'Collaboration' in cost-cutting encouraged

GM squeezes its suppliers -- gently

'Collaboration' in cost-cutting encouraged

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DETROIT -- One factor aided General Motors' bottom line last year more than any other: strong pricing from its transformed vehicle lineup.

But GM executives acknowledge that tailwind probably won't last long. With much of their big product push in the rearview mirror, they are counting on reducing supply and logistics costs as the next phase in their bid to match competitors in profitability.

To do that, GM needs help from the 2,700 suppliers that it works with globally. It's asking them to scour their own supply chains and distribution networks for fat to cut. And GM is offering to help, says global purchasing chief Grace Lieblein.

"We're not just saying, 'This is in your contract, you go figure out how to do it,'" Lieblein told Automotive News last week. "Let's work together to understand the cost drivers in your business."

Given GM's hard-line history with its supply base, the offer might remind supplier CEOs of Ronald Reagan's quip about the nine most terrifying words in the English language: "I'm from the government and I'm here to help." But GM's supplier relations have improved steadily since 2005, according to annual surveys by suburban Detroit research firm Planning Perspectives. Lieblein insists that GM's latest cost-cutting push isn't a return to the old-school tack of simply going after suppliers' margins.

GM backtracks
Seeking to smooth relations with suppliers, GM has reversed or clarified certain contentious terms that were added to its base purchasing contract last year. Among the changes


  • Eliminating a sentence that said suppliers' parts will “not, at any time (including after expiration or termination of this Contract), pose an unreasonable risk to consumer or vehicle safety.” Suppliers interpreted that as creating an open-ended liability, beyond the usual warranty on supplier parts.

  • Clarifying that GM's “audit rights” to access a supplier's books are limited to business between GM and the supplier. The 2013 language left the impression that GM wanted broader access that included proprietary information.

  • Deleting a provision that required suppliers to ensure uninterrupted supply during “any foreseeable or anticipated event.” Suppliers worried that this language would leave them responsible for flagging problems at an upstream supplier, for example.

  • Clarifying a provision that grants GM license to a supplier's intellectual property only when the supplier isn't able to ship products. Suppliers said the 2013 terms posed a broader risk to their intellectual-property rights.


Walker: It’s not about slashing supplier profits.

GM extended an olive branch to the supply base last week by scratching several contentious terms and conditions it added last year to its base purchasing contract, terms that suppliers felt exposed them to greater liability. Lieblein said the standoff distracted from "talking to them about technology and quality and driving waste from the system."

Lieblein acknowledged that GM made a "misstep" last year when it revised the contract terms without input from suppliers and implemented them without notice. Even though few, if any, suppliers chose to forgo GM's business because of the concerns, Lieblein decided to exclude the problematic conditions as a gesture of trust in GM's suppliers.

She says many suppliers already are working closely with GM to eliminate costs.

"It could be waste in the specs we provide for the part. It could be waste in [the supplier's] operations, or waste in our operations," she said. "We really have changed the lens that our teams use to look for that waste. And it's all over the place."

For example, one supplier worked with GM on a cost analysis that led to the supplier insourcing more of the parts needed to produce A-pillars for GM vehicles. The effort helped the supplier increase its scale and reduced GM's purchase costs with that supplier by 20 percent, a GM spokesman said.

Lieblein wouldn't cite GM's overall cost-saving target or give details about its discussions with suppliers.

In a letter sent to at least a few suppliers last month and obtained by Automotive News, GM said it wants to reduce its purchase costs from those suppliers by up to 10 percent over the next three years.

In the letter, GM offers to help identify waste, forecast costs, reduce raw-material costs and incorporate other methods. "Close collaboration will be necessary to ensure this challenge can be met," the letter reads.

In recent years, much of GM's profitability has been a result of higher prices on new and redesigned vehicles. In 2013, GM said, pricing contributed $2.4 billion more to its pretax profit than in 2012, pushing its earnings to $8.6 billion, excluding onetime items. GM's average transaction price in December hit a record $34,634 in North America, its most profitable market, according to TrueCar.com.

For the next few years, GM CEO Mary Barra has identified "significant reductions" in supply and logistics costs as a key strategic initiative, along with improving the image of its brands. GM has targeted a 10 percent pretax profit margin for North America by "middecade." It averaged 7.9 percent in 2013, vs. Ford Motor Co.'s 9.9 percent.

GM doesn't disclose its annual purchasing budget, the spokesman said. In a 2011 presentation to analysts, GM pegged its total annual spending on the direct purchase of materials at $77 billion.

Rob Fisher, president of TK Holdings Inc., the North American subsidiary of Japanese airbag maker Takata Corp., says GM has made clear that it's targeting inefficiencies, not suppliers' profit margins. He says his company is working with GM on logistics changes that would shift where some passenger-restraint parts are produced, which would lead to savings for both companies.

"They don't want our margins to drop," says Fisher, a member of a council of about a dozen suppliers that serves as a liaison to GM. "So far, down to the manager level, we're hearing the same thing."

Don Walker, CEO of Magna International, which makes chassis, interiors, powertrain systems and other components and is one of GM's largest suppliers, says GM and other automakers increasingly are looking to drive cost savings through smarter component designs, manufacturing methods and logistics, rather than simply slicing into supplier markups.

"The OEMs all seem to have recognized that you can only squeeze the lemon so much," Walker said.

You can reach Mike Colias at mcolias@crain.com.


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