General Motors - Just in Time

OVERVIEW

The global automobile industry has become increasingly competitive and the previously dominant "Big Three" manufacturers of Ford, General Motors (GM) and Daimler Chrysler have lost much of their market share to their Japanese competitors. Manufacturers continually have to look toward lowering their costs and GM and Ford largely go about doing this through their purchasing practices, more specifically, their supply chain management.

In this paper, we shall discuss our findings on the different practices of Ford and GM (the carmakers) on how they get the most out of suppliers in terms of price, quality, timeliness and other expectations. We will further discuss the implications of their current strategies, short term future plans and supplier relations before deciding on whether Ford or GM would potentially make a better working partner for suppliers.

CARMAKERS AND SUPPLIERS

The automobile industry has seen a great shift in the way business is conducted over the past few decades. Gone are the days where the manufacture and assembly of parts and the sales functions were all done in-house. Today, Ford and GM are highly dependant on external parties to supply them individual parts and sub-assemblies (suppliers) and take care of their sales functions (dealers). The carmakers' challenge these days is to coordinate and manage the complex supply chain network where the quality of the partners they work with would determine the carmakers' ultimate performance.

To manage these vast networks, Ford and GM have turned to the internet as a solution. In 2000, Ford and GM were part of an initiative that set up Covisint , an online portal where OEMs and their suppliers could interact under a common infrastructure and carry out their business transactions. The use of such portals meant that OEMs and registered suppliers could easily have access to each others information in the form of online catalogs, real-time inventory levels, contract bidding auctions and other cooperative applications.

Presently, Ford and GM continue to use such portals in the form of the Ford Supplier Portal and GM SupplyPower . These portals have enhanced information flow and feedback between carmakers and suppliers and allowed the carmakers to announce supplier requirements and tender contracts. Interactions with each individual supplier have also been reduced, saving much time and paperwork. Such portals also represent doorway to new and lower cost supply markets (China) which the OEMs might not have been able to reach previously due to geographical distance.

OBTAINING BETTER PRICES:

For Ford and GM, one of the biggest cost drivers would be the price at which supplies are obtained. The sheer volume of automobile parts demanded by them each year put them in extremely powerful positions to negotiate supplier contracts aggressively. Some of the smaller suppliers supply almost exclusively to the two companies and their business survival depends on totally on contracts with them. Ford and GM have in the past leveraged on such positions to demand two digit price cuts knowing that suppliers would likely accede and not want than to risk financial ruin like the bankruptcy of Tower Automotive . For example, GM inserts clauses into contracts that allow them to switch supplier by giving a 30-days of notice if another supplier offers a better rate.

Ford and GM are also known to place parts requirements on their portals for suppliers to bid for the contracts. This is done on a reverse auctions basis where the lowest unique bid wins the contract . This ensures that the suppliers are obtained at the lowest possible cost without overpaying.

GM expects their suppliers to provide competitive pricing - assist in providing substantial cost reduction when demanded. GM launched a three-year cost-cutting strategy possibly starting in 2007; transferring the stress to their suppliers to fulfil their cost-cutting plans. The suppliers would have to set up factories in low-cost countries such as Brazil, China, Honduras and India in order to attempt to reduce costs. It should be noted that suppliers are still in the midst of a previous three-year cost reduction programme implemented by GM, which was targeted at reducing the global purchasing bill of $85 billion by 20 percent . This continuous pressure to cut cost resulted in a widening rift between suppliers and GM as they struggle to remain competitive with the rising raw material costs and drop in sales with the automakers.

Similarly, Ford had announced plans in 2000 to require their suppliers to relocate to a supplier complex next to their assembly plant. The aim was to reduce cost when shipping parts from suppliers to Ford's assembly plant. Other benefits include better coordination of the flow of vehicle parts where the supplier will only transfer the parts when Ford needs them, thereby cutting down the holding cost for Ford.

Ford launched their Aligned Business Framework in 2005 to align themselves with their suppliers, designers and assembly personnel in the pursuit of sustainable profitability. A big part of the Framework is to cut down the number of suppliers and lower cost by giving business to suppliers that can supply parts to them at the lowest prices, naming them Preferred Suppliers.

Ford also pushed for Team Value Management (TVM) between them and their suppliers. The goal is to further reduce costs for both of them, in particular material costs. This involves joint effort to monitor and find cost efficiencies. This is an ongoing process that requires openness on the suppliers' part, allowing Ford to scrutinize their operations closely. Ford will leverage on its global reach to find the lowest metal prices and technological innovations for its suppliers .

The carmakers have not only sought to get the best prices for themselves through aggressive contract terms, they have tried to help (and in certain instances) force their suppliers into cost cutting measures after which they would demand for even lower prices from their suppliers.

SEEKING FOR BETTER QUALITY:

GM had a "zero-defects mentality" and viewed any disruptions caused by quality defects as more than lost time. The spillover effects like affected staff morale were equally important to them. To establish the fundamental quality expectations for suppliers, Ford, GM and Chrysler developed the QS-9000 certification which has now been superseded by the ISO/TS 16949:2002 . All suppliers would have to obtain the certification before any supplier contracts were to be awarded. In the case of GM, suppliers who found to be non-compliant to strict quality of products