GM purchasing chief sees suppliers turn unruly

Automotive News / August 29, 2005

Detroit, Michigan -- General Motors purchasing czar Bo Andersson is seeing a lot of stress among GM's suppliers.

Andersson, who oversees global component purchases of $86 billion annually, says suppliers have become so angry about their business dealings with GM that they have grabbed his tie.

GM is working with a number of large suppliers operating in Chapter 11 reorganization. And the automaker is pulling the design of vehicle interiors in-house to gain more control over quality and price.

It won't get any easier next year. Andersson says GM wants a price reduction on its steel contracts and is prepared to contract more with steel minimills to get relief.

The carmaker also is preparing a new price-reduction program to replace the controversial program of 20 percent over three years, which expires Dec. 31.

Andersson, who is vice president of global purchasing and supply chain, was interviewed last month by Automotive News Editorial Director Peter Brown, Editor David Sedgwick, Industry Editor David Barkholz and Staff Reporter Robert Sherefkin.

GM is in the final year of a three-year program to cut component costs by 20 percent. How has the program worked?

First, why did we do it? We did it because we wanted to have a longer-term view of the supply base and work on savings today, tomorrow and the third year out.

Secondly, we wanted purchasing to own the accountability for getting the numbers in.

And third, we wanted to see who are really the sharp guys.

So I think from that perspective it worked out extremely well.

We assigned 250 suppliers the 20/3 targets.

Their (cost-cutting) targets were all different. The targets were different by subgroup of the vehicle. So if you were a steel maker, your target was 15 percent. If you were a radio supplier, your target was 50 percent.

And if I should hand out gold medals, 45 have exceeded their targets and have had no quality issues, no warranty issues - no nothing.

You had 45 overachievers. How many achievers did you have?

A hundred.

How much money did you save on that 20/3 program?

Big numbers.

How big?

Very big numbers.

Were the suppliers also able to improve their profit margins?

It starts with good management and with having very aggressive cost controls. You cannot achieve a 60 percent cost reduction over three years if you didn't do anything different. Some changed design. Some received 50 percent more business from us. Some changed their supply base. Some changed their manufacturing processes.

Gentex (is a good example). I won't give you their numbers. But they exceeded their 20/3 targets. They have a good manufacturing structure. They have continuous improvement. They produce 50,000 mirrors a day.

Are you preserving the 20/3 target for next year, or will you change that?

We will have a new program that will be multiyear, with a different design. We have not decided yet.

We work with a group of 10 suppliers on how to define how it is going to work. And these 10 are part of the 45 that overachieved.

We wanted to be fair, we wanted to be aggressive. But it is too early to say. We may have fewer suppliers participating in it because it should be an honor to be part of it, vs. saying this is the dumbest thing they've ever done. Some suppliers took it like that. They didn't have very high results, and they didn't get very much business, and you know the rest.

Is GM purchasing doing the right things?

Sometimes. We have a lot of areas of opportunity. What keeps me awake every day in purchasing is we do a lot of things well; we do a lot of things poorly; and the variation between good and poor is too big.

If you ask me about logistics, I think we do a good job. If you ask me about initial quality, I think we do a good job. If you ask me about warranty, we can do much better. If you ask me about design in six to eight months, we can do much better. If you ask me about behaviors, we can do much better.

But being very open to you, I've met suppliers all year, and behavior (among suppliers) has deteriorated extremely.

"Behavior" - what does that mean?

The level of emotions. The yelling, the threatening has increased dramatically in the last two years. I'm typically a nonemotional guy, and I am trained to be nonemotional. But I see much more emotion in our supply base and nonprofessional businessmanship in the last two years than I've seen in my career before that.

Were the suppliers threatening to suspend shipments of components?

It's all cutthroat. Some of them (grabbed) my tie.

Many suppliers that depend on GM and Ford are losing money. Are the losses because of shrinking vehicle sales?

I don't know. I think that many of these guys have maybe done unrealistic business plans, or they have unrealistic owners. Maybe they have unrealistic quarterly commitments.

Do I think that we do everything right? No. But suppliers that cannot look you in the face and tell you the truth, that you won't respect them, we don't need that. Life is too short to guess.

When you look on the last four or five (bankruptcies), what do they have in common? They are highly leveraged - very, very highly leveraged. Typically, they are owned by investing groups. Typically, they have very high labor costs and operate with inflexible labor agreements. Typically, they have poor purchasing departments. And they have a lot of launches going off at the same time that they manage poorly.

Are you describing Collins & Aikman Corp.?

No.

So why do the auto companies keep giving them business if they have too much business and not enough financing to do it?

What I think I just described was Tower, Oxford, Collins & Aikman and a couple of other guys. We don't really know what other business they have with others.

Do you think suppliers tell us that? That I cannot take this piece of business because I have two other pieces of business?

And this is where we sometimes prefer mid-sized suppliers today. I mean mid-sized suppliers share much more with us. They typically are more focused on one customer.

Large suppliers like the Europeans, Japanese, Gentex and Johnson Controls sell parts with critical technology. They have fewer product lines. They have a more diversified customer group. They have a very strong management team. And their returns are much higher.

Will you source new business with a company that's in bankruptcy?

No.

Last year you talked about assigning 200 people to monitor the suppliers on quality and launch. How has that gone?

It's worked out extremely well. You look on the major disruptions, we have reduced those 50 percent over each of the last four years except one year.

It is still time-consuming to do the final phase of development and launch activity.

And for the plant and the consumer, it doesn't matter if it's the first car built or the last car built - they expect the same type of quality.

Suppliers tell us that Toyota and Honda launch models better than the Big 3. Is it because they settled on design and parts earlier than the domestic makers?

I hear you, but I disagree.

Suppliers tell me that they should be better off if we didn't even quote the business. They just want us to hand it to them.

But if I go back to your question, where I typically see the biggest benefit for us in the supply business is when we reuse parts. Magna has the frame on the 900 (GMT900 full-sized truck program). We said we want you to reuse as much as you can on the 800. They reuse their Canadian plant and Mexican plants. They reuse the investment. They reuse the design. It's a perfect example of win-win.

Your question kind of implied that we had a problem with our launches. For example, at J.D. Power this year, I think the Buick Century was the best-launched product in all of North America. So I think your implication may not be really accurate.

Several GM launches have not gone like clockwork. For example, the Solstice roadster, Cobalt coupe and G6 hardtop were late.

From the supply base on that one, can we do better? Yes.

But on the other hand, NHTSA has increased its standards dramatically.

And we have been much, much more cautious before we release products.

The other thing is we do many more internal audits of vehicles, and I personally don't see it as a failure when we protect the customer and we delay the launch.

Last year I personally worked on the Corvette. When we started to sell the Corvette it was a great vehicle. The bad thing is we delayed it two months. But if you go back and talk to Corvette owners, there have not been any issues, and J.D. Power supports that. So, personally, I don't view that as a failure.

What's your position toward big-time interior integration? Lear Corp. President Douglas DelGrosso says it looks like there's going to be less of that - whole interiors by one integrator.

We're gradually refining it. We started from a situation where I don't think we maybe allocated enough money to interiors. So we said, "Let's change."

Secondly, we didn't allocate money (correctly) inside the interior, so we maybe gave too much money to the door trim and too little to the seat. So that was the main reason to do interior integration.

The third reason was to do it faster.

The fourth reason was to get better quality.

And the fifth reason was to develop a better cost level.

And on the last three we didn't do very well.

Based on that, we changed some of the things. The Tier 2 suppliers were very upset here a year ago, and they came to us, and they said that they had lost all contact with us. They told us that they really think that they're good at developing new technologies and that Tier 1 stifles us.

We listened to that. We were very concerned that some of our very good innovative, Tier 2s, Tier 3s in Detroit came to us and said, "We really feel that we are being pushed out (by Tier 1 suppliers), and we think you pay too much."

Are there other modules that you're looking to bring in-house?

Not really. But we see electronics playing a very important role in our vehicles, and electronics having a very big fallout if it doesn't work. Our engineering is beefing up very quickly in some software development and general electronics.

Beefing up? Like hiring people for software development?

More or less developing our own capabilities. With vehicles being more and more electronics-driven, that's one area we see that it's important for us to have integration capability.

We've seen a fairly substantial decline on the spot market of steel prices. Do you expect to see a similar decline in contract steel prices when contracts come up for negotiation?

Yes. Or I will see a very sharp increase on purchases from minimills (steel companies that make steel from scrap steel instead of iron ore).

Except you still have to use Class 8 exterior quality sheet. AK Steel said prices are going to increase this year, and you're a major consumer.

There are many steel makers in the woods.

What percentage of steel components can minimills build?

A lot. Fifty percent.

What percentage of your steel comes from the minimills?

Too little.

What's your target?

No target. Only the benefits of a minimill. They don't need any ore, and they don't need any coal. Steel scrap prices are continuing to go down. Yesterday it was $126 a ton. And since we are a high producer of scrap, we can do smart arrangements, and it becomes a source for the minimills. That is one of the things we are looking into.

Are you going back to more one-year contracts or sticking with multiyear?

We buy 10 million tons of steel worldwide.

Our steel makers have been very good to us, and we treat them very well. We will have long-term agreements with those steel mills.

You had talked about a goal of purchasing $10 billion of parts in China, with 60 percent for use in China and 40 percent elsewhere. How is your Chinese purchasing, and is the goal the same?

Our first focus in the last four years has been to support our manufacturing and sales group in China. And when you look at being No. 1 in the Chinese market today, it's something that we are really proud of. Secondly, we have not had any bottlenecks regarding supply of these components. And third, I think we have developed a rather large, competitive supply base.

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