Remember that saying attributed to President Ronald Reagan about being wary of government assistance: "Hi, we're from the government, and we're here to help?" Now, suppliers to General Motors might be feeling a little bit of that same trepidation: "Hi, we're from General Motors, and we're here to give you the business."
According to a recent IHS SupplierBusiness editorial, GM's new One Cost Model purchasing program is "gaining traction among suppliers—so much so that only a handful of suppliers are currently refusing to participate in the scheme." While the One Cost Model proposes to be beneficial to suppliers, only participants that actually agree to the terms with GM and pass the "smell test" will get work for the life of the program, with GM not soliciting bids from other suppliers.
To get to that point suppliers must do what many of them dread: Opening their plants and their books to the scrutiny of GM engineers and purchasing agents. For many molders and moldmakers in the tier ranking, opening their plants is one thing; opening their books to reveal internal cost data is something many resist vehemently.
Obviously, the reason for this resistance is the fear that the automotive purchasing people will use that information against them by letting competitive bidders for the work know the cost structure and make a lower bid. GM calls this "activity-based costing," in which GM assesses material costs, labor, scrap rates, production cycle times and other costs, then uses the data to see if these activities/costs meet GM's desired goals.
IHS notes that this process can take up to 20 weeks to complete. And the kicker is that the program also requires suppliers to "identify fresh cost-cutting opportunities from time to time. GM will update its cost analysis every year to see if the supplier can reduce costs by using more efficient production."
One of the chief complaints I've heard from automotive molders over the years is that GM always wants the cost savings to go into their piggy bank, never in the pockets of molders. I've had more than one molder tell me that they would never tell an OEM or Tier 1 supplier that they were able to cut two or three seconds from the cycle time, because the OEM would demand an immediate (or even retroactive!) price reduction to reflect that savings. Heaven forbid that a supplier do anything to improve its profitability even by the slightest margin!
Suppliers should be so thrilled to get these long-term, no-bid contracts that they would be willing to hand over every cent in production savings to the OEM in exchange for the privilege of being able to keep these razor-thin margins for several years.
Trust is a big factor for any supplier opening up the company's books to a customer and revealing internal costing data. According to the 2015 survey of 700 automotive suppliers by Planning Perspectives, "supplier trust of GM buyers is at its lowest in three years, and is the lowest of the six OEMs. Pressure on GM suppliers to reduce cost, improve quality and introduce more innovation has increased significantly, with GM buyers becoming more adversarial in going after supplier price reductions. The threat of losing business has increased to 27% from 18% (in 2014) as the most important reason for suppliers to give a price concession."
Something is wrong here. "Gee, I'm not making much money with this work but I'm willing to make even less money in order to keep the business."
Can anyone who has attended Harvard Business School help me understand the business strategy behind this thinking?