GM: Be the cheapest, or be gone
11-03-2003, 09:01 AM
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GM: Be the cheapest, or be gone
GM: Be the cheapest, or be gone
Suppliers dislike GM's 30-day escape clause
By Robert Sherefkin
Automotive News / November 03, 2003
GM's new purchasing contract allows GM to
Switch suppliers after 30 days notice
Avoid compensating suppliers for lost business
Source: GM and supplier documents
DETROIT -- General Motors has a new get-tough tool to pressure suppliers on price: language in all new contracts that gives suppliers 30 days to match a rival's lower price, or else lose the business.
GM began putting the language in contracts
Oct. 1, according to a bulletin posted on GM's supplier Web site.
Suppliers have no opportunity to recover their investment because GM can terminate the contract with no cost or liability, according to an opinion from the legal department of a major supplier.
"The mere existence of this clause gives GM much leverage," the memo states.
Suppliers are not convinced GM will exercise the option to change suppliers more frequently; changing suppliers is expensive and risky. But GM's ability to terminate contracts on short notice is a powerful weapon to pressure even the most determined supplier to cut prices.
"It's patently unfair," says Neil De Koker, managing director of the Original Equipment Suppliers Association, which represents more than 300 suppliers. "It's called adversarial commerce and does not promote any kind of professional relationship."
Wary suppliers
GM spokeswoman Renee Rashid-Merem says the revised contract language gives the automaker an alternative if a supplier is not competitive.
Previously, vendors would retain GM's business for a period of time even if they no longer met the automaker's standards. Says Rashid-Merem: "Now they have to be competitive every day."
But suppliers are wary. An executive at a large Detroit-area supplier fears GM's new strategy could endanger his investment in r&d and tooling. In the past, a vendor that lost a contract could negotiate with GM to recover its costs. Now, he says, GM contends that it faces no liability if it switches suppliers. "You won't get any of the investment in engineering, packaging and tooling back," the executive says.
Another supplier's legal counsel has advised company executives to fight or attempt to modify GM's 30-day contract clause.
"If you are negotiating new business with GM," the lawyer's memo states, "be aware of this change and work with your legal counsel to document objections to this provision and establish acceptable contract terms."
The new contract language "extends greater control over our business practices than we have ever seen," says the president of a third major supplier. "There is an outcry from suppliers over this."
Although GM's 30-day opt-out provision has riled suppliers, the automaker says it hopes to collaborate with suppliers on a new cost-cutting program.
The automaker wants to use its market muscle and engineering prowess to help suppliers reduce part prices.
20 percent cuts
GM has told most of its 3,700 Tier 1 suppliers worldwide to reduce parts costs in the next three years by an average of 20 percent. Instead of eroding suppliers' profit margins, GM says it will help suppliers save money on materials and design.
Rashid-Merem says GM's "strategy is to reduce material costs, and it does not translate to price-downs. … We want suppliers to look at things differently. We want them to find creative solutions or approaches or product solutions."
In the 1990s, the former Chrysler Corp. saved money with its SCORE program, which rewarded suppliers for designing cheaper parts. GM also experimented with a program similar to SCORE.
But in general, the Japanese automakers are the biggest proponents of cooperative cost cutting. The Big 3 often prefer to generate quick savings by demanding across-the-board price cuts.
Some suppliers question whether GM will commit to a strategy that requires long-term collaboration with suppliers. "They are not as rigid as the old GM," says the CEO of a fast-growing GM suppler. But he likened GM's expectations of a 20 percent cost saving as a sword dangling above his head.
Rashid-Merem declined to speculate on the fate of suppliers that fail to meet their cost targets.
GM underscored the need for cost cutting in recent meetings with suppliers. According to a GM document distributed to suppliers, the automaker wants suppliers to reduce logistics costs, move work to low-wage countries and benchmark rival automakers' components.
GM also wants to use off-the-shelf parts in more vehicles and adopt new technologies.
A glass industry supplier says GM also has offered to form a buying consortium to help suppliers obtain raw materials and natural gas at a discount. This would be a natural extension of GM's practice of buying large quantities of cheap steel for resale to suppliers.
Using GM's market power to reduce commodity prices sounds good, the glass industry executive says.
But there is a limit to the benefits of buying consortiums, the executive warned: "I can assure you that there is not a lot of opportunity to buy sand at a lower price."
Sherri Begin of Rubber & Plastics News contributed to this report
Suppliers dislike GM's 30-day escape clause
By Robert Sherefkin
Automotive News / November 03, 2003
GM's new purchasing contract allows GM to
Switch suppliers after 30 days notice
Avoid compensating suppliers for lost business
Source: GM and supplier documents
DETROIT -- General Motors has a new get-tough tool to pressure suppliers on price: language in all new contracts that gives suppliers 30 days to match a rival's lower price, or else lose the business.
GM began putting the language in contracts
Oct. 1, according to a bulletin posted on GM's supplier Web site.
Suppliers have no opportunity to recover their investment because GM can terminate the contract with no cost or liability, according to an opinion from the legal department of a major supplier.
"The mere existence of this clause gives GM much leverage," the memo states.
Suppliers are not convinced GM will exercise the option to change suppliers more frequently; changing suppliers is expensive and risky. But GM's ability to terminate contracts on short notice is a powerful weapon to pressure even the most determined supplier to cut prices.
"It's patently unfair," says Neil De Koker, managing director of the Original Equipment Suppliers Association, which represents more than 300 suppliers. "It's called adversarial commerce and does not promote any kind of professional relationship."
Wary suppliers
GM spokeswoman Renee Rashid-Merem says the revised contract language gives the automaker an alternative if a supplier is not competitive.
Previously, vendors would retain GM's business for a period of time even if they no longer met the automaker's standards. Says Rashid-Merem: "Now they have to be competitive every day."
But suppliers are wary. An executive at a large Detroit-area supplier fears GM's new strategy could endanger his investment in r&d and tooling. In the past, a vendor that lost a contract could negotiate with GM to recover its costs. Now, he says, GM contends that it faces no liability if it switches suppliers. "You won't get any of the investment in engineering, packaging and tooling back," the executive says.
Another supplier's legal counsel has advised company executives to fight or attempt to modify GM's 30-day contract clause.
"If you are negotiating new business with GM," the lawyer's memo states, "be aware of this change and work with your legal counsel to document objections to this provision and establish acceptable contract terms."
The new contract language "extends greater control over our business practices than we have ever seen," says the president of a third major supplier. "There is an outcry from suppliers over this."
Although GM's 30-day opt-out provision has riled suppliers, the automaker says it hopes to collaborate with suppliers on a new cost-cutting program.
The automaker wants to use its market muscle and engineering prowess to help suppliers reduce part prices.
20 percent cuts
GM has told most of its 3,700 Tier 1 suppliers worldwide to reduce parts costs in the next three years by an average of 20 percent. Instead of eroding suppliers' profit margins, GM says it will help suppliers save money on materials and design.
Rashid-Merem says GM's "strategy is to reduce material costs, and it does not translate to price-downs. … We want suppliers to look at things differently. We want them to find creative solutions or approaches or product solutions."
In the 1990s, the former Chrysler Corp. saved money with its SCORE program, which rewarded suppliers for designing cheaper parts. GM also experimented with a program similar to SCORE.
But in general, the Japanese automakers are the biggest proponents of cooperative cost cutting. The Big 3 often prefer to generate quick savings by demanding across-the-board price cuts.
Some suppliers question whether GM will commit to a strategy that requires long-term collaboration with suppliers. "They are not as rigid as the old GM," says the CEO of a fast-growing GM suppler. But he likened GM's expectations of a 20 percent cost saving as a sword dangling above his head.
Rashid-Merem declined to speculate on the fate of suppliers that fail to meet their cost targets.
GM underscored the need for cost cutting in recent meetings with suppliers. According to a GM document distributed to suppliers, the automaker wants suppliers to reduce logistics costs, move work to low-wage countries and benchmark rival automakers' components.
GM also wants to use off-the-shelf parts in more vehicles and adopt new technologies.
A glass industry supplier says GM also has offered to form a buying consortium to help suppliers obtain raw materials and natural gas at a discount. This would be a natural extension of GM's practice of buying large quantities of cheap steel for resale to suppliers.
Using GM's market power to reduce commodity prices sounds good, the glass industry executive says.
But there is a limit to the benefits of buying consortiums, the executive warned: "I can assure you that there is not a lot of opportunity to buy sand at a lower price."
Sherri Begin of Rubber & Plastics News contributed to this report
11-03-2003, 09:42 AM
#2
Fahrvergnügen'd
I hope Lutz knows what he's doing because "be the cheapest" sets off alarm bells to me. What I hear is "be the cheapest and if that means you have to build crap, so be it"
11-03-2003, 02:13 PM
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Originally posted by heyitsme
siriously, i thought we were trying to get away from this. same thing ghosn is doing for nissan and now they have cheap materials going in all their cars as well.
siriously, i thought we were trying to get away from this. same thing ghosn is doing for nissan and now they have cheap materials going in all their cars as well.
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