If John Henke’s calculations are accurate, General Motors could boost its operating income by $400 million per year just by improving its relationships with its suppliers. For Ford the number is $327 million, and Chrysler, $308 million.
We are not alone in claiming that suppliers don’t give their best stuff to their worst customers, but Henke, who is a Ph.D. and president and CEO of Planning Perspectives, Inc. has finally projected a dollar cost for bad relationships. He’s been studying supplier relationships and cost concessions within the automotive industry for many years, and he developed an index to measure it.
For the first time ever, however, Henke used proprietary data his firm has collected, public records, and media reports to calculate the costs when suppliers do such things as shift their innovations, A-Team support, or added value service to other customers. Foreign automakers have been able to take advantage of those shifts and have saved significantly over time as a result, according to Henke.
You might quibble with Henke’s formula, but the conclusion is pretty solid for any manufacturer in any sector. Beating up suppliers on price is a short-term tactic, not a long-term strategy for profitability. Are the Big Three listening? Here’s an Automotive News video report with Ford’s chief purchaser sounding like he’s read the study and is trying to catch up, while Toyota’s purchasing chief is taking steps to shore up his declining supplier scores.
Posted in Auto Industry, Inside Baseball, Supplier Relations
Tagged automotive, cost containment, General Motors, global business, manufacturing, procurement, purchasing, sourcing, Supplier Relations, supply chain, supply management
A seismic shift may be coming in the automotive industry.
“Not even two years after the delivery of the first Model S, Tesla Motors has transformed from fledgling start-up to arguably the most important car company in the world. We are not joking,” said Morgan Stanley analyst Adam Jonas in a quote to the LA Times.
According to the article, suppliers who once dismissed this manufacturer are now considering building dedicated lines and facilities solely for Tesla’s business.
At least four southwestern states are vying mightily to become the home of Tesla’s $5 billion gigafactory which will employ more than 6,000 people to produce enough battery packs by 2020 to supply 500,000 vehicles.
But suppliers and states aren’t the only ones to sit up and take notice. One of the largest automakers in the world, General Motors, established an internal “Team Tesla” to analyze that company’s culture and success. Managing and collaborating with suppliers is one key to success.
Dare we say the current may be shifting toward electric cars?
If you weren’t already convinced of supply management’s role in developing and driving overall corporate strategies in global companies — take a look at what General Motors just did.
The board of directors for General Motors took a bold step this week by naming a woman as the company’s Chief Executive Officer, replacing Dan Akerson when he retires next month. Here’s the GM News release. Mary Barra will be making history as the first woman to ever lead GM — or any global automaker — as Chairman and CEO, and that’s certain to receive plenty of attention.
It’s also very important to look at her experience because she is a 100% GM insider. Barra rose through the ranks at GM as an engineer and engineering manager, starting as a co-op student at General Motors Institute (now Kettering University). She was named the senior VP for product development in 2011, and a few months ago, also assumed responsibility for GM’s global purchasing and supply chain organization (with a promotion to executive VP).
That last step — tying together global product development with global supply chain sent a very strong signal that GM expects to deliver innovative products through its relationships with suppliers. Selecting the executive holding that dual position as the CEO over others who have managed brands or regional operations says a lot about GM’s strategy for the future.
Last year the global auto industry was caught by surprise when the Japanese tsunamis knocked out the factory that makes a black paint pigment used by several car companies.
This week it’s deja vu all over again, as The Detroit News reports that an explosion in a single factory in Germany likely has disrupted 50% or more of the supply of a critical resin used in brake hoses and fuel lines by all three U.S. automakers. The News reports that 200 engineers, purchasers and others gathered outside of Detroit to figure out what to do next.
It turns out that the explosion at the Evonik Industries AG plant in Marl, Germany not only produces 25% of the world’s supply of nylon-12, a petroleum resistant resin, it also supplies a critical chemical building block used by suppliers of another 25% of nylon-12. With automotive production up in the U.S., global inventories of the resin could run out in quickly.
Now, it does show progress that the industry responded quickly after the accident to sort out alternatives, but it’s still shopping for an umbrella after you’ve already been caught in the rain. If the OEMs had thoroughly mapped their supply chains before this happened, they would have seen the big red “X” where all fuel hoses and brake lines led back to Marl. And that should have led them to formulate risk mitigation strategies that could be implemented the moment the news of the explosion hit Twitter.
Posted in Auto Industry, Chemicals, News Analysis, Risk Mitigation
Tagged automotive, Chemicals, General Motors, manufacturing, procurement, purchasing, risk management, sourcing, supply chain, supply management
Marketing costs are a category of indirect spend that are notoriously hard to control. As one ad agency executive admitted a long time ago, “I know that half of every ad budget is wasted, but I just don’t know which half.”
General Motors has often talked about streamlining its marketing — but with so many brands and geographic markets it never really made progress. Automotive News reports that an earnest effort that started during the bankruptcy reorganization is taking a new turn — which might save $400 million per year, or about 10% of GM’s estimated global advertising budget.
It will take discipline to make that number stick, because marketing is exceptionally prone to chasing whatever seems to be the latest hot idea — regardless of cost. But it is an eye-opening lesson that every dollar saved, regardless of where it comes from, is a dollar that can contribute to the bottom line.
I have a friend who trains and races on several light-weight, high-tech bicycles. He calls them his “carbon fiber diet.” I know golfers who have a similar appetite, and now General Motors seems to have acquired a taste for carbon fiber as well.
According to the Wall Street Journal, “General Motors and Tokyo-based Teijin Ltd. on Thursday disclosed plans to jointly develop lightweight automobile components using an advanced carbon-fiber materials process.”
WSJ reported that GM Vice Chairman Steve Girsky admitted that GM’s internal capabilities were limited in the new technology, so it went looking for a new strategic partner. That’s a significant statement coming from GM. Considering its long history of rocky relations with suppliers, this is another sign that GM is recognizing the value of the supplier community in delivering innovation as well as cost savings. We’ve been hearing executives talk the talk in the past, but this is concrete (or should we say carbon fiber) evidence that they have begun to walk the walk. What do you think?
General Motors CEO Dan Akerson recently told Automotive News that it had to be more upfront about telling its suppliers about its product plans, adding “we have to be willing to say that, if they’ll bring a good idea to us first, we’d be willing to pay for it.” (Quote as reported in Crain’s Detroit Business.)
Congratulations. We’ve been saying for years that a well-managed supply chain is a source of innovation as well as cost improvements. In it’s most simple expression — you can’t expect suppliers to bring their best ideas to their worst customers.
Sounds like that message has finally arrived in the corner office at GM.
Crain’s Detroit Business confirmed this week the trend I recently mentioned here — that automotive companies are back to singing a one-note song, and the only lyric is “price, price, price.”
Crain’s called it the price vice in its coverage. That’s particularly apt, because it is a squeeze between costs and price. I like the term because “vice” also means a forbidden activity, and that’s exactly what a fixation only on price ought to be.
General Motors used the cover of bankruptcy to whack at huge overhead and legacy costs within its own organization. The payoff was big profits on a reduced sales volume. That in turn gave GM the ability to sell its stock at a price that will go a long way toward making its majority stockholder, the U.S. Government whole again.
That’s all great — unless automotive companies from the OEM’s through Tiers One and Two fall right back into the habit of focusing only on price in their procurement strategies.
Yes, many companies throughout the industry accomplished some restructuring to lower their overheads, too, but the fact is that the purchasing practices over the last decade had already pushed lower tier suppliers to razor thin margins. Simply going back to hammering on price is a strategy that is blind to the long term. Buyers should never stop searching for value from suppliers — but price is only one component of value. The global market is demanding innovation, better safety, reliability and environmental sustainability as well as affordability. These are values, along with production planning efficiencies and risk management that trusted suppliers can bring to the companies that are smart enough to recognize them.
Long term success will go to the companies — in every industry — that develop the skills to tap into those other values from their suppliers.
So — Toyota’s safety issues have put its president testifying in front of a panel of Congresspersons representing the U.S. Government. Just to have the head of foreign company testifying before Congress is unusual enough — but there’s another twist. The U.S. Government is still the majority owner of General Motors. The old adage “what’s good for General Motors is good for the country” is literally true now. If Congressional criticism of Toyota helps General Motors gain market share — it should increase the value of GM stock that the U.S. Government owns.
Wouldn’t you like to own a company where you get to regulate your competitors?
Listen to my discussion with Jon Hansen of PI Window on Business on this and related supply chain topics on this blogradio program: