Speculation that financier Carlos Ghosen, CEO of both Nissan and Renault, will head up a three-way alliance with faltering industry giant General Motors has ignited much commentary and criticism. I will avoid prognosticating on the likely success of merging three global automakers — each with more brands than the market will bear and vastly different organizational structures, business practices, and cultures. (Oops, I fear that may qualify as commentary.) Instead, I will examine the potential impact supply management improvements might have on GM’s future.

An article in the lastest issue of Fortune magazine validly suggests that a good indicator of how Ghosen might attempt to revive GM can be found in the playbook he used to turnaround Nissan. Hidden among plans to invest in small cars and step back from alternative fuels, is the strategy to “find the elusive synergies” between the auto-making triumverate. The top-noted synergies? Improve spending leverage, rationalize the supply base, and drive parts standardization and reuse.

On the surface, this appears to be a solid plan. An examination of previous mega-mergers suggests that as much as 60% of the so-called “synergies” are the result of improvements in spend leverage and supply management practices. (Considering this fact, I’m personally dubmfounded why a thorough spending analysis is not a prerequisite for any M&A due diligence.) The 2001 HP-Compaq merger is a good indication of the significant impact supply management leverage and improvements on the overall value and success of any merger.

In his profile on HP for Purchasing Magazine’s 2004 Medal of Excellence Award, my former teammate Jim Carbone says both companies brought supply management strengths to the merger: Compaq’s purchasing operation was centralized and the company was aggregating demand and leveraging spend with suppliers. By contrast, HP was more decentralized but was advanced in integrating buyers and suppliers into the new product development process.

After joining forces in 2001, the companies not only leveraged their joint buying power but also exchanged and standardized on best practices and systems, including risk management, spending analysis, e-procurement, and contract-sharing agreements with its contract manufacturing partners. (The latter is a technique HP calls “buy-sell” in which it buys parts from suppliers and sells them to its outsourcing partners. The process lowers material costs across the supply chain and allows HP to exact a slight margin on the resale.) According to Jim’s article, these efforts yielded the following results:

• Increased spending leverage contributed to $1.2 billion savings in production (”direct”) material costs
• Reduced number of direct materials suppliers by 53%
• Reduced number of logistics partners by 68%
• Cut logistics costs by 11%
• Helped reduce total supply chain costs as a percent of revenue by 22%.

It is important to note that HP’s efforts were not wanton cost-cutting tactics. On the contrary, HP’s efforts were intended to develop a supply network with which it could forge long-term relationships focused on joint innovation and continuous improvement. Evidence: HP fosters such collaboration by assigning senior-level executive sponsors to key suppliers to insure performance and drive improvements.

All this bodes well for supply management to lead a turnaround at GM, right? Well, not exactly. While there is no doubt the above practices are a sure-fire method to reduce supply costs, GM has a few things working against it.

First, GM has already substantially leveraged its buying power with suppliers. It has also done a fairly good job of driving parts standardization and reuse by centralizing on common vehicle platforms around the globe.

But new leadership may have a bigger challenge fixing GM’s image problem with suppliers. In tracking GM’s procurement and supply chain performance over the past 16 years, I have watched (often in horror) as the automaker has burned bridges with suppliers, rebuilt them, and then torched them again. Supply management veterans are familiar with the now infamous tactics of Jose Ignacio Lopez who, while at GM, tried to take a short-cut to cost improvements by tearing up existing supplier contracts and demanding 20% price discounts. (GM later sued Lopez for allegedly stealing trade secrets when he defected to Volkswagen.) To this day, many suppliers still view GM as the automaker they love to hate.

While an editor at Purchasing magazine, I was fortunate enough to spend time profiling GM in the mid-1990s as then-CPO Harold Kutner attempted to mend fences with suppliers. Purchasing doesn’t archive articles online beyond 1998, so I’ll give you a brief synopsis: Kutner is responsible for many of the tremendous improvements GM has made in global commodity councils, early supplier involvement in new designs, and parts standardization and reuse. (Yet, he may largely be remembered as one of the masterminds behind Covisint, the auto industry’s attempt to capitalize on the Net Market craze.)

Despite Kutner’s attempts, GM has once again made suppliers skittish with recent public announcements of a three-year plan to reduce supply costs and further consolidate spending with fewer suppliers. Off the record, suppliers say this move portends a Lopez redux.

Upshot: If Shakespeare wrote business books, GM would be the perfect foil for a morality play centering on the need to be good to your suppliers. GM’s heavy-handed supplier tactics in Acts I may come back to haunt them in Act III. I can hear it now, “A chassis, a chassis, my kingdom for a chassis.”  

Email Forward & Bookmarks

Close this WindowBookmark and Share This Page

Save to Browser Favorites

Ask backflip blinklist BlogBookmark Bloglines BlogMarks Blogsvine BUMPzee! CiteULike co.mments Connotea del.icio.us

DotNetKicks Digg diigo dropjack.com dzone Facebook Fark Faves Feed Me Links Friendsite folkd.com Furl

Google Hugg Jeqq Kaboodle linkaGoGo LinksMarker Ma.gnolia Mister Wong Mixx MySpace MyWeb Netvouz

Newsvine PlugIM popcurrent Propeller Reddit Rojo Segnalo Shoutwire Simpy sk*rt Slashdot Sphere

Sphinn Spurl.net Squidoo StumbleUpon Technorati ThisNext Webride Windows Live Yahoo!

Email This to a Friend

Copy HTML: 

If you like this then please subscribe to the RSS Feed.

Powered by Bookmarkify™

More »