How “New” is the New GM?

It’s obvious a lot of us are waiting to see how “new” the new GM is going to be in its supplier relations. Jason Busch recently chimed in with this posting. (The link is also in my link list.)

I’ll be talking about GM and supplier relationships in general in a few weeks with Jon Hansen at Procurement Insights’ Internet radio show. More on that as we firm up the details.

Lean, Green, Global Machine

You’ve heard of carbon dating — but in Japan and the UK at least, consumer product companies have begun rolling out “carbon labels” on what they sell. The labels tell purchasers the amount of carbon dioxide released during the manufacturing, marketing, distribution and likely disposal of the product.  Procurement professionals are adept at looking back through a supply chain — but this approach also has us “forward thinking” through the whole lifecycle of a product.

I think sustainability initiatives are likely to be with us over the long haul. They are themselves sustainable, if you will, so we should be prepared to manage them. One of the basic steps is to establish your enterprise’s standards for evaluating environmental impact. The rise and fall of ethanol is a great example of how an idea for moving away from fossil fuels was tarnished by questions about its overall impact and the pressure it puts on food supplies.

Japan, the UK, and Scandinavian countries are moving quickly to create independent assessments of sustainability. The carbon labeling is just one example. Here in the U.S., we have Leadership in Energy and Environmental Design (LEED) standards for buildings. A Green Restaurant trade group has set up a certification process for “sustainable dining,” and you can look to your own industry groups to find out how they are setting standards for sustainability.
In the absence of industry metrics – you might follow the example of Herman Miller, which set itself these goals by 2020:
•    zero landfill
•    zero hazardous waste generation
•    100% green energy
•    all buildings LEED Silver certified
•    100% of sales from products designed for the environment
Those targets may be aggressive for your company, but they do provide a good framework for prioritizing and measuring green progress. Back them up by planning and executing steps to reach them. Once your own house is in order, you can turn to your suppliers – wherever they are – and negotiate standards for them.
What is absolutely clear is that companies can no longer ship their environmental issues to offshore suppliers. Even in countries where regulations may be lax, watchdog groups are vigilant, and bad news travels at Internet speeds.
The imperatives are clear, but like any transformation, it may not happen overnight. Still, with continuous support, you can turn your company into a lean, green, global machine.

Riding the economic Tsunami

Darwin probably said it best – the fittest will survive. That’s also the assessment of my colleague in the UK, Robin Jackson, CEO of ADR International. If you haven’t seen ADR’s newsletter, this is what he had to say:

“The business environment has changed fundamentally and we will have to look back to the great depression of the 1930s, the collapse of South American economies in the 1970s and 1980s and Japan’s “lost decade” of the 1990s to draw lessons.

In this radically changed environment it is vital for the survival of businesses for procurement leaders to consider new ways of handling these challenges and develop new offensive and defensive sourcing strategies.

Remember this is a once-in-a-century readjustment of prices. Only if you are bold and act speedily will your business survive. Your competitors will be doing it and to survive you will need to do it too.

It’s time to call in the favours – if ever there was a time for strategic co-operation with key suppliers, this is it. If they don’t live up to their part of the strategic partnership billing, move swiftly to find alternative partners. Leverage your strategic supplier relationships. Be demanding and move rapidly.

Conserve your cash. Even if your business can borrow it is more expensive to do so now. So extend payment terms to the maximum without damaging the viability of your suppliers.

If you receive a price increase request then the supplier must be having a joke. With basic commodities falling in price by 40 per cent or more (a barrel of oil is down 70 per cent) how can any supplier claim their input costs are increasing? Any increases caused by the fall in the value of currency will be more than offset by the collapse in input prices.

Your defensive strategy should include preparing now for possible disruption of your supply chain. Disruption can result from suppliers going bankrupt, economic meltdown in countries, significant currency fluctuations and political unrest, so plan carefully how your business will manage it by developing detailed countermeasures.

In China the number of bankruptcies has increased significantly and this has led to an increase in social instability – imagine the chaos if a new political regime closed China’s borders to the West again, or Russia switched off the gas.

We need more than ever to be aware of currency movements and take them into account in all our procurement decisions. Given the volatility now inherent in the world economy, today’s low-cost destination of choice could be tomorrow’s high-cost country to avoid.

In this climate, it almost certainly makes sense to shorten your supply chain to reduce risk and vulnerability, so local sourcing could become the new must-do procurement strategy to replace the obsession with low-cost country sourcing of recent years.


These are unprecedented times. So our strategy for 2009 should be: be bold, be brave, act swiftly and be ruthless. Develop new offensive and defensive ideas and ways of working. Only then will you and your business have a chance to survive this economic tsunami.”

Thanks, Robin. We should all bookmark this. Post it on our desktops and build it into our work plan every day for 2009.

Find more articles by Robin and others at our ADI International web site. 

 

Damage Control = Cost Control

We were thinking here about how Wal-Mart wants to eliminate all returns from its suppliers over the next 2-3 years and it reminded us that even though you expect the carrier or supplier to cover the cost of damaged products — it still makes sense for buyers to take an active role.

Here’s what our consultant Fred Parkinson had to say on the matter.

When products or merchandise that arrive at your loading dock damaged – what do you do? Could the damage have been prevented? What are the actual costs, both direct and indirect, of managing product that has to be returned or discarded?

Prevention 

OK, you can’t control weather or sloppy package handlers, but you can write packaging specifications into your product orders. Purchasing should call on other departments within the company to help develop specifications and shipping requirements that will insure the integrity of the product when it arrives from the supplier. 

Your supplier should also be used as a resource to develop the packaging and shipping requirements because they likely have dealt with damage returns in the past.

Your parts supplier may guide you to its corrugated supplier, who will likely have a packaging engineer or designer whose services would be available to you free of charge. 

The transportation carrier should also be able to provide or recommend shipping solutions that will get the product to your dock without being damaged. Maintaining good supplier relations will help you in times like these when you need to draw on their expertise.

Costs

The hidden costs associated with returning damaged product may include:

·      Warehouse labor costs, both at your facility and at the suppliers plant, that result from handling the damaged goods three or four times.

·      Administrative labor costs of notifying the supplier of the problem, submitting claim forms with the carrier, arranging for pick ups and expediting a replacement shipment.

·      Inventory costs associated with carrying a larger safety stock if the problem is a reoccurring one.  If the product is being imported the pipeline will be substantially longer, which will also have a big impact on how much safety stock has to be carried.

·      Accounting labor costs to process and handle multipliable invoices and credit vouchers.

·      Cash flow issues while claims are being settled or waiting for credit.

·      Lost sales revenue from being out of stock and customer dissatisfaction which may result in loss of business long term.

All good suppliers and carriers will cover the obvious expenses, but when you calculate these hidden costs – you can see why it’s in the interest of buyers to take active steps to prevent damaged goods from arriving at their plants.

 

Follow the Money When You Rescue Detroit’s Big 3

People throughout the Midwest are stunned by the barrage of questions hurled at the captains of the automotive industry by Washington insiders, but there is a question that hasn’t been asked that probably should be: Where is the money going to go?
All three Detroit companies argue that they are the engines behind a huge supply chain of companies that forms the backbone of the U.S. manufacturing base. And while that still has some truth, the fact is that GM, Ford and Chrysler have all been backing out of U.S. manufacturing for years.
Caught between the unrelenting cost pressure of foreign manufacturers and union, pension and health obligations that could take a generation to shed, Detroit’s original equipment manufacturers, or “OEMs” have enthusiastically embraced the strategy of sourcing parts from low-cost countries. They started in Mexico, but over time, they have pushed suppliers to eastern Europe, China and other Asian sources.
Three years ago Bo Anderson, General Motors vice president of global purchasing and supply, proudly announced that GM had increased the share of parts it sources from low-cost countries, saving from 20% to 30%. He said to GM’s supply base, “if you are a world-class runner, your competition is global.”
Just last August, John Campi, Chrysler executive vice president of procurement, said Chrysler aims to cut supply chain costs by 25%.
In a way, the strategy of price-buying and low-cost-country sourcing has decimated and bankrupted the entire supply chain.  It is not difficult to understand that a bankrupt supply chain eventually worked its way up to the Big 3.
The key question that comes to mind as these executives prepare their plans to save the industry is: How much of the federal tax money will flow down the supply chain, and where precisely will it go?
Will the strategy of off-shore sourcing continue under the federal assistance? Members of Congress and others argued that funds shouldn’t be subsidizing job banks in America where people are paid for simply showing up. Should they instead be subsidizing factories in China, Russia or Vietnam?
Congress seems to be insisting that the industry restructure itself, but the way that is going now is by driving the automotive supply chain overseas. If the national interest in the automotive industry is to maintain and grow a domestic manufacturing base – how does that reconcile with the direction the industry has been heading for a decade?

Treat Suppliers Well Because You Depend on Them

Here’s an obvious truth that buyers often overlook in their drive to pressure suppliers to lower prices:

Over the long haul, you can’t make money in any industry unless your suppliers can make money, too.

The U.S. automotive industry has many examples of price myopia. For too many years they have used their volume leverage and power to focus on driving down Tier 1 supplier prices. Many suppliers in the domestic automotive supply chain who needed volume to amortize large investments conceded on price, resulting in margin erosion. At a certain point, those lost margins undermined new investment and created cutbacks in research and development. The result, companies were making products based on older designs using older technologies. That’s a combination that begs for competitors to move in with more efficient processes or better designed products. In some cases, the lost margins simply led to bankruptcy.

In contrast, automakers from Japan are taking a different approach. They focus on cost and cost transparency rather than price. These automakers make supplier development and joint problem solving a key priority. While still demanding cost and value improvement, the focus is on the elimination of cost using approaches such as specification change or waste elimination.

When companies view their suppliers as extensions of their own manufacturing capability, they can take a longer view of their relationships. One good example of continuous cost and value improvement can been seen in the pharmaceutical and biotech industries. Working from patented processes and technological breakthroughs, companies in these industries enter a 15-20 year relationship with suppliers and life cycle pricing models.

Executives will often argue that they have to serve shareholders over stakeholders, but that’s a short term view. Successful executives realize that over the medium to longer term, such a forced choice is inappropriate. It is in the interest of both manufacturers and suppliers to pursue value-added strategies in line with customer expectations and to align business strategies.