Despite rising material costs and a blemished image with suppliers, General Motors claims to be on track to acheive its goal to reduce $2 billion from its global procurement costs this year.

This represents about 2% reduction in total spending, an ambitious target, considering GM’s previous cost-cutting initiatives and its current financial woes. And renegotiating supplier agreements now could deflate some of the “synergies” expected from the portended Renault-Nissan-GM alliance. (In a previous post, I challenged the estimated supply cost savings and improvements expected from the deal.)

However, in an interview with Reuters last week, GM procurement chief Bo Anderson suggested that GM is beating the odds: “We are still inside those brackets. We are working hard to offset the rise in raw material prices.”

To its credit, GM has been able to drive additional supply efficiencies and savings through the use of alternative sourcing and supplier management methods. For example: Once a pioneer of price-based reverse auctions and low-cost-country sourcing methods, GM has reassessed global sourcing decisions based on the best landed cost.

Total landed costs incorporate the costs of materials, labor, transportation, tariffs, taxes, handling fees, duties and similar factors. Total costs also assesses how sourcing decisions affect inventory and cash flow. Such factors have dramatic impact on the total cost of a product. A change in government import/export rules or a shift in transportation charges or capacity can dramatically alter the costs and effectiveness of a supply strategy — as well as the profitability of a company.

For example, tariffs on assembled high-tech goods shipped into Brazil can be 2X the cost of the good. However, manufacturers can avoid these tariffs by shipping sub-assemblies into Brazil and doing final assembly in country. As such, leading industrial manufacturers like have begun assessing both the geographical state (e.g., China, Mexico, etc.) and the physical product state (i.e., piece part, sub-assembly, full-assembly, etc.) in order to game the tariff schedules based on their global manufacturing and customer plans. I anticipate that such landed cost optimization and inventory post-ponement strategies will become more popular thanks to globalization, international political uncertainties, and tightening supply markets.

According to the Reuters report, GM now buys 32% of its parts from low-cost countries, such as Mexico, Brazil, Russia, South Korea, China, and Thailand. That’s up 20% from 2002. That may sound impressive, but in North America, labor rules have GM buying 95% of its parts from North American suppliers, with only about 16% of that coming from Mexico. Andersson said he would like to boost supply from Mexico to support the North American market. “Logistically, it’s cheaper because they are so close to us,” he said.

Another strategy GM is using to meet its cost savings goals is to drive parts standardization and reuse across vehicles on a global basis. This would allow sharing of commoditized parts, such as seat frames. According to the article, GM makes 26 versions of seat frames, while white-hot competitor Toyota Motor Corp., makes only two. Reusing common parts and sub-assemblies across vehicles (or products) can not only reduce costs through better volume leverage and simplified supplier management but can also help speed new product development cycles and improve product quality by eliminating variability. Supply Excellence has documented how other manufacturers, such as Harley-Davidson, have used parts standardization and reuse techniques to their advantage.

Whether GM can reach its lofty savings destination is yet to be seen. However, the new approaches the automaker is using on its supply management improvement journey should have long-term benefits for the automaker and its suppliers.

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