Another automotive supplier victimized by General Motors’ purchasing strategies

What if you had a customer who demanded that you lose money every year? Or, when you found a way to actually make a small profit margin on your parts, demanded that you share part of that profit? Or demanded that you reduce the price of your parts by a certain percentage every year, regardless of material price fluctuations, higher labor costs and other increased costs of doing business.

Molders and moldmakers find ways to use technology to become more efficient and boost productivity, but they are constantly under the gun to “give back” those gains in the form of “rebates” to the OEM. How much more efficient can a molder become once the law of diminishing returns kicks in?

I encourage you to read "Supplier Feud Threatens GM Plants” in the July 12, 2016, issue of the Wall Street Journal. It’s the tale of yet another General Motors supplier gasping for air and declaring bankruptcy in an attempt to crawl out from under the weight of this automotive behemoth. Clark-Cutler-McDermott Co. (CCM), based in Franklin, MA, filed bankruptcy last week, blaming the move “on an unprofitable contract with GM that has drained it of $30,000 a day since 2013.”

The only option CCM felt it had was to declare bankruptcy after more than 100 years in business. To keep producing parts while losing money is surely another definition of insanity! CCM makes sound insulation and interior trim products, and GM, for which CCM makes a reported 175 different parts, represents 80% of the company’s revenue. CCM was a single-source supplier of many critical interior parts for GM, said the article, due in part to the fact that GM has reduced its supply base so drastically over the past few years. In spite of implementing new schemes, like its One Cost Model purchasing program, to lock suppliers into long- term, no-bid contracts to keep them in the supply chain, suppliers continue to complain that GM’s attitude toward suppliers hasn’t changed a whole lot from the days when Jose Ignacio Lopez de Arriortua, Global Purchasing VP in 1992, roiled the GM supplier base with his tactics that many claimed were less than ethical.

Of course, said the WSJ article, GM’s response was swift and biting, accusing the supplier of using the bankruptcy process and its position as a critical parts supplier to "protect personal interests rather than honor contracts.”

This is a problem of GM’s own making, and if the carmaker is expecting any sympathy from the supplier community, it shouldn’t hold its breath. Cost cutting is the name of the game at GM, using tactics left over from the Lopez days, and CCM isn’t the first GM supplier to fall on its sword in an attempt to be released from the pain of GM’s business tactics.

A few years ago, I received a phone call from a guy whose father had founded a moldmaking company back in 1965. Eventually they got into molding, as many moldmakers do, and because they were near Detroit, the automotive industry was an attractive market for them. The family business grew, and much of the business from GM grew, as well. That was the trap into which this company fell.

GM kept making more and more demands, particularly regarding price, and the company found itself digging a hole that kept getting deeper. The trap was that GM represented the majority of the business, and to say “no” to GM’s demands would have meant certain—and sudden—death. The family and its more than 100 employees struggled to find ways to be more efficient and productive, and to collect money from GM which was extremely slow in paying.

The end finally came and the family had no alternative but to declare bankruptcy. As I recall, GM demanded that the company give it the parts of the business that were GM’s (tooling and so forth); lawsuits were filed; and the fight was on but, of course, the supplier was no match for the big OEM. The saddest part of this story is that the elder statesman of the family, who had founded the company, died of a heart attack during this whole process. The bitterness that this young man felt toward GM was obvious as he told me the tale.

The story of this young man who had tried to save the family business, as incredible as it was, is similar to other stories I’ve heard over the years from molders. This business strategy is not exclusive to  the automotive industry, but it is the worst when it comes to supplier relations. And GM is, from all I’ve heard over the years, just about the worst of the major automakers. As I read this article, I thought I was experiencing a repeat of the story told to me by that young man who probably just needed to vent to me. Reading the article in the WSJ, I saw what I suspect has come to be a pattern of supplier abuse by GM, something that started back in 1992 with Lopez, who many critics said “poisoned” supply chain relationships.

According to the WSJ article, “CCM had been negotiating with General Motors to address its money-losing contract issue, which it says resulted from an expansion of its facilities to be closer to GM manufacturing operations.” In April, GM and CCM “reached a temporary agreement . . . under which GM propped up CCM as the auto giant analyzed whether it could or should pay more under the contract.”

Which is worse: Changing a contract price to keep a critical parts supplier in business by allowing them to make a decent profit or driving them out of business? I understand that a contract is a contract, and that in reality both CCM and GM are to blame in this scenario.

I’ve written many articles concerning molders who keep on molding and shipping parts when they haven’t been paid for the parts they shipped six months ago. That just doesn’t make good business sense in any way, shape or form! I’ve challenged them to shut off the presses before the hole gets any deeper! I’ve warned many custom molders and moldmakers against putting all their eggs in one basket, because then they are no longer “custom” molders or moldmakers—they are “captive” molders or moldmakers! When you’re in that position and the customer says “Jump,” your only response is, “How high?”

In the 1980s when I was doing marketing and sales for a custom molder/moldmaker, Hewlett-Packard was one of my customers. While I don’t know if it is still HP policy today, back then it never wanted to be more than 20% of a supplier’s business. Not only was it dangerous for HP to have all its eggs in one basket, HP knew that it was dangerous for the supplier should HP’s business slow down or if a program were cancelled. HP never wanted to be responsible for putting a supplier on the ropes.

The WSJ article noted that on July 6, GM “moved to exercise its contractual option to purchase equipment, machinery, and inventory from CCM,” and is “asking the bankruptcy court for special permission to allow it to proceed with its purchase.”

This isn’t the first company to fall under the hammer of GM’s purchasing practices, nor will it be the last. The rumors of GM having become a kinder, gentler company appear to have been greatly exaggerated.