Jose Ignacio De Arriotua and Gm

Jose Ignacio De Arriotua and GM

This story is about Dr. José Ignacio López of General Motors (GM) who became their Vice President for Worldwide Purchasing in April 1992 and how he became a dominant force in the automotive supply chain industry.

In the automotive industry, purchasing components “made up the single largest portion of the cost of manufacturing.” (case:Ao2-98-0003, page 2). At over 45% it was an ideal place to look for cost savings. Lopez was working in GM’s flagship operations in Russelsheim, Germany when he was promoted by the then new President for GM’s European Operations, Jack Smith. Smith was made President after GM had record losses in 4.5 billion, in 1991 while under Smith’s predecessor Roger Stemple. Smith, with the aid of Lopez, had made the European Branches successful and therefore, GM’s hope was for them to do the same in North America.

Lopez’s tactics may have been considered off-putting but it got results, at least it brought immediate results. What Lopez did immediately is to start re-competing existing contracts with GM’s suppliers. Also, GM’s internal suppliers that provided 70% of the components in GM vehicles would no longer be favored. He also demanded to see 50% improvement in productivity within 3 years. He changed all the rules GM had in place and he had no in-house loyalty knowing that the internal wages, made the cost of supplies higher than external suppliers. Lopez shifted from building long-term relationships with specific suppliers, to his main driver being the lowest cost provider. He believed that with broadening external suppliers, he could get “lower costs, excellent delivery, and design capabilities that could be integrated into GM’s product development activities” (case:Ao2-98-0003, page 4) by pitting suppliers against each other and creating a Buyer dominance position. He had a team, he called his warriors and they stayed loyal to Lopez more than to GM.

In retrospect, Lopez’s tactics can work and did work, but not forever. With a company like GM, that has been in existence since the early 1900s, long-term co-dependent relationships is a better model for lasting success. Building loyal relationships with all aspect of the business from the business executives; employees; customers and suppliers is crucial. It is this collaborative force that has everyone vested in seeing the success of the company. In a supply chain, it is possible for the buyer to be dominant and still have a collaborative position but only if the relationship is not a strain and the supplier is not in a constant competitive position. Assurance is what builds a loyal relationship.

Under Lopez, GM’s purchasing agents were ordered to obtain a minimum of 10 bids for each

supply contract, including one bid from outside the United States (excluding Canada).

This was the first step in what he termed PICOS, the Program for Improvement and Cost

Optimization of Suppliers. Suppliers considered this a stressful environment and it caused discord with some suppliers. Lopez and his warriors demanded 10% or more decreases in cost and when suppliers could not meet that demand he sent his own engineering warriors to the supply plants to aid them in finding a way to cut costs. Was Lopez abusing his power? Yes and no. After all, this is what he was hired to do. I think he used the leverage he had appropriately since he also had engineers to aid the suppliers. Finding cost savings as a GM purchaser, even if he has to go to his suppliers and see how to make it happen is the point. However, when a supplier is taking a loss, that is crossing the line. Suppliers are in business to make money, like everyone else and if that is compromised buy a dominant entity, then that is abusive. Ultimately, it will stop being of benefit to anyone. Where is becomes unethical is when GM, under Lopez’s direction takes all of the cost savings it finds. Where suppliers are readjusted to be able to make savings it should benefit both parties and not just the Buyer. “The Toyota Motor Company/NUMMI model typically distributed

cost savings benefits on a 60/40 or 70/30 split between manufacturer and supplier.” (case:Ao2-98-0003, page 5)

Lopez’s was known for hard tactics and dramatics. He would make grand jesters and showed open affection for Jack Smith. However, with all of that, his loyalty proved to be rather thin. Less than one year