of remaining products

¨ Variable profit of the product

¨ Costs that will be incurred to deal with the new source

¨ Layoff; SUB Costs

¨ JOBS Bank Cost

Non‑financial Factors That Should Be Considered Include:

¨ Impact on the people remaining at the facility

¨ Impact on the misplaced workers

¨ Impact on the community from in which the work is removed

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Competitive Analysis

Text Box: To identify products which are not competitive and to assist in identifying cost reductions and process improvements. This is not to be used for sourcing decisions.

Purpose

Cost to Manufacture vs. Cost of Acquisition

A method for making sourcing decisions, both insourcing and outsourcing, based on all relevant costs to the decision.

Purpose

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

COSTS INCLUDED IN ANALYSIS

Cost to Manufacture

UAW's Position

Management's Normal Position

Direct Material

Direct Labor

Variable Burden

Engineering (As it specifically

relates to the part)

Direct Material

Direct Labor

Variable Burden

*Engineering

*Fixed Burden

*Commercial

*The UAW does not count because the costs remain.

Cost of Acquisition

UAW's Position

Management's Normal Position

Purchase Price

**Transportation

**Purchasing Activities

**Engineering

**Receiving

**Inspection

**Warranty

**JOBS Bank Costs

**Layoff Costs

**Area Hire

**Scrap

**Fixed Burden

**Tooling and Equipment

(Tools are usually owned by GM)

Seller's Price

** These are costs to GM which should be added to the purchase price, if they are incurred. Other costs should be included as appropriate.

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

MANAGEMENT'S STATED POSITION

(Per September 22, 1992 Letter)

When evaluating potential sourcing issues related to individual parts or components, the following steps must be followed;

¨    Determine whether the product line with which the part is associated is competitive on a total operating cost basis, or a reliable plan exists to become competitive.

¨    If the product line is competitive, the cost to manufacture that part is determined on a cash flow basis.

¨    If the product line is not competitive, determine if this is a unique case where a cash flow analysis might be appropriate, such as where a long term JOBS bank is present.

The following costs should be considered:

-Direct Material             -Variable Burden              -Engineering

-Direct Labor (A)            -Other Burden (B)             -Commercial

(A)        The utilization of JOBS Bank employes can offset some direct labor cost on a

cash flow basis.

(B)        Incremental burden costs are considered when making a cash flow analysis.

NOTE: Existing depreciation, amortization, commercial and current retiree benefit costs are not incremental to the decision and should not be included in a cash flow analysis.

The UAW is in total disagreement with Management's position stated above. For example, Appendix L of the GM/UAW National Agreement does not place the requirement on any part, system or sub‑system that its entire product line be competitive on a total operating cost basis. The language in Appendix L clearly excludes from consideration certain inappropriate burden costs that would be included in a total operating cost analysis.

Moreover, the Corporation is unable to provide definitions for terms used in their stated position such as: product lines, long term JOBS Banks, long ‑term versus short term strategies, purchase price adjusted for design differences, etc.

For these reasons, (and others), Management's position should be ignored.

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Example

Cost to Manufacture Versus Cost of Acquisition

Purpose

To determine whether to manufacture or purchase a part.

Assumptions

· The plant is operating at less than full capacity.

· There are 20 direct and indirect employes. The volume is 200,000 units per year.

· JOBS Bank Costs per employee is $56,000 per year.

· GM provides Engineering for the outside supplier. GM owns the tooling and equipment used by the supplier. The transportation cost is $.25 per part. The estimated purchasing cost is $.05 per part. The receiving inspection cost is estimated at $.075 per part.

· The supplier's price is $12.00 (assuming same quality, reliability in delivery, etc.)

· Other relevant costs per unit:

Direct material $7.00

Direct labor 2.50

Manufacturing Burden

- Variable 2.00

- Fixed 2.00

Engineering .50

Commercial .50

Total Factory Cost $14.50

Based on the above information, should GM continue making the part or purchase it?

Financial Tools and Techniques for Sourcing Decisions 7-8

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Example

Cost to Manufacture Versus Cost of Acquisition

(continued)

The cost of acquisition ($20.475) exceeds the cost to manufacture ($12.00).

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

EXERCISE 7‑1

COST TO MANUFACTURE VERSUS COST OF ACQUISITION

Purpose

To determine whether to manufacture or purchase a part.

Instructions

Read the assumptions presented below and determine if you should manufacture or purchase the part. Answer the questions below. Indicate the amount of the difference, if any, between the two decisions.

Assumptions

The plant is operating at less than full capacity.

1 . Based on the financial information below, should you continue making the part or purchase it?

Financial Information

A. There are 10 direct and indirect employes. The volume is 80,000 units per year.

1 . JOBS Bank Costs per employe is $56,000 per year.

B. Engineering for the outside supplier is provided by GM. Tools and equipment are owned and provided by GM. It costs $.50 per part to ship from the supplier to this plant.

C. Other Relevant Costs: Cost (per unit)

Direct Material $13.00

Direct Labor 5.00

Manufacturing Burden

- Variable 4.00

- Fixed 4.00

Engineering 1.00

Commercial 1.00

Total Factory Cost $28.00

D. Suppliers Price

Assuming same quality, reliability, delivery, etc. $23.00

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

EXERCISE 7‑1

COST TO MANUFACTURE VERSUS COST OF ACQUISITION

(Calculations)

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

EXERCISE 7‑2

INSOURCING

Purpose

To determine whether to insource or continue purchasing a part.

Scenario

The local JOBS committee has identified a potential job to insource and management agrees to do a financial investigation. The following information is provided to t9e Local Union representatives.

Assumptions

· Floor space is available.

· No employes from the plant are on layoff or in the JOBS bank. Several hundred employes are in Area Hire (Cost per employe in Area Hire is $52,500 per year).

· Insourcing the job would create 80 jobs.

· The plant would have to purchase equipment and do some rearrangement.

· GM provides engineering for the outside supplier. The supplier owns all his own equipment and machinery and would deliver the part at his expense for $0.5250 per part.

· Volume is 38,250,000 per year.

Based on the other relevant financial information that follows, should the part be insourced?

Other Relevant Costs Cost (Per Unit)

Direct Material $.3100

Direct Labor .0930

Manufacturing Burden

· Variable .1075

· Fixed .1075

Engineering .0250

Commercial .0520

Total Factory Cost $.6950

Supplier's Price

Assuming the same quality, reliability, etc. .5250

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

EXERCISE 7‑2

INSOURCING

(Calculations)

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Participant Manual

Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Information Is Provided In Many Formats

On the next few pages are examples of how you might receive financial information. The information comes in a variety of formats. Each plant and/or division has their own format for providing financial information.

The chart on page 7‑6 illustrates the different cost elements that are needed to assist in making appropriate sourcing decisions.

The purpose of showing the different formats is to assist you in identifying what information is missing or not provided. You may need to ask for additional information to properly perform the analysis.

The UAW Position is that the clock on the 120 days does not start until we have all the required information.

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Example

Information Provided By the Plant

Appendix "L"

Sourcing Decision/Cost Analysis

PART NUMBER(S) 16625542‑3 G‑CAR R/D OUTSIDE DOOR HANDLE

199X VOLUME 85,540 TOTAL PIECESYEAR

$'S PIECE

DIRECT MATERIAL $4.97

DIRECT LABOR $0.25

MANUFACTURING BURDEN $0.54

PLANT FABRICATING COST $5.76

MEMO: LABOR/LABOR RELATED $0.49

GENERAL $0.16

PRODUCT ENGINEERING N/A

COMMERCIAL $0.29

OPERATING COST $6.21

ADJUSTMENTS ** $0.00

COST TO MANUFACTURE $6.21

OUTSIDE QUOTE (SELLING PRICE) $4.51

IN‑HOUSE PENALTY ($1.70)

ANNUAL COST PENALTY ($145,119) @ BUDGET LEVELS

OFF‑STANDARD ($1.24)

IN‑HOUSE PENALTY ($2.94) INCL. OFF STANDARD

ANNUAL COST PENALTY ($251,299)

** BUSINESS UNIT, DIVISIONAL, ACG AND CORP. C.O. ASSESSMENTS

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Section 7 – Cost To Manufacture vs. Cost Of Acquisition

Example

Information Provided By the Plant

(continued)

INVESTMENT SUMMARY

GM PLANT OUTSIDE QUQTE

TOOLING $0 $0

FACILITY $0 $0

EXPENSE $0 $0

TOTAL $0 $0

5‑YEAR

DISCOUNTED

INVEST &

PCE COST $1,987,709 $1,203,653

WHAT RAISES A RED FLAG?

1 The direct material exceeds the outside quote.

2. The manufacturing burden is not split between fixed and variable.

3. General and commercial costs are for the same purpose. This division breaks it down.

4. There is missing information we would need. Let's refer to page 7‑6.

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Answer Key

ANSWER KEY

EXERCISE 7‑1

COST TO MANUFACTURE VERSUS COST OF ACQUISITION

1. Should you continue making the part or purchase it?

Continue to make the part based on the following calculation:

Cost To Manufacture

28.00 Total Factory Cost

‑4.00 (Fixed Burden)

‑1.00 (Commercial)

$23.00 Cost To Manufacture

Cost Of Acquisition

$23.00 Purchase Price

1.00 Engineering (Supplied by GM)

.50 Transportation (Paid for by GM)

4.00 Fixed Burden

7.00 JOBS Bank Cost/Unit

$35.50 Total Cost of Acquisition

The cost of acquisition ($35.50) exceeds the cost to manufacture ($23.00).

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Participant Manual

Answer Key

ANSWER KEY

EXERCISE 7‑2

INSOURCING

1 Should you continue purchasing the part or insource it?

Insource the part based on the following calculations:

Cost To Manufacture

$0.6950 Total Factory Cost

‑0.1075 (Fixed Burden)

‑0.0520 (Commercial)

$0.5355 Cost to Manufacture

Cost Of Acquisition

$0.5250 Purchase Price

0.0250 Engineering (Supplied by GM)

0.1075 Fixed Burden

0.1098 Area Hire Cost/Unit

$0.7673 Cost of Acquisition

Note: On very high volumes, partial cents are important.

The cost of acquisition ($0.7673) exceeds the cost to manufacture ($0.5355).

Financial Tools and Techniques for Sourcing Decisions Key-8