Will This Bailout End in Tiers?

Many of you will have learnt from the auto bailout news coverage that GM, Chrysler and Ford between them owe about $10B to their suppliers. You may also have learnt if you did not know already facts such as the following:

-Parts and components provided by auto suppliers (car seats, dashboard consoles, doors, windows, axles, wheels, brakes, etc.) constitute over 70% of the cost of a vehicle rolling off the production line in Detroit.

-While GM, Ford and Chrysler employ 239,000 people in the United States, the country’s 3,000 or so auto suppliers employ more than 600,000 workers

The "so what" about the above two nuggets is that the "auto industry" DOES NOT EQUAL GM + Chrysler + Ford although you would never have thought so from either the news coverage or the way that the recent $17.4B emergency bailout package was doled out. The Big 3 comprise CONSIDERABLY LESS THAN ONE HALF of the auto industry by either of the two measures above. And yet there is absolutely no guarantee that those auto suppliers in the greatest financial distress and/or those that are most critical to the auto industry supply chain will receive one penny of the initial $13.4B to be distributed to GM and Chrysler. Them two's got their own executive salaries and UAW wages to pay first. Auto suppliers will be paid strictly on a "what's left over" basis.

By way of an additional industry insight, I was speaking to a friend of mine who works at one of the auto industry's major tier one suppliers (i.e. one that sells auto assemblies and components directly to one of the Big 3) who told me that of the $10B owed to the auto suppliers over 50% consists of payables that are aged over 90 days. He also told me that many of the industry's lower tier suppliers (those that sell to the tier ones) are facing payment terms of net 120 days or worse (payment term lengths magnify as you go further down the supply chain). In other words they just don't get paid. It's not surprising then that hundreds of these lower tier suppliers have either gone out of business or will be out of business in the early part of 2009. To make matters worse many of these suppliers produce critical parts and/or tooling that could bring the entire auto supply chain to a halt if they are delivered late (or worse, not delivered at all) to a tier one vendor.

Okay so I'm being long winded again, what is my point here? My point is that surely there should be some type of strategy in place to guide the bailout funds to those parts of the auto industry supply chain that are most critical to driving higher levels of financial and operating performance for the industry as a whole. Sure, a substantial part of this should go to GM and Chrysler. But from my argument above, less than half. When President Elect Obama takes office he should form a Bailout Funds Distribution Team of auto industry experts to define a financial rescue package that ensures money is distributed among the Big 3, key tier one suppliers and supply chain-critical lower tier suppliers in a way that positively impacts holistic demand/supply chain performance metrics. Leave the distribution of bailout money up to the executive suites of GM and Chrysler and with what's left for auto suppliers you'd be lucky to be able to afford a year's subscription to the Jelly of the Month club.

A Lesson in Sourcing from Hugh Grant

Last night I was watching one of my favorite holiday season movies "Love Actually" and was watching the part where Hugh Grant (playing the British Prime Minister) is giving a press conference following meetings with the U.S. President (played excellently by Billy Bob Thornton). In these meetings the President has said that he will give the Prime Minister anything he wants unless "it is something he doesn't want to give". In the press conference Grant's character calls the President on his bullying tactics saying that the formerly special relationship between their countries has become a bad relationship for Britain. From now on the Prime Minister will make his own demands clear and stand firm on issues that are important to Britain. Go Hugh!

I was reminded while watching this scene of my time as a procurement practitioner in one particular company when I was often invited by user departments to provide assistance with sourcing activities. My relationship with this department was considered "special" from the department's point of view so long as my involvement was limited to providing general guidance on procurement best practices such as RFP procedures, contract templates and the like. On those occasions, however, where I challenged the rationale behind a supplier selection decision (especially when it involved an incumbent vendor) it was made clear that I was going outside of my area of responsibility. So, in effect, the relationship with procurement was only special from the department's point of view if I did not ask for something that they would not give.

What had happened in this instance was that the relationship was not "special" at all but had become a bad relationship for everyone - the user department, procurement, and the company. The user department was making supplier selection decisions based on entrenched histories with certain suppliers rather than an objective evaluation of total cost of ownership. Procurement (in this case, me) was not being assertive enough in challenging user departments with data-driven arguments for considering alternative supply options. And the company was suffering from the relationship because ultimately there were sourcing decisions being made that were not necessarily in the best interests of the organization or its shareholders.

So if you are a procurement practitioner facing the same issues I did how can you turn the relationship you have with your user departments from bad to truly special? Take a leaf out of Hugh's book and hold a press conference. Step out into the spotlight and tell your user departments and your company's senior management that the relationship you have with your internal customers is currently dysfunctional. Tell them that for your company to realize maximum value from its supply relationships there must be open and honest evaluations and communications about the relative merits of alternative vendors. There must be crucial conversations about whether incumbents still offer the most compelling value propositions for total cost of ownership, quality, service and supply risk. There must be a global recognition among internal customers, procurement, senior management and suppliers that the correct sourcing decision is not necessarily the most popular.

For sourcing insights that can be gleaned from "National Lampoon's Christmas Vacation", stay tuned for my next post.