News yesterday that Ford Motor Company reported its largest annual loss ever increased doubts about the future of Detroit. (General Motor’s decision today to delay earnings and restate past results only fueled greater concern.)

The bad news overshadows the tremendous progress both automakers have made on the supply management front. It also raises a serious question about the discipline: how much impact can supply management really have on the health of a business?

As reported here, both Ford and GM have committed and achieved big supply savings in the past year. Ford reports progress on its goal to cut the number of suppliers by 60% and shave $1.8 billion from its supply bill. In fact, earlier this month Ford reported that all its cost-cutting initiatives — including its procurement goals — were ahead of schedule.

Similarly, at last report, GM was on track to reduce its global spending by $2 billion in 2006. This progress was reaffirmed (although without detailed nubmers) in an interview with Fortune Magazine, GM CEO Rick Wagoner cited reducing structural and supply costs as his company’s top achievement in 2006. And, when it finally does report, GM is expected to post a profit for Q4 2006.

Yet, despite their supply management overhauls, Ford and GM will report significiant losses for 2006. And analysts (and the world) have serious doubts about the future of both automakers. These dynamics reminded me of what one business exec once argued against the benefits of supply management improvements: “Cutting costs will only get you so far. If you’re going to succeed, you’re going to have to grow.”

His comment was right. But his implications were wrong. Companies that view supply management’s only role as cutting costs are doomed to failure. (And supply managers that feel cost cutting is their primary role will never get respect within the company.) Just consider findings from Aberdeen Group’s CPO Agenda, which rated the number one role of supply management function as mitigating risk and assuring supply. Procurement’s other chief activities included, expansion into emerging markets, supporting compliance initiatives, and capturing innovation inherent within the supply base.

The cost and supplier reduction efforts of Ford and GM have grabbed the headlines, but the supply management engine within these organizations are driven by more strategic motivations:

• Standardization and reuse: A key driver for supply base rationalization efforts was to support company initiatives to reduce the number of vehicle platforms and to encourage parts standardization and reuse across the vehicle platforms. GM and Ford will be taking a page out of Toyota’s book by offering a huge array of market-specific vehicles worldwide. However, these new models will be built upon only a handful of vehicle platforms. This will lower costs, improve quality, and enable multiple models to be built in a single manufacturing plant. And, like Toyota, GM and Ford will share an increasingly larger number assemblies, sub-assemblies, and parts across models and across vehicle platforms.  
• Modules: Detroit is also looking to have suppliers take on more responsibility for design and manufacture of full modules — such as complete interiors. In one sense, GM and Ford will become master assemblers, snapping together a handful of modules that were built and often designed by their Tier 1 (or Tier 0.5, as they are now sometimes called) suppliers. It’s important to note that these Tier 1 suppliers will also take on a larger responsibility for sourcing and managing sub-tier suppliers. And GM and Ford will look to expand initiatives to leverage spending and share contracts for raw materials and parts with key suppliers.
• “Right-Shoring”: GM has very publicly stated its intention to rethink its low-cost country sourcing strategy. The automaker is now assessing supply in emerging markets not only on manufacturing and labor costs, but also on the total landed costs (e.g., tariffs, VAT, transportation, handling, etc.), risks, and leadtimes. However, only part of this move is located by cost and supply assurance. The bulk of GM’s future growth lies in emerging markets, particularly in Asia. (Demand for vehicles in China alone is slated to jump 12% annually for the next four years.) To capitalize on this opportunity, GM is rethinking its vehicle stylings and pricing (smaller is better) and building supply and manufacturing plans that can both meet growing demand and satisfy local content requirements. On that latter point, GM already has multiple joint ventures in China. The JVs have given GM 11% of the market. And GM is negotiating similar JV’s with manufacturers in Central and Eastern Europe.

These initiatives are vital to the future of Detroit. And are further evidence of how supply management is the engine (or at least, a vital piston) in driving key corporate strategies forward.

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