GM climb down over new contract – how could suppliers force GM’s hand?

We reported in part 1 yesterday that GM had gone back on some of the onerous contract terms it was trying to impose on suppliers, an embarrassing climb-down for their CPO, Grace Leiblein.

But why have the suppliers got the power to force through this change of heart? Surely GM as one of the largest firms and therefore buyers in the world can do pretty much what it wants in terms of handing its suppliers?

Well, no, clearly that isn’t the case. and there are number of reasons for this. It comes back to the fundamental point of power in the supply chain and where it resides – I find myself quoting again Professor Andrew Cox and his seminal work, Business Success, published in 1997 (and subtitled “A Way of Thinking About Strategy, Critical Supply Chain Assets and Operational Best Practice”).

Cox said this.

The control of relatively scarce material resources is the major factor in ensuring sustainable business success. Owning, controlling and leveraging those resources which cannot easily be imitated in the supply chain is the key to success. These resources, which allocate value in supply chains, are referred to as critical supply chain assets.

Note that ‘material resources’ can include knowledge and IP (intellectual property) – indeed, these intangible resources have become absolutely central to obtaining and maintaining supply chain power.

So how does this explain what has been happening in the automotive supply chain? Put simply, it is now in many cases the suppliers to the big car firms who call the shots. The key providers of gearboxes, engines, safety-related technology,  even entertainment systems, hold real power in the supply chain and cannot in any sense be dominated by Ford, GM or BMW.

That is in part the result of technology becoming ever more complex and critical. The car makers can’t understand every aspect of every component part of their products, so IP and therefore power resides within the wider supply chain. Ironically, another driver has been the consolidation of suppliers often caused by procurement people through much of the 1980 and 90s, implementing aggressive category management aggregation and supplier rationalisation schemes. That has played into the hands of the suppliers who survived that and the economic woes of the last decade.

So we have major and critical spend categories now, where there are only four or five major manufacturers in the entire world. These firms, as sub-contractors to GM and their rivals, will inevitably hold significant power.

The end result of all this is that when GM changed their contract in a way that disadvantaged suppliers, those strategic suppliers didn’t have to just sit back and take it. They can decide which manufacturers are truly going to be their ‘customers of choice’, and which will be supplied grudgingly, if at all.  Give Leiblein credit – it didn’t take her long to see the writing on the automotive plant wall and back down. She needs her key suppliers at least as much as they need GM.

And this applies to many, many other industries and supply situations. Where does the real power lie in each supply chain and for each spend category?  It is important for procurement executives to understand this. It plays a central part in defining appropriate negotiation approaches, vendor management and strategic relationship strategies. And certainly think hard about these issues before you try and impose a tougher contract on your suppliers!

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  1. Chris C:

    Supplier rationalisation is fundamentally bonkers if you lose competitive tension – I could see this happening at a large UK vehicle manufacturer in the 90’s from the inside but going against a mantra, probably inspired by naive but expensive management consultants, was not very well received by the powers that be…

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