How to cope without a crystal ball

General Motor’s head of logistics Susanna Webber talks to Christopher Ludwig about improving supplier relations and how a total enterprise cost approach could help the company understand how to react to future risk and changes in the global supply chain

Susanna Webber took over as General Motor’s executive director for global logistics at the end of May 2008, not long before the company fell into the most tumultuous era in its history. Already deep into a decade-long effort to reduce production capacity and fixed costs in North America, and following several years of double-digit billion dollar losses, the subsequent financial crisis led to 18 months of sharp sales declines, a massive restructuring that put about 30% of its remaining US manufacturing capacity on the chop, and of course a US government bailout and bankruptcy.

But what a difference a year (and chapter 11 proceedings) can make, with both sales and profit outlooks dramatically improved. GM’s first quarter $865m gain was its first quarterly profit since 2007. Despite eliminating Hummer, Saturn and Pontiac, and selling Saab, vehicle deliveries are up 15% in the US compared to the “Old GM” at this point last year, and 45% across its International Operations division, which includes Asia Pacific, Russia, Africa and South America. Despite shedding brands and capacity, GM has maintained its 11.2% global market share.

Production during the quarter was especially high, up 57% globally (including joint ventures), and 80% in North America. That is because GM was slashing inventory in the first quarter of 2009, while this year it was building up stock for the spring selling season.

More important than size, the company is largely debt free, and more competitive in the US following new agreements with the UAW that introduce tiered wages, bringing labour costs more in line with transplant competitors. North American capacity use, calculated on a two-shift basis, is now around 85%, compared to 38% in the first quarter of 2009.

If most of Webber’s initial time in the job was spent managing contraction in the supply chain, today she is facing more volume and growing distances. While the latter challenge is certainly preferred to the former, those familiar with supply chain management know that bringing production back up can be even more difficult than cutting it down. But if both cost savings and recent improvements in supplier relations are to be sustained–particularly with cost pressure from rising oil and commodity prices, as well potential capacity shortages in areas like container shipping or car haulaway–the “New GM” will need the tools to prove that it can really manage its cost structure more wisely than in the past. Webber is working on several initiatives to ensure just that.

Looking back and learning from the pain

During the bankruptcy, GM’s logistics department went through some difficult internal changes. Three rounds of departmental cuts and reorganisations brought not only redundancies, but the consolidation of several functions under the control of the logistics team, including containerisation, warehousing, sequencing and intercontinental movements.

The external impact for providers and suppliers was huge. Prior to the crisis two years ago, GM’s annual global budget for all inbound and outbound-related logistics activities was more than $7 billion. For the 2010 budget, Webber reveals, the figure has been reduced to more than $5 billion (the FT estimates that GM’s total purchasing spend is around $74 billion). The $2 billion or more taken out of logistics purchasing includes a 50% reduction for the United States, although logistics spending is likely to surpass earlier budget estimates given the recent increases in the North American market.

But the logistics response following the bankruptcy hasn’t only been about deep cuts. According to Webber, the new GM has learned important lessons in both cross-departmental communication as well as external supplier relations. Webber speaks passionately about the company’s need for transparency. “What we experienced through the bankruptcy was a long, eye-opening lesson in terms of how we worked and interfaced both as a company and with our suppliers and providers,” says Webber. “There was a big awakening that we have to work together.”

GM has made efforts to change the way that it communicates with its logistics providers and suppliers on a management and relationship level. That is not to say the company isn’t interested in better IT links, which Webber concedes need improvement for daily operations. But she believes that, for now, improving dialogue with service providers can make the most gains.

The recession’s silver lining

Such recognition marks a change for a company that has had a poor reputation in recent years with suppliers. Planning Perspectives, a Michigan-based consultancy that publishes a highly watched supplier relations index, has consistently ranked GM near the bottom among the top six carmakers in the US for much of the past decade. However, the most recent survey saw improvements at both Ford and GM (Ford moved to third place, while GM, still 5th, improved 25% even as some of the Japanese carmakers deteriorated). John Henke, the consultancy’s chief executive, has called these improvements by US carmakers “the silver lining to the recession”.

For logistics specifically, GM has set up a feedback loop for providers on operational issues, as well as contractual and administrative details such as the procurement process. For example, GM is currently taking suggestions from providers on how it runs RFQs (request for quote), including how much time it should allow providers to quote a piece of business, how much information is given about potential volume, as well as specific project timelines. Based on feedback, the company is even re-evaluating what should be communicated to providers that do not win business following an RFQ.

Webber says that she is particularly mindful about not wasting a provider’s time with RFQs that test market prices, rather than offer new business. “We cannot work our service providers just to work them, because it will hurt us in the long run by taking away resources from a daily business to which they have such a strong tie,” says Webber. “And the last thing I want to do is to put a false expectation into the market.”

This new mindset has been led by Webber, who also played a leading role in supplier communication during the bankruptcy proceeding, and purchasing chief Bob Socia, who took over last year as vice president of Global Purchasing and Supply Chain (GPSC) following the departure of the respected but famously combative Bo Andersson. The change has been marked for logistics providers, who are well represented on Socia’s ten-member supplier council and now have plenty of opportunity for feedback and shared ideas, according to Webber.

“The fact that we are asking ourselves and our providers what we can do to improve and then act on it is providing the opportunity to really do better,” Webber says.

Building a better crystal ball for risk

While GM’s renewed appreciation for external relations is important, equally significant, if not more so, is a current initiative intended to improve how GM calculates project and material sourcing costs. Total enterprise cost will eventually go farther than so-called ‘total landed cost’ approaches, according to Webber. Although no crystal ball, included in such a sourcing model would be a greater emphasis on allocating potential risks, including those arising from capacity shortages, premium freight, quality issues, warranty costs and hedged bets for the unkown (such as, to take examples from the past few months alone, Icelandic volcanoes, oil spills or military tension in places like Thailand or Korea).

For total enterprise cost, the data and input from logistics plays an earlier and deeper role in the GM product lifecycle. Webber talks about extensive evaluations of the supply chain at the earliest stages of product development to establish the release and sourcing strategies. She believes that such a model would mean more influence from the supply chain side of the organisation when it comes to making decisions. While she acknowledges that some aspects of logistics will always react to decisions made for sales or manufacturing reasons, GM is now taking stock of more voices within the company.

“For logistics and supply chain, we are now a more essential part of making important decisions,” Webber says. “We have become an equal person sitting at the table. That is a result of GM looking at all the elements of cost.”

An appreciation for dialogue

Webber’s 12-year career with the carmaker has been largely on the purchasing side, including stints buying raw material and steel, fuel tanks, injection mould and plastics as well as trim and interior parts. She also worked briefly in the finance department to support purchasing.

Despite a career spent in a highly competitive purchasing environment, where cost reductions have been the rule of the day, Webber has nevertheless brought an agile and inclusive approach to supplier communication. And like Socia, her style bears little resemblance to the aggression and bravado for which some GM executives had become (in)famous in recent years. Webber is at once confident and straightforward–a presence more commanding than her 5ft 2 inch height would suggest–and yet has a remarkably calm and patient demeanour (even for journalists and photographers that take up a few more hours of her time than scheduled).

While her purchasing background provides a strong link to the logistics role, the job has nevertheless been more complex than Webber previously thought. “From an outside perspective, you might have a naïve view that the job is simply the purchasing of logistics services, but it is a great deal more,” she says. “My responsibility runs the gamut from day-to-day operations to supply chain engineering and more, particularly as the organisation has evolved and absorbed other functions.”

The expansion of the department’s responsibilities has been among the drivers for total enterprise cost. “I would say that putting together logistics with supply chain engineering and containers, for example, is strongly linked to the true analysis of cost and helps to understand the needed input of the direct material cost versus what was traditional landed cost,” says Webber.

Webber’s time in the job has also been somewhat influenced by the role that she played in supplier relations during the actual bankruptcy process. During that time, Webber was the lead representative for supplier communication for GPSC. This mammoth task included the analysis of every supplier contract from the bankrupt GM and deciding which were going to be moved to the new entity, all the while ensuring that production and deliveries were not interrupted. A constant communication would be necessary to ensure that suppliers understood exactly how the bankruptcy was going to affect them.

The process essentially meant rerunning the entire contract assumption and assignment for more than 700,000 contracts across GM’s various organisations. Part of that included executing a communications plan to handle directly all of the suppliers’ and providers’ legal issues and questions, not to mention payment terms. Webber and her team set up a call centre that was open 24/7 for the first three weeks.

Its dealer network and creditors aside, GM has been praised for helping to make the bankruptcy transition relatively smooth from the point of view of maintaining production right down to paying invoices quickly. For Webber and the team that she led, it was a baptism of fire in supply chain communication. The work had to be done not only for purchasing but also across all of the relevant departments for each contract, and also required a communication plan for suppliers and operations outside of the US.

“It was tough, but the feedback that I have gotten from suppliers was that we were transparent and open,” Webber says. “It was definitely a learning experience for me as well for the company.”

The experience has left her with a greater appreciation for the relationships the company must maintain with service providers. “No matter what the situation you need to be transparent and work with service providers or material suppliers. That focus is what has continued to move forward,” she says.

Webber points to the volcanic eruptions in Iceland and subsequent flight cancellations in Europe as an example of how balancing such relationships are essential. “I think it would surprise folks that we had multiple service providers all working together during that period and communicating with GM in a single point about what we needed,” she says. “We were working around the clock and balancing our global team to charter airplanes and utilise the complete chain of movement. In times like that you really appreciate having a global logistics team.”

The education of a global supply chain

While the bankruptcy threw into focus the need for better communication and cost models, continuing global shifts in the supply chain have highlighted the need for total enterprise cost. GM continues to build and source its cars across global platforms, which means a reduction in parts variation and more shared sourcing across the globe. Such a shift has been particularly aggressive in North America recently.

Global platforms have created a more complex production footprint and in many cases have led to sourcing the parts from global locations depending on where the primary tooling is based. If the tool set is in China, then many of the parts built there are being shipped globally to where the vehicles are assembled in Europe or the US, for example. But there may also be multiple tool sets in different locations depending on the product. “You might have one part that is domestic but another from a different continent and so we have to learn to manage that,” Webber says. “In some cases it means different levels of inventory, or balancing the lead time. We are still educating ourselves in how to manage the pipeline.”

One of the realities of such a supply chain, however, has been “a fair amount of premium freight,” Webber admits. But Webber believes that high logistics cost and premium freight are not necessarily a given fact of a global supply chain, but they are often driven by factors such as the production capacity, as well as the modes of transport.

Currently, for example, GM is seeing a considerable challenge in the container shipping market. As shipping lines and operators removed capacity during the downturn, slowed down vessels and added more ports of calls, the supply chain’s ability to respond to recent increases in markets such as the US has been hampered. In some cases, it has meant a switch to more expensive airfreight. “It is a great challenge, and a situation that I anticipate will not leave us overnight, but which we will face for some time,” she says.

Learning to calculate the “C price”

At the Automotive Logistics Europe conference in March, Opel/Vauxhall revealed that airfreight volume had increased from 15 tonnes a month to 530 tonnes between the beginning of 2008 and the end of 2009. The majority of those shipments were from the US and China. The costs of moving even 2% of material by air can often be higher than the transport for the rest of the material combined. That is wasteful at a time when GM has made such progress in reducing its fixed costs.

“It is going to be a reality that we have to manage and minimise these extraordinary costs,” says Webber. In the long term, this management is where the total enterprise cost will become so important for GM. The project goes beyond looking at potential logistics cost or supply chain inefficiency, but seeks to evaluate cost across every department.

Webber outlines the major cost brackets, including capital outlays, such as engineering, design and development, vendor and plant tooling, material cost, logistics customs and third party and plant labour. Traditionally, GM has controlled the costs of such factors as they fell within specific functions, whether manufacturing, purchasing, engineering or logistics. However the new emphasis is on making sure that decisions are made not for the benefit of each department but for the entire company. An obvious example would be sourcing parts in countries with low labour costs, but failing to account for all of the unexpected logistics or quality costs that may offset the initial savings.

Avoiding such a scenario, of course, would have been the objective in the past as well. However the company appears to have been humbled by its recent troubles and therefore more willing to accept what went wrong. The approach that will be emphasised for total enterprise cost is driven by a more vigorous analysis of the potential and historical costs that could impact a project decision.

In simple terms, Webber says that GM’s traditional total landed cost equation would have been A + B, where the A price represented material cost, and the B price was all freight and duty costs. But with all the added complexity in the supply chain, GM is developing a more reliable C price to add to that equation, including a risk assessment. “A huge element of that C price is the cost of premium freight,” says Webber. “It is not to be perceived as a penalty to a supplier or provider, but really as a reflection that GM has taken all of the potential factors into consideration.”

The way that GM is working to build that C price equation is again a reflection of the benefits of the new GM, according to Webber. She believes that the company is no longer working against itself–each department from purchasing to manufacturing is willing to be more transparent and help do what benefits everyone. The carmaker has also been asking other suppliers about their experiences in global sourcing to help better understand the costs.

Building a data repository

The next and most important step for understanding that C price, Webber says, is for GM to build an appropriate repository of data, which is being developed as the project moves along. Webber admits that GM faces an obstacle in collecting data in a standardised format that allows for reliable calculation, because the different elements of cost are complex and varied, whether premium freight, obsolescence, cost of quality and rework, weather disturbances, etc.

“But those elements of cost are also factors of different drivers, such as schedule variation, lead time, inventory or the amount of engineering changes that have to be made,” she says. “It is a complex calculation that comes down to the importance and reliability of the data.”

Total enterprise cost is still in the proof of concept and pilot phase, according to Webber, so it is yet to have an impact on the supply chain. While she anticipates a full global rollout in the sourcing process, she does not necessarily think that the approach will lead suddenly to a less global or complex supply chain so much as it will lead to more alternatives.

“Traditionally we might have gone with one select release strategy, but this is going to describe a couple of alternatives,” she says. “It could create a combination where rather than have a complete module coming from an outside location as we normally would, we might consider buying the product on the outside but then assemble or sub-assemble it locally, whether in house, by a third party provider or a tier one, etc.”
 

How to manage a loosely connected empire

As GM continues to better learn the balance of moving a global supply chain, it will no doubt also face challenges in managing its global organisations and partners. In some of the company’s most important future growth regions, such as China and India, various joint venture companies control GM’s operations. Most notable among these is Shanghai GM, GM’s partnership with China’s SAIC, which recently expanded from China into India and in which SAIC also took a controlling stake at the end of 2009 (it now owns 51% to GM’s 49%). Webber says that the joint ventures each handles logistics as individual organisations, and that her team does not get involved directly in sourcing and service decisions, except for on global touch points, such as container movements.

She notes, however, that GM’s global logistics teams, including GM International Operations, are involved in supporting those joint ventures, particularly in India, where the operations are less established than in China. She does not anticipate any significant changes in the management setups and influence following the recent sale of GM’s controlling stake in SGM nor from SGM’s expansion into India.

But while the JVs are largely self reliant, GM has been adjusting the way it manages its global freight forwarding. While in the past the company typically relied on one provider to act as a global material manager, it has now moved in the direction of establishing a network of origin-based providers that will manage the consolidation of material and freight forwarding. The move reflects something of a shift away from the idea of a global provider as “one-stop shop”, towards a more regional model. It is a view that has also been reflected in the last year by 3PLs that have pulled out of some regions to focus on core markets, such as Ryder System and Gefco.

“Sometimes I wonder if we really have global logistics providers,” says Webber. “Our so-called global providers function with us differently at each level of the organisation and region, rather than serving us with a global interface. If they could do that, I would see that as a huge advantage, especially with our growth in the intercontinental space.”

But despite the lack of complete control over all global operations, as well as the fragmented service still found among logistics providers, reporting lines or organisational structures do not faze Webber. It is more important, she says, that GM communicates well with its providers and within its own departments. “We really must be hand-to-hand,” she says.

And that communication will be even more important now that GM has shifted again to managing growth, which Webber anticipates in intercontinental material movements as well as increased exports of vehicles from North America. Even if the New GM does not surpass the old one at its peak volume or output anytime soon, Webber is hoping that it will in terms of maintaining a transparent and healthy supply chain.