Supply and Procurement Strategies for General Motors - Research Paper Example

Supply and Procurement Strategies for General Motors 1. Introduction The survival of organizations in the global market is usually depended on their ability to locate and establish strategies that effectively support organizational goals. Moreover, strategies, which have been used successfully in the past, may be proved inefficient in covering certain organizational needs, under the terms that the success of organizational plans cannot last for a long period of time due to the continuous turbulences in the global market. Supply and Procurement strategies have been found to be valuable for the increase of a firm’s competitiveness; however, it seems that the challenges related to the particular strategies can be many. Two key aspects of the supply and procurement strategies, the Supplier Quality Management and the Strategic Cost Management are reviewed in this paper. The case of General Motors is used as an example in order to understand the response of organizations worldwide to the challenges of the Supply and Procurement strategies. Moreover, the choices of the organization in regard to Supplier Quality Management and the Strategic Cost Management are presented and critically evaluated. It seems that the firm has highly focused on the continuous development of its Supply and Procurement strategy, a fact that has highly benefited its performance. It has been also proved that the growth of the organization in the long term is closely related to its decisions in regard to Supplier Quality Management and Strategic Cost Management. The comparison between the choices of GM, as of these sectors, and Ford, leads to the following assumption: GM, like Ford, strongly emphasizes on Supply and Procurement strategies. Still, GM seems to be more appropriately prepared than Ford in order to support its strategic choices in the long term. 2. Supply and Procurement strategies in General Motors General Motors, as also most other firms in the automotive industry, has emphasized on supply and procurement strategies in order to improve its relationship with its customers and decrease its costs. Through the decades, the firm has developed a series of initiatives in order to increase its performance as a major competitor in the global automotive industry. The introduction by the firm of the portal ‘Covisint’ (Wiggen 2009), which was also launched by other firms operating in the same industry, and the development of the website ‘GM BuyPower’ (Wood 2002) are examples of the firm’s efforts in regard to its supply and procurement strategies. The firm has also promoted important schemes in regard to the Supplier Quality Management and the Strategic Cost Management, as parts of its supply chain management strategy. These schemes are analyzed below, since they have significantly contributed in the standardization of the firm’s position in the global market. The effectiveness of the firm’s policies in regard to its supply and procurement strategies is proved if referring to the similar practices of one of its major competitors, Ford. At the same time, the reference to the organization’s challenges in regard to the supply chain management has been considered as necessary in order to understand the ability of the organization to face critical organizational problems; the practices that the firm used for overcoming these challenges prove that the firm is well prepared, more than its major competitor, Ford, to face market turbulences. 2.1 Supplier Quality Management in GM General Motors, as other major firms in the automotive industry, has adopted the QS-9000, a quality system, through which the firm’s ‘NAO Targets for Excellence’ (Campanella 1999, p.29) was aligned with the quality frameworks of other firms in the particular industry. According to Rufe (2005) QS-9000 incorporates two sets of rules: ‘Section I incorporates the elements of ISO 9001 while Section II focuses on the quality frameworks of three specific firms in the automotive industry: Ford, GM and Daimler – Chrysler’ (Rufe 2005, p.121). In the context of the QS-9000 if a firm is interested in cooperating with a firm in the automotive industry, then it needs to meet the requirements, which are 20, of Section I of the above quality system (Rufe 2005). In addition, if the firm is interested in cooperating specifically with one of the above three firms, then it has to meet the quality standards applied for the specific organization (Rufe 2005). The adoption of QS-9000 by GM took place in 1988 (Charantimath 2011); it was then that the ‘Supplier Quality Requirements Task Force’ (Charantimath 2011, p.543) was established. The three firms participated in the particular initiative developed a common framework of rules and supplier requirements (Charantimath 2011). Any firm that would like to cooperate with the above organizations had to meet these requirements. 2.2 Strategic Cost Management in GM Traditionally, cost management is used in organizations in order to support the decision making process, i.e. in order to reduce risks related to wrong decisions (Shim et al. 2012). At the same time, cost management helps managers to develop effective decisions (Shim et al. 2012). Strategic cost management plays an additional role: it helps to develop effective strategies by using appropriate cost information (Roozen & Steens 2006). When managing supply chain, three different categories of costs are important: ‘direct, activity based and transactions cost’ (Seuring & Goldbach 2002, p.5). GM has managed in costs in such way so it can keep its competitiveness at high levels, at least this was the priority that the firm set when managing its operations in China; in this way, in regard to the Chinese market, the organization has developed an economy car, not just for increasing its chances for profits but mostly to compete its rivals that have launched such plans (Hitt, Ireland & Hoskisson 2010). In regard to the global market, the firm has followed a similar practice, focusing on the reduction of costs by ‘standardizing the components across its vehicle platforms’ (Atrill &McLaney 2007, p.311); in this way, the firm reduced the number of its suppliers increasing the effectiveness of its supply chain management (Atrill & McLaney 2007). Through the years, the firm had to face a significant challenge, in regard to its cost management: if evaluated in the context of the global market, its production costs are higher than those of the competitors (Thompson & Martin 2010). For example, in 2005 the firm lost $2,496 per vehicle in regard to the North American market while its major competitor, Toyota, achieved a profit of $1,200 per vehicle in the same market (Hill & Jones, 2007, p.82). The company has tried to reduce its losses in regard to each of its vehicles, not just in the North American market but also worldwide, by eliminating discounts (Smith 2011); the above practice was first employed by the firm in 2007. At the same time, the firm introduced changes in its financial reporting methods, aiming to improve its performance in ‘capital accumulation as aided by the state’ (Chapman, Hopwood & Shields 2007, p.214). 2.3 Supply and Procurement strategies – GM v Ford The supply and procurement strategies chosen by organizations are usually aligned with the organizational goals, the resources available but also the conditions in the internal and external environment, meaning especially the willingness of employees and suppliers to support the relevant schemes. It seems though that firms operating in the same industry may choose to introduce similar supply and procurement strategies, especially if these strategies have been proved highly successful for the firms operating in the particular industry. For example, in 1999 GM introduced ‘the portal ‘Covisint’’ (Wiggen 2009, p.32) trying to support the performance of its industry; indeed, the same portal was launched by ‘Ford and Daimler-Chrysler’ (Wiggen 2009, p.32). The above portal can be characterized as a mode of e-procurement, allowing the development of ‘a direct marketplace in automotive industry’ (Wiggen 2009, p.33). In the above case, the efforts of GM to improve its performance, as a member of the automotive industry, were aligned with those of Ford. The two firms followed a similar strategy in order to support their industry. At the same time, when the initiatives developed by GM and Ford as of their supply and procurement strategies are compared, it is made clear that GM ranks at a higher level, even if similarities seem to exist. The above assumption is verified by the following fact: GM has highly emphasized on strategic alliances for improving its supply chain. According to Kang (2001) GM has managed to increase its competitiveness by developing a dynamic supply chain network; the firm acquired many of the components used in the assembly of its product by Japanese firms (Kang 2001, p.86). Also, it acquired a share of these firms, ensuring the continuation of its cooperation with the particular organizations (Kang 2001). Ford also used strategic alliances as a strategy ‘to leverage its resources’ (Yoshino 1996, p.33); for example, the cooperation arranged between Ford, Nissan and Mazda (Yoshino 1996). In other words, Ford also, like GM invested on the cooperation with Japanese automakers in order to reduce the time of product delivery and to control costs (Yoshino 1996). Again, the superiority of GM in choosing supply and procurement strategies can be verified by referring to its financial indicators, as compared to those of Ford for the same period. The financial results of the organization reveal, even not directly, the effectiveness of its strategies in regard to supply chain and procurement strategies, especially as compared to those of the firm’s competitors. According to Jimenez-Gonzalez & Constable (2011) a key element of GM’s supply and procurement strategy is the effort of the organization to prevent the pollution of the environment, as potentially caused by its activities. The ‘green procurement strategies’ (Jimenez-Gonzalez & Constable, p.504) introduced in GM’s branch in Canada indicate the willingness of the organization to take initiatives for limiting the effects of its activities on the environment. At the same time, this practice increases the firm’s competitiveness in its industry. If compared to Ford, which has not developed similar practices, at least not at such level, GM is proved to have a competitive advantage. The firm’s financial results, can be used for identifying the effectiveness of supply and procurement strategies in GM, as compared to those of Ford. Even if sales in Ford seem to be higher compared to GM for the same period, years 2009 to 2011 (Figures 1-4, Appendix), still the profit margin of Ford seems to be decreased in all markets worldwide (Figures 5-7, Appendix), reaching negative points in the case of Asia Pacific. This fact indicates the inability of Ford to control costs and to compete its rivals. Instead, GM shows a trend for continuous growth of its volume of production (Figures 2& 3, Appendix). 2.4 Procurement/supply challenges that the company has faced in the past – methods used for overcoming these challenges One of the most critical challenges that the firm had to face in the past in regard to its supply/ procurement strategy has been the time required for the delivery of its products to the customers. In the past, the firm used to focus on the efficiency of its supply chain management (Wood 2002, p.419). In this way, costs were kept at low level, but the customer satisfaction was under risk. For this reason, the firm changed the scope of its supply chain management, adopting ‘an efficient customer response (ECR) tactic’ (Wood 2002, p.418). In the context of this approach, the firm introduced ‘the website GM BuyPower’ (Wood 2002, p.418). This website allowed the transfer of customers’ information directly to the firm’s suppliers, a fact that reduced significantly the time required for the delivery of ordered items (Wood 2002). The above approach was proved to have a major disadvantage: the cost involved was higher, compared to the firm’s traditional supply chain management system. Still, due to the structure of the system the inventory required for the completion of orders could be reduced; at the same time, ‘the potentials for profit, per vehicle, were increased’ (Wood 2002, p.419). The introduction of the above practice resulted in the transformation of the firm’s supply management system; in the context of the new system the firm focuses ‘on responsiveness rather than on efficiency’ (Wood 2002, p.419). The above supply chain management strategy has been already established in Dell; the firm’s website allows the exchange of information directly between the customers and suppliers, leading to the significant reduction of time in the completion of customers’ orders, a benefit also achieved in the case of GM. As noted above, GM, along with other organizations in the automotive industry, has adopted the QS-9000. Before adopting this system, the organization has secured the quality of its products through the following quality standards framework: the Targets of Excellence (Kelada 1996). The particular system included six elements, among which were quality and costs (Kelada 1996). The specific system was proved as not effective, not being able to cover all the organization’s activities. The adoption of QS-9000 was considered as the most effective plan for improving the firm’s performance in regard to quality control (Besterfield & Besterfield 2011). 3. What must the company consider when moving ahead in the 21st century business environment In order to identify the potential issues that the company should consider when moving ahead in the modern market it would be necessary to refer to the common market trends in regard to supply and procurement strategy, focusing on the Supplier Quality Management and the Strategic Cost Management. Managers in GM should take these trends into consideration when updating their organization’s current strategies as of the above sectors. Thus, the views of researchers on the issues under examination addresses issues that should be used for transforming the firm’s current supply and procurement strategy but also its Supplier Quality Management and the Strategic Cost Management strategies. According to Basu (2011) the procurement strategies of modern organizations are not standardized, meaning that each organization can choose the procurement strategy that is most aligned with the organizational goals and resources. Despite the fact that the key forms of procurement strategies are four, including the In-House and the Contract-Partnership (Basu 2011, p.53), firms can develop hybrid forms of such strategies, at the level that they are able to support them effectively. On the other hand, Gurnani, Mehrotra & Ray (2011) note that the key challenges for modern organizations when having to manage their procurement strategies are related to the following issues: on which criteria each organization should decide to terminate its cooperation with certain of each suppliers and how the organization would estimate the amount of products ordered to suppliers, so that no products are left unsold (Gurnani, Mehrotra & Ray 2011, p.76). In regard to the scope of procurement strategies, Gopalakrishnan (2004) notes that the primary target of these strategies should be the increase of customer satisfaction, meaning that the procurement strategies of organizations should not be based on the organization’s characteristics and needs but on the needs and the preferences of customers (Gopalakrishnan 2004, p.243). In GM, the above rule should be taken into consideration when planning and establishing the firm’s supply and procurement strategy. On the other hand, Gattorna (2009) emphasizes on a critical organizational challenge, as related to the supply and procurement strategy: the overestimation of the customers’ responses to the firm’s plans. In fact, it seems that often organizations fail in identifying and evaluating properly the customers’ needs and preferences. This results to the introduction of supply and procurement strategies, which are not feasible, or the cost of which is significantly high compared to the expected benefits. The particular issue should be also discussed in relation to GM. The particular organization seems to use standardized criteria for choosing its supply and procurement strategies; in this way, the risks involved are reduced. Still, the risks in developing a supply and procurement strategy cannot be ignored; the continuous increase of competitiveness in the global market and the limitation of the buying power of consumers has led to the transformation of organization’s structure and goals (Gattorna 2009). The supply and procurement strategies of firm can support organizational growth, but only if they are appropriately developed. Apart from the above, the firm should try to establish appropriate schemes in order to check, periodically, the level at which supplier objectives are met. This issue is highlighted in the study of Seaver (2003). According to the Seaver, the plans developed by firms in regard to supplier improvement are often inappropriate (Seaver 2003). It is explained that when a customer complaint related to the quality of a product appears, the response of supplier to the particular complaint is not appropriate (Seaver 2003). In such cases, suppliers are likely to claim that ‘their suppliers are based on same tools and standards’ (Seaver 2003, p.83). The above phenomenon is related to the firm’s perception that setting a tool for ensuring supplier improvement is enough for achieving the particular target (Seaver 2003). Tools for promoting supplier improvement could be valuable, only if they would be combined ‘with attitude change’ (Seaver 2003, p.83). Most important, the firm should ensure that the quality and the costs of its products would be periodically reviewed. The fact that the firm has already developed effective strategies in regard to quality control and cost control, as explained in sections 2.1 and 2.2 above, cannot lead to the assumption that the firm’s performance in these sectors has been standardized. Hakes (1991) focuses on the quality systems used in the automotive industry. He notes that, in the specific industry, the obligations of suppliers in terms of quality control are increased (Hakes 1991). In fact, suppliers in the automotive industry need ‘to use the latest versions of quality assurance systems’ (Hakes 1991, p.135); common quality techniques used in the particular industry are the following ones: ‘failure mode and effect analysis, the Taguchi quality engineering and so on’ (Hakes 1991, p.135). 4. Conclusion The performance of organizational strategies is usually affected by a series of factors. Even if they are carefully planned, organizational strategies may fail to achieve their goals. At the same time, the support provided to the strategic choices of managers is not standardized. Moreover, strategies that are quite complex, such as the Supplier Quality Management and the Strategic Cost Management strategies, may require a long term in order to produce their benefits. In the case of GM this fact is made clear. For many years, the particular organization has used Supplier Quality Management and the Strategic Cost Management in order to increase its competitiveness. At a particular level, this target has been achieved, if taking into consideration the firm’s financial results for a long period of time (Figures 1-4, Appendix). Moreover, the firm has supported all its industry’s initiatives in regard to the above sectors, as for example, the introduction of the portal ‘Covisint’ (Wiggen 2009, in section 2.3). Still, the long-term performance of the firm’s plans, as of the above sectors, has not been verified. The financial results of the organization, as presented above, can be considered as indication of the firm’s perspectives in the future; however, these figures cannot guarantee that the firm would be able to keep its market position in the long term. The recommendations included in section 3 above, would help the organization to standardize its performance in supply and procurement strategies and develop an effective Supplier Quality Management and Strategic Cost Management strategy, a fact that would secure the long term growth of the organization. References Atrill, P., & McLaney, E. (2009). Management Accounting for Decision Makers. Essex: Pearson Education. Basu, R. (2011). Managing Project Supply Chains. Burlington: Gower Publishing. Besterfield, D., & Besterfield, G. (2011). Total Quality Management. New Delhi: Pearson Education India. Campanella, J. (1999). Principles of Quality Costs: Principles, Implementation and Use. Milwaukee: ASQ Quality Press. Chapman, C.,Hopwood, A., & Shields, M. (2007). Handbook of management accounting research. Oxford: Elsevier. Charantimath, P. (2011). Total Quality Management. New Delhi: Pearson Education India. Ford Motor Company (2012) Corporate website. 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Appendix Figure 1 – Performance of GM in 2009 and 2010 (Source: 2010 Annual Report, p.39) Figure 2 – Production volume in GM in 2009 and 2010 (Source: 2010 Annual Report, p.40) Figure 3 – Production volume in GM, for 2009 and 2010 (Source: 2010 Annual Report, p.66) Figure 4 – Financial results for Ford, from 2009 up to 2011 (Source 2011 Annual Report, p.37) Figure 5 - Financial results for Ford, for 2010 and 2011 (Source 2011 Annual Report, p.40) Figure 6 - Financial results for Ford, for 2010 and 2011 (Source 2011 Annual Report, p.43) Figure 7 - Financial results for Ford, for 2010 and 2011 (Source 2011 Annual Report, p.45) Read More