UTC and GE Realise That Suppliers Are Important – Hold the Front Page!

The Strategic Sourceror website reported on a Wall Street Journal article that appears to come to the revolutionary conclusion that supply chains and suppliers are really quite important to large manufacturing companies. Well, who would have thought it! Hold the front page and all that.

UTC has "some of the most productive factories in the world and yet all of our suppliers or all of our competition has moved to low-cost" areas, Hayes explained. "And so, we're going to have to follow them." The Wall Street Journal also noted that the manufacturing company expects to spend approximately $1.5 billion over the next few years implementing a new approach to supply chain operations.

"The weak link in our whole manufacturing process remains the supply chain," Hayes added. "As good as our factories can be, if you have a crappy supplier, it doesn't matter. You need all the parts."

“Hayes” is Gregory Hayes, the CEO of United Technologies Corp, and appears to have just caught on to the importance of the supply chain, which is a depressing reminder of how far down the priority list procurement is for many firms and top managers.

Meanwhile, GE is also pursuing an amazingly innovative course, Strategic Sourceror reports, “to cut approximately $1 billion from supply chain costs per year. According to the source, GE also announced it would be increasing the components sourced from Russia, India, China and Mexico from 20 percent to 30 percent”.

So the GE strategy is cost reduction, low-cost country procurement and Russia as a key supply source (really dodgy, we would have thought)? Good luck with that guys, you can’t be more than 10 years behind the curve there. It is a sample of one, but I have a friend who works for a firm GE acquired a few years back who says, “we have to use the GE corporate procurement deals and they’re all more expensive than what we used to buy ourselves”.

GE has also announced it is buying Metem Corporation, “a U.S.-based provider of precision cooling hole manufacturing technologies that enable turbine engines to function more efficiently, saving costs, increasing operation time and reducing emissions”.

This is a vertical integration play - GE is Metem’s largest customer, and “over the past 50 years, Metem has grown into one of the largest machining companies in the world by emphasizing innovation, advanced technologies, operational excellence, and continuous focus on strategic, long-term relationships with customers”.

So the questions are: will Metem’s other customers, some of whom are presumably competitors to GE, still buy from Metem? (Answer – only if they absolutely have to). Will Metem still “emphasize innovation” as part of the GE monolith? Will Metem still have “long-term strategic relationships with customers”? (Answer – probably not with non-GE customers).

Acquiring a key supplier is an interesting and sometimes effective procurement and supply-chain strategy. But it is fraught with dangers as well. We don’t really know enough about this industry to comment authoritatively, but whilst the benefits to GE are obvious (security of supply, potential cost savings), the risks are pretty obvious too. Let’s wait and see.

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