It’s All About Management

Another performance measurement of the auto industry came out, with the usual results:  Toyota way out ahead of the pack, followed in order by Honda, Nissan, Chrysler, Ford and, bringing up the rear – GM.  With every other measure – cost, hours per car, quality, lead times – the old U.S. car manufacturers have an excuse, such as legacy costs or the lack of a ‘level playing field’ with the Asians; or they point to the factory as the source of the problem and the location of their solution.  But the problem is never management.  Oh no, management is fine – it is everyone and everywhere else that is screwing things up.  This measurement, however, is purely a management metric, and it is remarkably consistent with the rest of them.

The metric is a supplier relationship survey that covered 260 automotive suppliers.  On a scale of zero (Poor) to 500 (Very Good), Toyota scored 407, Honda came in at 368, Nissan rated a 300, Chrysler received a 218, Ford scored 174, and GM a pathetic 131.  It is not due to legacy costs or the UAW’s fault that GM and Ford were last, and that their suppliers don’t like doing business with them. Bob Lutz and Mark Shields designing exciting new products won’t fix these numbers.  Laying off tens of thousands of workers will not help.

No reasonable person can possibly believe in this many coincidences.  The rankings are about the same as the cost, quality and delivery rankings among the same companies, and it is a ranking of management, pure and simple.  It is unlikely but maybe someone in Detroit will wake up and think, "Gee, maybe the cost and quality results have something to do with management too."

The idea of a ‘partnership’ with suppliers continues to be a mystery to Ford and GM, as it is to every manufacturer driven by the Sloan system.  The U.S. auto makers have long sent engineers and accountants into supplier plant looking for inefficiencies, then demanding that virtually all of the cost cutting schemes be immediately translated into lower prices.  They were the first to gleefully embrace the incredibly bad idea of online, reverse auctions where they cut pit suppliers all over the world in bidding wars with each other for each purchase order.  Their current modus operandi is to continually wave the ‘China Price’ in front of their supply base, holding the threat of taking all of the business to China at any moment, and often enough carrying out that threat.

While the lead dogs are clearly the problem in the automotive supply chain, it is frequently the companies further upstream in other supply chains.  In a previous life in purchasing management, I cannot tell you how often I sat across the table from a potential supplier who  presumed to tell me his company’s terms – 30 day lead times, 30 day payment terms, Return Authorizations required for defective parts, and on and on.  And I cannot tell you how hard many of them found it to grasp the issue when I explained to them that it was not up to them to set the terms.  For that matter, it was not up to me either.  The terms were set by whoever was out at the point of the spear in the supply chain. 

I would try to explain to them that I am not really buying anything from them, I was simply offering them an opportunity to embed their product in mine and we would sell the whole thing to Walmart and ultimately to the only customer who counts – the one plunking down cash at a Walmart check out counter.  The terms of the deal were set by Walmart, who spoke for the end customer.  Those terms were five day lead times, 60 days payment terms that usually turned out to be closer to 90 and product returns for any reason and often for no reason at all.  They weren’t my rules, they were the rules of the supply chain set by my customer. 

For me to have bought under the potential supplier’s terms would have meant that my company would have been carrying all of the inventory and financing the whole supply chain, along with taking all of the risk of quality.  That simply was not going to happen – and if the supplier did not like the terms of our supply chain, he was certainly welcome to look for another supply chain that played by rules more to his liking.  On the other hand, if the supplier was willing to accept the rules of our supply chain, I would open my books and he could open his and I would pay him a price that provided him with a margin that was about the same as the margin I got from Walmart.  Then we would work together to drive down the costs and improve the margins, always sharing proportionate to each of our investment and risk.

Very few were willing to do business on those terms.  The only supplier measurement that counts at Ford and GM, or in any Sloan company is Purchase Price Variance – a supplier’s value is measured by how many nickels and dimes a buyer can squeeze out of him.  The only customer measurement that counts in a Sloan company is Margin, or Return On Sales – a customer’s value is measured by how many nickels and dimes a salesperson can squeeze out of him.

Chalk the Ford and GM supplier relationship measurement to another casualty of simple minded accounting systems.  Traditional manufacturing management is driven by accounting systems that track direct labor to four decimal places, but provide no visibility into the overhead expenses that often go out the window at a rate five or six times faster than direct labor.  With no insight into total cost, management wreaks havoc by focusing exclusively on the one number they do have – direct labor.  The same is true with purchasing.  Accounting has no idea what the cost of inventory, quality, handling and logistics are, but they can measure purchase price to the fraction of a penny.

The idea that either manufacturing or supply chain performance can be measured and managed by one simple number is ridiculous, but that does not prevent Sloan managers from doing so.  It is no wonder that Ford and GM – and most other big manufacturers – cannot forge a partnership with either their employees or their suppliers.  Only a fool thinks a partner can be summed up in one narrow number.  I know I am not interested in forming a serious partnership – either personal or professional – with anyone who is so intellectually limited as to think that my worth or that of my business can be summed up in one number, and wants our relationship to be one of continual haggling over that single number.