AMR Confidential & Proprietary

AMR Confidential & Proprietary
Value Fishbone Cost Management Tools Inventory Management Initiatives Transportation/Logistics/Customs Utilize value engineering Utilize lean, Kaisen & Six Sigma Consigned inventory Evaluate end of product cycle inventory Establish and recover expedite fees for poor delivery Direct ship vs. warehousing Utilize “Aim & Drive” Review lease vs. buy decision Supplier managed Inventory Provide accurate forecast to entire supply chain Repair development strategy Establish gain sharing with suppliers Minimize customs fees with proper documentation Optimize package size/quantity or bundle multiple orders Just in Time Inventory (“JIT”) Weight reduction initiatives Early Supplier Involvement Establish free return policy in excess inventory Breakdown supplier provided transportation costs Establish and recover expedite fees for non- compliance Power by the hour / variable pricing Utilize should cost analysis to set target cost Manage inventory levels in the whole supply chain Expand kitting options from suppliers Include transportation costs in all bid evaluations + customs Evaluate equipment positioning / repositioning costs Negotiate future product upgrades/changes for free Evaluate appropriate insurance needs Establish inventory pools with other airlines & suppliers Utilize consolidated warehousing Source material for suppliers Beyond economic repair strategy Optimize mode of transportation and routes Minimize or eliminate all assessorial charges Optimize delivery time & TAT requirements and recover expedite fees Establish supplier inventory pool vs, AA inventory Minimize logistics, transportation, customs costs costs and packaging cost Volume discount matrix in contract Evaluate customs related exposure on life cycle of parts Warehouse re-positioning review Source products/services at global prices Commodity/Product teams Establish productivity goals in contracts Utilize reverse auctions at 1st & 2nd tier suppliers Set warranty duration based on load factor or hours of operation Accelerate surplus sales Expand PMA strategy in all areas Analyze total cost of ownership Eliminate all clauses with automatic inflators Eliminate maverick buying Expand warranty terms Identify ways to better manage taxes Analyze benefits of local/regional/national/ global contracts JV PMA’s with airlines/suppliers Bid “evergreen” contracts Negotiate signing bonuses for contracts Maximize exchange rate/currency opportunities Extend payment terms Leverage volume throughout AMR system Extend or expand contracts in exchange for price reductions Simply and standardize product / services specifications Review royalty, warrants & stock option opportunities Negotiation performance guarantees Identify supplier value added items beyond core offering Establish contracts where none exists Expand web-based pricing technology (SmAArtBuy/AEX) Expand surplus buying Utilize integrated suppliers Enforce contractual penalties Look for areas where AA can sub-contract to suppliers Use M/WBE sources whenever possible Source de-coupled supply chain components Establish price via recurring bids/auctions Establish consortium buying where applicable Consolidate suppliers Review dual sourcing in high risk areas Evaluate benefit for suppliers to lock in raw material costs Develop suppliers in limited competition markets Utilize alternate parts strategy Map the supply chain for each commodity or service Leverage volume across all supplier divisions Review contract length to consider market conditions Sourcing Strategies Inflation Fighters Other AMR Confidential & Proprietary

Cost Management Tools Utilize value engineering Process of evaluating the value of each good and service relative to its cost in the design phase of a product life cycle. This process allows for possible alteration of the spec that could reduce costs without impairing functional suitability. (Same fit, form or function – including feed components.) Utilize “Aim and Drive” Methodology to work collaboratively with suppliers to find cost reduction opportunities within their product’s supply chain or process chain and drive those costs down. Repair development strategy Purchasing partners with engineering and suppliers to develop repairs, processes, procedures and optimize work scope to improve total cost of ownership. Weight reduction initiatives Perform a fuel burn analysis for each product purchased for the aircraft (fixed or movable) and evaluate lighter alternative products to determine potential cost reduction opportunities. Power by the hour / variable pricing Cost ratio basis for the complete maintenance of a product based on the amount of time in service. AA pays the supplier per flight hour of time that the part is operational or a boarded. AMR Confidential & Proprietary

Cost Management Tools (cont’d) Negotiate future product upgrades/changes for free From time to time suppliers upgrade their products to generate new revenue streams. Purchasing can lower AMR total cost of ownership by including future upgrades in the purchase price. Source material for suppliers Work with suppliers to negotiate or perform reverse auction for 2nd tier material in order to reduce AA’s cost. Minimize logistics, transportation costs and packaging costs Review the supplier’s planning and control of the flow and storage of raw materials and finished goods throughout the supply chain to drive out costs. Utilize Lean, Kaisen & Six Sigma Review these processes with suppliers to ensure they are as efficient as possible. Review lease vs. buy decision Work with financial analyst to look at both lease and/or buy options of equipment procurement. AMR Confidential & Proprietary

Cost Management Tools (cont’d) Establish gain sharing with suppliers A practice where suppliers source or produce parts that have the same fit, form or function that costs less and share the productivity improvement with AA. Early Supplier Involvement A practice that brings together one or more selected suppliers with a buyer’s product design team early in the product development process The objective is to utilize the supplier’s expertise and experience in developing a product specification that is designed for effective and efficient product roll-out with a lower total cost of ownership. Utilize should cost analysis to set target cost Perform an analysis to determine cost components in each product or service along with appropriate profit margins (target cost). Purchasing uses this target cost to work with the suppliers to ensure that the combination of each component’s cost comes in at or below the target. AMR Confidential & Proprietary

Cost Management Tools (cont’d) Evaluate appropriate insurance needs AA has a standard insurance requirement for suppliers. If this cost is driving suppliers costs higher, review requirement with AA’s insurance department to determine if the standard is required for the specific situation. Beyond economic repair strategy Develop threshold for repair versus buy based on the repair history of product along with purchase price and normal life of product. Volume discount matrix in contract Where possible, negotiate volume discounts utilizing a matrix in contract negotiations. AMR Confidential & Proprietary

Inventory Management Initiatives Consigned inventory A method of procurement in which a supplier maintains inventory on the premises of the purchaser. The purchaser’s obligation to pay for the goods begins when goods are drawn from the stock for use or sale. Supplier managed inventory Inventory management system that holds a supplier responsible for ensuring that stock is maintained at appropriate levels in the purchaser’s facility and for replenishing items when these levels drop. Just In Time Inventory (“JIT”) System in which materials are purchased, transported and processed “just in time” for their use in a subsequent stage of the manufacturing process. An operations management philosophy whose objectives are to reduce waste and cycle time. JIT should minimize inventory at all levels. Manage inventory levels in the whole supply chain Review inventory levels in the entire supply chain in order to determine appropriate figures and reduce or increase based on lead time, cost, etc. AMR Confidential & Proprietary

Inventory Management Initiatives (cont’d) Establish inventory pooling with other airlines and/or suppliers Evaluate opportunities with other airlines and/or suppliers operating similar fleets for part sharing at common locations. This process is designed to reduce inventory levels and holding costs for each of the participating airlines. Establish delivery time &TAT requirements and recover expedite fees Ensure delivery times and turn around times are established at contract inception with normal delivery methods included. If supplier has to expedite shipment to meet these times, then expedite fees should be the suppliers’ responsibility. Evaluate end of product life cycle inventory Some products that American buys may have good residual value, another way to lower cost to compete or to generate revenue is to account and leverage the value of products at the end of American Airlines life cycle Provide Accurate Forecast to Entire Supply Chain Communicate demand throughout the supply chain adequately to reduce inventory increases at 2nd, 3rd and 4th tier suppliers also known as the “Bull Whip Effect”. AMR Confidential & Proprietary

Inventory Management Initiatives (cont’d) Establish free return policy on excess inventory Negotiate with supplier to eliminate restocking charges. Expand kitting options from suppliers Evaluate opportunities and negotiate discounts for a supplier to bundle the necessary parts to perform a specific function/repair (BOM) by AA and sell these as a single “kit”. (Could include non-aircraft product.) Utilize consolidated warehousing Evaluate opportunities to move stored products from diverse locations to a central facility. Establish supplier inventory pools vs. AA inventory Negotiate with suppliers to create inventory pools to ensure immediate delivery of parts, reduce costs and avoid repair time for rotable parts. AMR Confidential & Proprietary

Transportation / Logistics / Customs Direct ship vs warehousing Review potential for shipping product directly to the desired location in order to minimize or eliminate warehousing costs. Minimize customs fees with proper documentation Ensure that suppliers are aware of the documentation required for the shipping required for a product in order to minimize customs fees. Contract should have provision for capturing fees for improper documents. Breakdown supplier provided transportation costs in all bids Compare supplier’s transportation costs and total cost of delivered product separately (product, transportation, customs) and compare to costs with AA handling the transportation and customs. Work with AA’s transportation group to assist in this process. Establish and recover expedite fees for poor delivery Suppliers must pay expedite fees if product is not ready in sufficient time to allow for normal delivery method. AMR Confidential & Proprietary

Transportation / Logistics / Customs (cont’d) Optimize mode of transportation and routes Evaluate alternate modes of transportation (e.g., truckload, multi-stop truckload, less-than-truckload, intermodal, etc.) for a group of shipments taking into consideration size and frequency of shipments, handling requirements, transit times and costs. The optimal transportation mode is the mode that meets these requirements at the lowest possible cost. In the case of where a private fleet (i.e., company-owned trucks) is an option, alternate routing of the trucks is another variable that is considered. This should include backhaul opportunities. Evaluate customs related exposure of life cycle of parts All merchandise coming into the United States must clear Customs and is subject to a Customs duty unless specifically exempted by law. Clearance involves a number of steps: entry, inspection, appraisement, classification and liquidation. Based on AA’s operational needs an aircraft part could possibly be imported and exported from the U.S. numerous times within its life cycle. All of these factors should be evaluated when positioning parts and shipment and questions should be directed to the customs group. AMR Confidential & Proprietary

Transportation / Logistics / Customs (cont’d) Establish and recover expedite fees for non-compliance Shippers usually establish a set of minimum performance criteria (e.g., complete orders with on-time, damage-free shipments), that carriers must meet for their shipments. Along with these performance criterions, shippers usually include financial penalties that are applied to each shipment that is non-compliant, which are subtracted from the carrier’s freight bills prior to payment. Optimize package size / quantity of bundle multiple orders When AA purchases multiple products in the same period from a supplier that offers those products in a variety of package sizes, the optimal package size and quantity is calculated based on the transportation, handling (unloading and put away cost at the warehouse), inventory carrying and ordering costs of different combinations of package size, quantity and bundling of products. Compare suppliers’ vs. AA’s transportation costs AA usually has the option of having transportation costs included in the cost of products purchased from suppliers or paying for the transportation separately. If AA is able to determine the cost that the supplier is paying for the transportation portion of an invoice, then this cost can be compared to what AA would pay for the transportation and the lowest cost option selected. AMR Confidential & Proprietary

Transportation / Logistics / Customs (cont’d) Evaluate equipment positioning / repositioning costs Evaluate transportation/relocation costs when considering where to locate equipment or supplies. Minimize or eliminate assessorial charges There are a number of “additional” charges beyond the base rate for most types of transportation. While negotiating freight rates with carriers, it is possible to have these accessorial charges waived or reduced in return for committing a large volume of shipments to a given carrier. Some charges, such as wait time and demurrage can be minimized through good transportation management. Warehouse repositioning review The location of a company’s warehouses is usually based on numerous factors that affect total logistics costs including distance from suppliers to the warehouses (inbound transportation), distance from warehouses to customers (outbound transportation), real estate or leasing costs, labor costs and other operating costs such as utilities and insurance. Ensure that suppliers are choosing the least-cost alternative if they are relocating warehouse space. AMR Confidential & Proprietary

Sourcing Strategies Source products / services at global prices Utilize existing suppliers who provide needs in the global marketplace, assist existing suppliers to develop into a global provider or find new suppliers in other areas of the world. Expand PMA strategy in all areas Identify opportunities to work with suppliers to obtain PMA authority for high cost OEM parts. (Parts Manufacturing Authority - PMA) Analyze benefits of local/regional/national/global contracts Research benefits of combining usage across multiple areas and/or breaking areas up to take advantage of regional expertise and/or pricing Simplify and standardize product / services specifications Through market analysis determine if AA’s requested specifications fall outside of the norm and work with the internal customer to determine if the costs associated with the “custom” product” is really required. AMR Confidential & Proprietary

Sourcing Strategies (cont’d) Expand surplus buying Optimize opportunities for utilizing excess or surplus parts from various approved or known sources Utilize M/WBE sources whenever possible Search the Supplier Diversity database or request assistance to find suppliers that can be potential sources for AA’s needs. Consolidate suppliers Utilize the supplier optimization strategy to reduce the supply base where possible. Utilize alternative parts strategy When parts are needed, look at repair first, surplus, buying refurbished, PMA and then new if necessary (review chart on web site under Waterfall Chart). Commodity/Product Teams Cross functional teams that include purchasing employees and internal customers whose common denominator is the products/services with which the members are affiliated. A primary role is to determine and support the commodity strategies as they change and develop over time. AMR Confidential & Proprietary

Sourcing Strategies (cont’d) Analyze total cost of ownership Price, delivery, quality, supplier financial health and lower scrap rate must all be evaluated prior to making a sourcing decision. Contract length should be based on market conditions. Map the supply chain for all commodities Utilize supply chain maps for products/service sourcing strategy development. JV PMA’s with other airlines/suppliers Explore PMA opportunities with other airlines and leverage volume to develop potential joint ventures for PMA parts. Utilize integrated suppliers Explore opportunities to manage a service and the related products based on the principles of specialization and synergy. The intent is to leverage the expertise of the supplier and allow them to manage the inventory, procurement and order fulfillment processes. AMR Confidential & Proprietary

Sourcing Strategies (cont’d) Source de-coupled supply chain components Separate design from the manufacturing process to drive efficiencies in each of the areas separately. Review dual sourcing in high risk areas Review market analysis to determine if the supply base for a specific product or service is in jeopardy of failing. If so, then a strategy for dual sourcing may be appropriate. Review royalty, warrants & stock option opportunities Review when AA’s volume helps a supplier get established in a new line of business. AA gets the benefit as the supplier grows. AMR Confidential & Proprietary

Inflation Fighters Establish productivity goals in contracts Research those contracts where either there are escalators or no productivity clauses and negotiate them into a new agreement. Eliminate all clauses with automatic inflators Renegotiate contracts to eliminate any clause that could cause prices to rise over the course of the contract term. Bid “evergreen” contracts Determine which contracts are currently evergreen, do the market research and bid them to achieve more favorable terms and/or productivity improvements. Leverage volume throughout AMR system Identify opportunities where the combined volume of common goods and/or services could be leveraged to achieve lower prices. Establish contracts where none exist Research spend in each area and either establish a contract with the current supplier or move the business to another supplier where a contract exists. AMR Confidential & Proprietary

Inflation Fighters (cont’d) Establish price via recurring bids/auctions Bid or auction recurring services offered by multiple suppliers needed on a regular basis to take advantage of potential short term excess capacity. Evaluate benefit for suppliers to lock in raw material costs Review when raw material represents a large percentage of the total cost. Work with a finance rep. to analyze potential cost benefits of fixing these costs vs. allowing them to fluctuate with the market. Utilize reverse auctions at 1st & 2nd tier suppliers Encourage suppliers to utilize reverse auctions for subassemblies and parts used to produce what we purchase. Eliminate maverick buying Review POA and P-card spending to determine what areas are creating maverick spend, then create a plan to drive this spend through contracted sources. Negotiate signing bonuses for contracts Encourage suppliers to provide AA with a signing bonus (credit) to be used for future purchases, over and above contracted cost reductions, upon contract execution. AMR Confidential & Proprietary

Inflation Fighters (cont’d) Extend or expand contracts in exchange for price reductions Renegotiate the term of an agreement in exchange for price concessions. Leverage volume across all supplier divisions Look at the parent company of suppliers to determine if additional leverage can be achieved. Review contract length to consider market conditions Long term contracts may not be the best if market conditions are changing rapidly. Leverage new equipment with after market spares and overall supplier spend, not only contract spend. Expand web-based pricing technology Actively search for ways to utilize SmAArtBuy, Aeroxchange and other technology tools. AMR Confidential & Proprietary

Inflation Fighters (cont’d) Establish consortium buying where applicable Identify opportunities where the combined volume of common goods and/or services could be leveraged to achieve lower prices. Develop suppliers in limited competition markets Review market analysis to determine if the lack of competition in a specific industry is such that little leverage is possible. If so, review he possibility of developing an additional supplier in this area. AMR Confidential & Proprietary

Other Set warranty duration based on load factor or hours of operation Negotiate warranty guarantees with the suppliers based on product performance in relation to operational reliability/usage. Expand warranty terms Explore opportunities to increase the time that the supplier will warrant each product or service. Accelerate surplus sales Actively work to determine all potential surplus products and research all potential ways of eliminating the surplus (auction, exchange with other departments and/or airlines and utilizing dealers and brokers). Negotiate performance guarantees Negotiate minimum acceptable performance levels and assess penalties for failure to achieve these levels AMR Confidential & Proprietary

Other (cont’d) Enforce contractual penalties If the contract calls for liquidated damages or penalties of any sort, then these should be enforced to ensure future compliance. Identify ways to better manage taxes Research tax rules with internal Tax Department and supplier to determine most effective shipping process to reduce taxes where possible. Maximize exchange rate/currency opportunities Work with Treasury to monitor exchange rates in order to take advantage of fluctuations in currency (e.g. pay in local currencies). Extend payment terms Payment terms must be at least net 45 days, unless appropriate approval is secured. AMR Confidential & Proprietary

Other (cont’d) Identify supplier value added items beyond core offering Suppliers, in some cases, have significant resources available to them (Engineering, Design, Marketing, etc.). Purchasing should consider how to increase the value of the transaction to American, by evaluating products or services beyond the supplier offering Look for areas where AA can subcontract to suppliers Review potential for supplier to manage roles/processes where AA may not have resources or wants to utilize those resources elsewhere. AMR Confidential & Proprietary

AMR Confidential & Proprietary

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