General Motors and U.S. Tooling Industry Reach Crossroads
This exclusive was originally sent to subscribers-only two months ago. Here is a copy…..
The legacy and future political careers of President Obama, his administration and the high-profile automotive task force he assembled to handle the U.S. auto industry mess are directly tied to not what happens with GM as it is how they conduct business going forward.
However, political connections and years of gaudy compensation insulates them from a doomsday economic climate caused by negligent and short-sighted business decisions that could potentially lay ahead should they fail to lay a foundation of oversight over General Motors highly anticipated decision of where to source their upcoming programs.
For many it’s a nightmare scenario, from the legions of middle-class factory workers to scores of small business owners. Between the lower and upper portions of the middle class lies the majority of Americans. The U.S. manufacturing industry would be remiss by failing to perform its due diligence into this critical point in our future and ensure, by any and all means necessary, this new “Strategic Supplier Program” doesn’t include any remnants of General Motors former unmitigated disaster of a purchasing directive—which focused solely on lowest cost. We have 52.9 Billion reasons to make sure that doesn’t happen as well as our manufacturing industry’s future sustainability.
The media outlets have been instructed to tout this new supplier initiative as a descendant of Honda’s quality-driven, long-term sourcing strategy. The one Honda brilliantly used to improve quality, responsiveness and lower purchasing costs through incremental phases not by brow-beating but with a commitment to open, mutually beneficial and innovation-spurring relationships with suppliers.
The same strategy Honda has used to position themselves as a perennial quality leader and value-providing benchmark for their competition while the domestic automakers were fat and sassy, oblivious to the perils of failing focus on mid-to-long term conditions.
Lessons Learned from Lowest Cost Lopez
The swashbuckling purchasing chief led a search and destroy mission with one goal: Lowest Cost Wins, No Matter What – Regardless of the consequences.
While GM was deploying a black hat procurement mentality under the guise of Jose Ignacio Lopez, Honda was taking market share by implementing its valued partnership tactics. The now-disgraced former head of purchasing that came in like an ignorant tornado, inflicted lasting damage across fairly robust domestic supply chains. In this group was the heartbeat of our industrial sector–American tooling suppliers such as die, mold and machine-tool builders, machining shops, and tooling design houses among others.
His instructions were simple: Squeeze the life out of suppliers by demanding, threatening, deceiving and scaring their supply base into lowering “procurement” costs without real regard to the ramifications on quality and Total Cost.
Quality and value-driven organizations realize a sizable difference exists between “procurement”, or “purchasing” costs and Total Cost.
Purchasing managers across component or commodity lines were inexplicably compensated through bonuses on one—and only one—criteria:
The higher the realized cost reductions in terms of purchasing, the higher their bonuses would be.
Naïve execs and board members loved the idea of this renegade giving the false security of higher profit margins and rising shareholder value even though it would be impossible to sustain these “cost savings” after one, two at the most, years. Perhaps he knew it was a house of cards system and that is why he humiliated former CEO Jack Smith (who promoted him to the role) in 1993 after bolting to Volkswagen—which Smith didn’t learn of until an hour before he was to hold a scheduled press conference announcing yet another promotion for Lopez to President of North American Operations.
Frankly, if our domestic tooling sources are not given a fair and transparent opportunity to win contracts or if the new “Strategic Supplier Program” fosters impressions of the “Lowest Cost Lopez” model there will be hell to pay—whether through American consumer backlash, relenting pressure on Capitol Hill or widespread converging pockets of stakeholders demanding corrective actions.
China Subsidizes Its Tooling Sector! Now U.S Taxpayers Pay GM to Outsource Overseas?
The middle class, created and sustained by the automobile industry, may once again be underestimated should General Motors do what recent activity suggests — pacify the American public with promises of "keeping jobs in America".
You see, the public relations department inside GM is assuming they will face limited pressure from the working-class because they’re “none the wiser”. It comes from the adage 'what they don't know won't hurt them'. To understand this it's important to understand several facts:
In manufacturing there are certain classifications of skilled trades with varying levels of compensations and subsequently–each having different levels of impact on the U.S. economy.
§ Die makers, or toolmakers, die designers, machinists, CNC programmers and other skilled trades are those that tend to be higher-paying, value-added, jobs a society wants to keep to stimulate and sustain economic viability. Others, such as those at the end of the assembly line who pick up by hand stamped panels (hoods, fenders, etc.) and place them in a rack while welcomed, are not those that contribute to the power of "manufacturing" having the greatest multiplier.
A quick summation of the facts:
· GM is operating only because of $52.9 Billion in TARP/Federal Loans – $12.5 Billion to GMAC (their financial lending arm) – of which over $8 Billion is technically General Motors to use as they please. They couldn't possibly have borrowed more than really needed so they could make a textbook public relations move with the goal of generating goodwill with an "early repayment" of $6.7 Billion, could they? (Fritz Henderson discussed several days before his sudden resignation)
· Call it TARP, "Federal Loans" or any other point of distraction. Bottom line is it's really American Taxpayers Money. Additionally, the Canadian Government propped up them up with loans.
As functioning members of society most of us already have enough on our plates balancing finances, worrying about the economy, taking little ones to soccer practice, health care issues and beyond. Sadly, they know this and realize that a distracted, disengaged and uninformed society is the perfect cover to quietly slip critical manufacturing jobs out the backdoor.
I guess we will know when we find out how many parts or programs GM has awarded to American or Canadian Tier 2 suppliers and employers of value-added skilled trades providing services such as die construction or die and mold design in the second or third quarter of 2010.
To appreciate how ineffective GM’s purchasing strategy was is not difficult. Unless you, your parent, sibling or friend worked for a U.S. or Canadian supplier during the early ‘90s it’s unlikely you knew much, if at all, about the strong-armed squeeze imposed on suppliers—the primary focus of this movement, despite being just one part of a total supply chain.
The other aspect should be noted was the explosion of the internet between now and then. Unfortunately for the suppliers, the powers of spreading a message via social media, blogs and instant news wasn’t at their disposal.
Maybe this time around it will be different and those that have been traditionally kept in the dark will be enlightened enough to take a stand. Most within this group are U.S. citizens not employed by, or privy to, the inner-workings manufacturing which directly impacts their economic stability and freedoms. As long as the GM message-massagers are able to pull the fleece over the public, a very large demographic may facilitate the problem by buying their vehicles. .
Therein lays the key: Engaging and informing this group of how un-American GM is—should they make the decision to outsource tooling to LCC’s such as China or South Korea again.
I wonder what the father of modern manufacturing and the middle class Henry Ford—a former die maker himself—would think.
Yes, America Can Compete With Chinese Prices. However, if one of the most iconic American companies decides to shun our tooling (Machine, Tool, Die & Mold) base by exasperating the Low-Cost Countries systematic destruction of our ability to prosper and protect ourselves, it will show a complete abandonment of the American middle class—the group that made them who they are.
"It is critical for American manufacturing workers that the U.S. actively confronts Chinese communist government subsidies by enforcing the countervailing duty laws. We are confident that consistent and tough government enforcement will lead to domestic manufacturers regaining their competitive footing, saving jobs and the rehiring of laid off workers hurt by the onslaught of illegal imports,” according to Leo W. Gerard, President of the USW.
Penny Wise, Pound Foolish
As it stands, the challenge before us is seemingly immovable multinationals like Wal-Mart and GM with instant access to the most influential lobbyists, politicians and perhaps even Obama himself. Couple that with unethical initiatives consistently in play by the Chinese government, such as enormous subsidies to their own tooling base, and it’s easy to the frustrating odds we face.
While Bo Andersson was still in charge, he went on record strongly encouraging U.S. manufacturers to set up operations in Low Cost Countries. Two fundamental assumptions made by an offshore presence are: (1) Domestic OEMs sourcing (2) Because of cheap labor, purchasing comparisons tend to favor LCC bids against North American prices because of its impact on the bottom line of the OEM.
Those two assumptions are also entirely misguided, misfortunate and miscalculated.
There are several other perceived “Facts” which are actually “Fallacies” that deserve consideration but perhaps the greatest misnomer revolves around “cheap labor”.
(Fallacy) Chinese labor is the primary cause of their ability to offer lower bids against U.S. suppliers
(Fact) The discrepancy between Chinese and U.S. wages is nowhere near the wide-gap perception media has made it out to be.
All else being equal I can comfortably say if it were to ever come down to “labor costs” being the deciding factor of where tooling is sourced, American shops would win more than they lose. It’s another distraction the OEM public relations department strategically release to media outlets to sway the public’s perception.
If it isn’t labor swinging the pendulum in China’s favor, what is? The biggest elephant in the room nobody seems to notice is the shameless amount of subsidization China’s government provides to the metalforming industry.
1. China’s government consistently provides many incentives for multinational companies to set up manufacturing operations on their soil.
2. Taxes are very little—if at all
3. Business expenses are generously subsidized. Land costs are lavishly subsidized
4. Fuel prices, which are a big factor for U.S.-based manufacturers are largely subsidized in China, so their manufacturers don't have to pay them—at all.
When a 20-man tool and die shop goes to quote a set of dies against LCC counterparts they must include appropriate percentages of their own capital equipment costs like $450,000 in new machine tools to produce the dies several months ago. Across the ocean, China’s tooling suppliers have the luxury of excluding these costs because their government pays the bill in full without requirement of repayment.
“It seems that, like golfers seeking quick fixes and tips that promise better results without requiring any real change, GM executives were continually looking for Japanese “secrets” that they could incorporate into their own processes. Such secrets did not exist (at Toyota, the whole production system was the secret), and GM faced the need for massive, systemic change.
“With regards to its struggling supplier base, Problems in an ecosystem usually manifest themselves first on the edges, not in the core, and the major suppliers to the Detroit Three have been in dire trouble for decades. Japanese manufacturers usually see their suppliers as a source of innovation and systemic savings that should be nurtured and developed; U.S. automakers have typically seen them as resources to be consumed. Lopez’s arbitrary actions further poisoned supplier relationships and destroyed GM’s drive to improve quality. An examination of this episode would have revealed more clearly the striking inability of GM’s executives to see their organization as part of an ecosystem and their resulting habit of pursuing short-term fixes at the risk of long-term ruin.” (Holstein)
Honda’s System-Based Costing vs. GM’s “Opportunistic Buying"
As mentioned, GM tied Purchasing employees bonuses directly with the total amount of cost savings from tooling procurement realized year over year. This was a catalyst in the rapid decline of GM’s perceived, and actual, quality. Dies and Molds were being awarded to suppliers on one thing: ‘Purchase’ Costs'
Tooling sourced based purely on ‘Purchase’ Cost, or initial Hard Costs, was extremely short-sighted. It didn’t include the necessary ‘soft’ costs such as the group of employees they flew over to China to find LCC manufacturers, transportation costs, communication expenses, risk factors and more. Further, a significant amount of these tools required immediate repair shortly after entering production.
One can only hope GM abandons the multi-round, bidding style quote process. Especially when you consider how Honda sources tooling.
“The Machine That Changed the World, notes in lean-based companies, suppliers are not selected on the basis of bids, but rather on the basis of past relationships and a proven record of performance. As a philosophy-driven company, Honda feels it is easier to teach product and process knowledge than to find a technically-capable supplier with the right attitudes, motivation, responsiveness, and overall competence.” (MacDuffie & Helper)
Honda sees value in the management attitudes of their suppliers and puts considerable stock into that factor when choosing suppliers.
We can only hope GM—considering all of us have paid for their second chance—will perform its due diligence and utilize domestic tooling suppliers with the co-management and partnering tactics used by their Asian counterparts. After all, Honda is able to buy tooling cheaper than GM—without purchasing a majority of tooling in China.
Past management drove GM down a bumpy road to nowhere based on knee-jerk decisions around perceived small ‘purchase’ cost savings. According to Schmald, "A consistent supply chain allows you to sustain and improve quality tremendously. If you are always changing suppliers, how can you establish quality?"
The longtime Michigan business owner says that Honda values continuity in its supply chain and expects that suppliers need to be profitable. In what suppliers see as collaboration, "They want you to reduce your cost but maintain profit. They don't want to reduce their cost by decreasing our profit." (Whiting)
Instead of viewing American tooling companies in the supply chain as “cost centers” ripe to have already slim profit margins cherry-picked off.
This is where Government needs to step in. Media sensationalizes the “cheap labor” so much that society simply assumes this is the primary reason manufacturing jobs are vanishing overseas.
Hidden Costs + Irrational Compensation Tactics = Unavoidable Disaster
Extremely perplexing is the past regimes under Henderson and Rick Wagoner failure to adhere to the guidelines of Total Acquisition Cost (TAC), one of the most basic tools in managerial accounting and business decision making.
The Board of Directors has a tendency to place GM lifers from either its Finance or Accounting department to the top spot. Both have an MBA from Harvard while Wagoner has an economics BA from Duke University and Henderson a University of Michigan graduate who received the highest score in the state during a 1980 CPA exam. Yet neither of them had the wherewithal to confirm their procurement cronies in charge sourcing dies and molds to new, unproven countries such China, Taiwan or South Korea were using TCA to make these decisions.
Once you consider that these procurement guys were compensated with bonuses strictly on how much initial cost they saved (purchase cost) perhaps it sadly clarifies how and why it happened.
I recall sitting in a Logistics class not too long ago taught by Michael Silvio, and adjunct professor and one of the more respected minds in supply chain management in Metro Detroit. Silvio is the Director of Supply Chain Management at Cooper-Standard Automotive, a leading global supplier of fluid handling, body sealing and NVH control systems with 70 facilities worldwide and over 16,000 employees.
It was then I realized how many factors must be taken into consideration to gain a true sense of the totality of costs when making purchasing decisions. Rational managers know the role “Hidden Costs” play in TAC.
A general definition of Total Acquisition Costs is:
the sum costs connected with receiving and using a product including product costs, quality and maintenance costs, inbound shipping charges, ordering administration and size costs, ordering size costs, conversion or assembly costs and possibly more. For U.S. automotive OEMs the additional travel and LCC vendor identification costs to fly and board employees over there are another component.
These intangible costs may be hard to quantify but they are every bit as real as the initial product or service cost.
Often times, the ramifications of hidden costs often bit chunks of varying departmental budgets which muddies the water even further.
GM operating on our dime – Will they be transparent?
The predatory sourcing practices under Lopez and even Bo Andersson to an extent are well-documented.
Many betrayed U.S. and Canadian suppliers are on record stating Lopez and his department used their proprietary information to pressure most suppliers to lower prices.
Using suppliers’ proprietary manufacturing practices as a leveraging device to drive costs down without regard for concern of the supplier is arguably illegal let alone unethical. Andersson is on record and to his credit he doesn’t avoid the accusations:
Asked about security of intellectual property, Mr. Andersson says candidly:
“If it’s proprietary, don’t share it with GM.”
Mr. Andersson’s offered the following advice to suppliers with new technology:
“Unless we’re signing a contract, don’t show it to us if you don’t want us to take it and give it to another supplier.” GM needs new technology, Mr. Anderson says, but when you can have 25,000 people touching it, there could be some with different motivations, “so I say to suppliers, be careful if you show this to us if we’re not ready (to sign a contract to use it).” (Winter & Priddle)
Should General Motors decide to resort to any of these practices we must demand transparency and answers. Obama’s administration will regret any aloofness or apathy if they don’t provide America’s middle class these answers. Of course, this is assuming GM does the unthinkable and fails to keep our tooling companies busy with upcoming programs.
1. Multi-Vendor Bidding
Bidding creates a standoffish relationship between buyers and sellers that inhibits cooperative cost reduction efforts, which are the key to real cost reduction. (Anderson)
2. Online Bidding Systems (“Covisint”)
Many of you cringe anytime you see or hear “Covisint”, the shady bidding platform in which multiple suppliers openly drive each others’ prices down. Again, this platform only concerned one, and only one, factor: lowest cost. It unfortunately fosters burdensome outcomes and behaviors which lead to misguided decision-making, including:
3. GIGOD (Garbage-In Garbage-Out Decisions)
· Assumption that supplier inefficiencies can be somehow be corrected after a supplier wins a contract at a lower-than-usual price. However, soon after a supplier wins a bid, it is expected to deliver the goods, and there will not be time to implement any meaningful cost reduction program. Thus, without a real means to lower costs, the supplier will either have to cut its margins (which will be resisted), cut corners (such as inferior material) or do the same to thing to its suppliers, who may have the same difficulty achieving real cost reductions. · Some suppliers will temporarily lose money to buy into the business with the expectation of raising costs later, once they are in. there are even suppliers out there whose strategy is to bid jobs at zero profit and plan to make all their money on the expected change orders. This is exactly what several Chinese tooling companies did to another member of the original Big Three.
· Lowest-bidders win because they don’t understand the problem and then are ultimately unable to deliver at all. In other cases, winning bidders are vapor companies, whose goal is, keep bidding down until they win, and then patch together a virtual network of alliances to somehow fulfill the order. (Anderson)
This was revealed at a seminar when the audience was asked about any problems they’ve experienced with online bidding. They discovered that one bidding competitor, a Vapor company, was working out of an apartment and its strategy was to win the auction and then figure out later how to deliver the goods!
4. “A Dollar Saved, Is Two Dollars Spent”
A common assumption is that if suppliers know they will have to bid, they will implement effective long-term cost reduction efforts. However, the real progress in cost reduction through supply chain management has come from long-term relationships where manufacturers work together with suppliers. (Womack, Jones & Roos)
Not only did Mr. Lopez fail miserably in achieving cost reductions—except for maybe one year’s worth of hard purchasing costs—he alienated General Motors supply base. Honda and other Asian carmakers were happy to step in and form the type of innovative spurring, value-based relationships with suppliers that actually do generate lasting cost savings.
With Obama’s administration currently a 60% shareholder in GM, we must demand accountability in purchasing decisions. Now that we have a vested interest (literally) and Obama’s hopes for reelection will very well depend on it once the writing is on the wall (America finally understands why Manufacturing domestically is mandatory)
Bob Socia, General Motors New Global Purchasing Chief’s Legacy Begins….Now
Could General Motors, under the direction of Bo Andersson’s successor, Bob Socia have the nerve to resort to the implosive purchasing strategies of the dark days of Jose Lopez?
The real coup on American citizens would be new VP Global Purchasing and successor of Bo Andersson, Bob Socia or one of his spokesperson's coming out and issuing a statement along the lines of, "We here at General Motors understand the importance of a strong domestic manufacturing sector which is why we are using the financial support of American taxpayers to retool and employ thousands of people across our facilities." The key here that everyone must understand is that such a comment would be a frustratingly clear method of exploiting the misinformed or apathetic logic of our neighbors and friends. Why? Because in typical bootleg PR-speak, they cover up the fact that "facilities" truly mean production plants (stamping plants)–while nice to have–are not the engine of American manufacturing stability and ingenuity of the last 60 years that tooling, die construction, machining and other metalworking trades are. However, GM knows that most people don’t realize that.
Should we be alarmed that Mr. Socia, born and raised in Michigan, is an expatriate who was holding the position of Executive Vice President of Shanghai General Motors, GM's flagship joint venture in China since 2007?
Mr. Socia was born in 1954 in Bay City, Michigan. He earned a bachelor’s degree in Business from Oakland University (Rochester, MI) and his MBA from University of Detroit-Mercy.
Of course, Bob Socia should be given every chance to demonstrate he is not a disciple of the recklessly prohibitive purchasing philosophy of the infamous Jose Lopez.
He could not possibly outsource even one part to a Low-cost country such as China on his watch. Could he? GM's new purchasing strategy hopefully learned the disastrous lessons under Lopez including disengaging and squeezing suppliers, using reverse bidding and multi-round bidding while providing no transparency our tooling suppliers.
One thing is certain. If Socia makes, or Ed Whitacre allows, the unconscionable decision to enforce a strategy of ignoring the remaining U.S. tooling suppliers not only will their legacy be instantly tarnished beyond repair but we will be forced to look back and question statements about the longtime GM employee that should’ve tipped us off to a tendency to favor LCC supplier countries–such as Chinese suppliers and companies he knows very well from his tenure there.
For example, Kevin Wale, president and managing director of GM China's Group previously stated, "Bob distinguished himself as GM’s senior representative at our flagship joint venture in China. He provided important leadership as Shanghai GM embarked on the expansion of its product lineup and facilities to keep up with record demand for its vehicles. With Bob’s vast experience, GM’s global purchasing operations will be in very good hands.”
The near future will reveal the future’s of those involved. We can only hope they have learned their lessons from failed decisions of the recent past. If you call yourself an American citizen, regardless of a career in manufacturing, you have an important stake in this.
Works Cited
Anderson, Dr. David A. A Build-to-Order & Mass Customization CIM Press. 2004.
Holstein, William J. Why GM Matters: Inside the Race to Transform an American Icon
Publishing Company, 2009.
MacDuffie, John P., and Susan Helper, “Creating Lean Suppliers: Diffusing Lean Production
through the Supply Chain” California Management Review. Summer 1997
McLaughlin, Kathleen. “The big squeeze: As Detroit loses market share, automotive stampers’
fortunes hinge on customer mix.” STAMPING Journal 7 Feb. 2006
Whiting, Celeste. “For auto industry, cheap foreign labor isn’t cheap.” The Michigan Messenger
13 Mar. 2008
Winter, Drew and Alisa Priddle “GM Revamping Purchasing Strategy.”
Ward's Auto. 13 Aug. 2001
Womack, James P., Daniel T. Jones, & Daniel Roos, The Machine that Changed the World, The
Story of Lean Production Harper Perennial. 1990: Ch. 6 “Coordinating the Supply
Chain.”
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