Bo Knew

Bo Andersson's departure from GM last Friday may have had more to do with a shortage of what we procurement nerds call "addressable spend" than a shortage of bright ideas. The auto maker's former procurement head would have shouldered much of the responsibility for turning GM into a profitable operation post-Chapter 11 and with fewer tools at his disposal than MacGyver on a bad day Bo may have realized the impossibility of his task. Let's look at the numbers based on GM's 2008 financials and you'll feel Bo's pain:

Firstly, Andersson would have had two spend bases to work with to create the savings necessary to return GM's operating income to positive territory - purchased content in Cost of Goods Sold and indirect spend in SG&A. Let's do some super-rough calcs to figure out how much Bo would have had to work his magic on:

Cost of Goods = $150.6B, so assuming about 70% purchased content this corresponds to a direct materials spend of about $106B

SG&A = $14.2B, and assuming about 70% of the SG&A is indirect spend with only half of this being addressable results in an addressable indirect spend of about $5B

So let's say total spend under Andersson's management would have been in the range of $110B. How much savings could he have theoretically extracted from this total spend base? Well if he did really well and got 8% in direct and 15% in indirect that would be a total savings of $8B in direct and $1B for a total of $9B savings.

Well that's pretty good, right? The $8B savings in direct would wipe out GM's 2008 negative gross profit of $1.4B and contribute greatly towards reducing SG&A (together with non-purchasing savings) and helping achieve at least positive EBITDA if not quite positive net income.

Ah, but wait..... there's just one little matter. In reality Andersson would NOT have had the full $106B of direct materials to work with. Why? Because the restrictions placed on him under the Chapter 11 operating model now agreed between the UAW and the Obama Administration would have prevented Andersson from being able to execute the full range of potential sourcing strategies he would need to capture 8% savings over the complete direct spend base. This operating model requires UAW approval of sourcing decisions that would impact %outsourced assembly, %domestic vs. %off-shore content, and other various criteria. Net net, a whole range of world-class sourcing strategies that would have given Bo a fair shot at delivering game-changing cost savings to GM were stolen from his toolkit.

In reality the genuinely addressable direct spend base that Andersson would have had to work with would have been, oh, maybe 25% of the $106B. I'm just guessing here, and might still be on the high side. This is the part of GM's direct materials spend that for whatever reason has been able to enjoy the benefits of global sourcing, major sub-assembly outsourcing and other best practice supply strategies. And guess what, his ability to extract incremental savings in this spend areas would almost certainly be LESS since, by definition, many best practices are already in place. Realistically he would have achieved a maximum of about 5% further savings on this 25% of the total spend, or only about $1B. Hardly enough to erase GM's 2008 negative gross profit.

If there's a motto here (and of course there is) it's that.....ultimately.....a procurement team can only be as good as the addressable spend they are allowed to have and the levers they are allowed to pull. Otherwise even the world's most talented sourcing and procurement professionals will feel like white water rafters approaching the falls with only teaspoons in their hands for paddles.