Inside GM Purchasing: sorting out the winners and losers

In April, WAW detailed what goes on inside General Motors Corp.'s Worldwide Purchasing organization leading up to the actual awarding of contracts. The following article focuses on the awards process.

Everything starts with the "annual costbook value." That's what the costs analysts deep in the bowels of General Motors Corp. come up with for what they think GM can afford for the components, machine and equipment it buys - to the tune of $90 billion each year.

Then it becomes a serious game of "Let's Make a Deal" as GM's Worldwide Purchasing sets price targets, which aim to beat the costbook bogies - and almost always succeed.

"We go through the rounds, and the final price depends on how much movement there is," says Harold R. Kutner, vice president in charge of Worldwide Purchasing.

To GM suppliers who've bid and lost, this is a wrenching, disheartening process. It's also a big and ongoing source of contention between GM and many of its traditional suppliers who charge the corporation with all sorts of unfair practices, from snatching their proprietary technology passing it along to lower bidders to re-bidding after the "winners" think they have a firm contract.

Mr. Kutner denies these practices exist although he recognizes supplier trust i hardly a GM strongpoint. He's taking several steps to improve supplier relationships, he says, including developing closer ties with supplier executives, bringing supplier teams in to work side-by-side to lower costs, and expanding communications.

Still, deep bitterness and resentment among suppliers persists two years after J. Ignacio Lopez de Arriortua's departure a GM's purchasing chief. Mr. Lopez spent tumultuous year in the U.S. reshaping GM's purchasing and organizing its activities on a global scale, reportedly saving the automaker billions. But his tactics and ethics triggered a lingering firestorm in the supplier community.

Steps he initiated, and those taken since he abruptly quit to head up purchasing and production at Volkswagen AG, in part reflect GM's overall global strategy.

For one thing, GM is increasingly developing similar cars built in different regions, with tweaking for local markets. Numerous versions of cars developed by its Adam Opel AG subsidiary in Germany, for example, are being adapted to other markets. The Cadillac Catera coming in 1996, for example, is a spinoff of Opel's top-line Omega. Saturn will get a larger Opel-derived car in the late `90s.

Mr. Kutner insists GM's new way of buying things is vastly more efficient and can be beneficial to suppliers." In the old days, we kept doing business with the same people," says Mr. Kutner. "There was no analysis. We took price increases and added them to the customer's cost. We've got to work on cost, not price. We are not the low-cost producer."

Although some critics claim GM is sacrificing quality on the altar of price, Mr. Kutner says a large part of the award system takes into account supplier technical capabilities, strict current and future parts-per-million (PPM) defect rates, supplier investment terms, and performing on GM delivery schedules.

Still, GM drives a hard bargain. Winning bidders must agree to fixed future prices and it helps their cause if they give GM price relief on existing business, he allows.

So what goes on behind those closed doors Friday mornings at GM Purchasing?

As a warm-up, purchasing people around the world discuss major developments and opportunities via speaker phone with perhaps some 40 folks assembled in the purchasing conference room at GM's North American Operations (NAO) head-quarters in Warren, MI.

Then the buying begins. On this particular Friday, the chemical group under Executive Director Bo Andersson holds forth. "Chemical," as it turns out, is an extremely broad category that can include everything from conveyors to forklift trucks plus paint, plastics and rubber. Annual purchasing volume: $19.4 billion.

Eighteen contracts totaling nearly $90 million based on costbook figures are up for grabs this particular day, and the logic for each award is explained by buyers who've obviously done their homework. Each time they reveal how they beat the costbook, it's almost as if someone flashes an "applause" sign.

Buyer Ray Phillip tells how he shaved 33% on a stamping-bracket purchase. By changing suppliers he'll pay only $1.20 each, down from $1.80.

Buyer Horatio Seeley credits his conveyor creativity team with the idea of commonizing all paint-shop conveyor systems. This costbook for the particular system he's buying, to be used for a 1997 model, is $13-million-plus, but his final price comes in $1,569,000 under that. He also reports an $852,635 savings on a conveyor conversion carrying a $12.4 million bogie.

Eileen Gurko reports costbook savings ranging between 18% and 21% will be realized by consolidating Gm's forklift truck and "tugger" truck business with a single supplier working closely with GM. Total costbook estimate during several phases: $43 million. Final price: just over $34 million.

And the list goes on. John Rademacher says the deal he negotiated for the grille on a `98 model shaves nearly 28% from the $3.4 million set in the costbook. Other buyers rattle off savings ranging from 50 cents to $2 per vehicle.

That's big money when there's big volume at stake, but it's hardly any consolation to the losing bidders.