Wednesday, July 1, 2009

Bo Andersson, Purchasing and The Death of All Those Salesmen

Reader comments attached to Automotive News’ announcement of the departure of GM’s purchasing Czar, Bo Andersson, were of three camps: (I) folks at GM who worked with him and respected him, (II) folks who worked with him and were not fans, and (III) everybody else who was very unhappy with what Bo did in the supply arena. Most were in the third camp. Reading Camps II & III’s comments would lead you to believe that “Purchasing” was at the nub of the problem confronting this industry, and that Bo was incompetent. Neither is true; I will get back to this.

I use a fairly extensive review panel for each week’s blog – firm as well as industry insiders and outsiders. This one really stirred up the pot. I love my reviewers, but in the case of this blog, I found many of them too irrational – thinking with their hearts, not their brains. I see Bo Andersson as a man who was at the pivot point of massive change in this industry. Nobody in that position can emerge perfect and God-like. He took the purchasing baton from GM’s cult leader Lopez and the boorish Harold Kutner (not in this order) and ushered in a new world. Lopez and Kutner were both massively flawed – neither was capable of creating sustainable change. Bo was different. Forever gone now are the good old days of supplier relationships. Most supplier salesmen are now dead – figuratively or just plain dead and not replaced. Man, in my heart, I really loved those good old days … and I’ve got to tell you from the start:I, personally, really hate the depersonalization of relationships with our clients. But what does my brain tell me? Let’s take a journey together and talk about the current state of purchasing in this industry, mix in a little market research, examine some facts of today and then make judgment on what kind of man Bo Andersson was.

So, What’s The Current State Of Purchasing In The Auto Industry? The First Stage of Development Was To Make a Sow’s Purse From Gucci’s Ear

It all started about twenty years ago with José Ignacio Lopez’ discovery that supplier relationships were costing GM a lot of money. How did he fix this? Using a vintage typewriter, he pecked out his famous Warriors Diet and switched wrists for his watches to constantly remind him that something was different. Lopez created a Voodoo purchasing cult where insider relationships overshadowed, call it made obsolete, supplier relationships. It worked. But, it was hokey, and ultimately, the Voodoo side of it was not sustainable. Consultants stole the best of Lopez’ pre-1993 ideas (without the Voodoo) and went on the road. Many, if not most, OEMs have adopted these more aggressive pre-’93 purchasing tactics that strip out all personal relationships in the “buy.”

Most of those supplier salespersons from the 1980s and early 90s are now, figuratively, dead – simply because they are irrelevant. The “Needers” from the OEM may still have extensive relationships with suppliers, but once there is a requirement for a “buy”, the entire process is turned over to purchasing. The new purchasing process starts with professional purchasing agents (“buyers”) at the bottom of the pyramid with no authority to make the deal. They are Dickensian creations who simply ask for “more”, but without the “please.” Relationships are not allowed at this level; but, who cares anyway, they are now irrelevant. Requirements are defined, potential suppliers are identified, and bids are solicited with a fairly inflexible process, completely controlled by the junior purchasing agent. All the while, the process remains in the firm control of the junior buyer. Some OEMs have even outsourced these buyers to India, which further dis-intermediates any possible “negotiation” at this level. This part of the purchasing process is all about “give and take” – the supplier gives, and the buyer takes.

Bid winners are separated from bid losers and the information is culled from all the proposals and Purchasing’s supplier database to negotiate cost reductions with the winners, and to be better prepared for the next similar bidding process. It is very similar to making olive oil – first, second, and third pressings. The market has transformed from “virgin” olive oil to third pressings. Typically, there are at least two rounds of final negotiations. The first round is managed by the buyer or the buyer’s manager. The next round might even be managed by the true client – who is earnestly trying to close the deal, but purchasing is telling them that they need something more. The winner emerges through this gauntlet with a one-dimensional contract. The OE can terminate at will, the proposal is chopped up into discrete chunks, and they demand financial information … it’s all there in a thick contract that the supplier is desperate to sign. The supplier has few rights … if they think they do, then they can walk. Few do.

Systems Dynamics explains much of post-Lopez evolution – there were some sub-optimal unintended consequences of all this change. The four most important unintended consequences were: (1) the need to bring more and more suppliers into the bid process – neatly handled by global purchasing, (2) the inability of suppliers to improve product and service quality, improve responsiveness, manage their own financial sustainability, and deliver lower prices – neatly handled by building supplier development groups, (3) more supplier bankruptcies than intended – neatly handled by revised terms and conditions and outside firms like AlixPartners, and (4) the need to recognize that all suppliers were not “commodity” suppliers. Let me explain this last point. More evolved purchasing organizations work with more evolved suppliers. Suppliers must make a choice: Do they remain as commodity suppliers, or do they evolve into strategic suppliers? Most can’t evolve; hey, most haven’t even the slightest idea of how to evolve. Strategic suppliers are the new “partners”. Well, not really partners … but certainly better that being lumped in with the commodity supplier group.

That’s it. Same thing as a Moroccan Bazaar, but on a much more massive and systematic scale … and with infinitely more savvy buyers.

Some Market Research

In the mid-90s, at the beginning of this purchasing transformation, when I was much younger and much more naive, I was bamboozled by a brilliant client into moderating eight focus groups of supplier salespersons. The client’s name was “blind,” and the objective was to listen to about 100 different supplier voices to gauge if these newly emerging “aggressive” purchasing tactics were sustainable. I love stuff like this, so I agreed.

Mid-way through my first group of eight, I became educated. The suppliers were furious with these newfound tactics. They became uncontrollably angry. They shouted at me and they vented to the mirror in the back of the room – they used profanities. They told me the new process stripped them of their dignity and sense of respect. Beyond dehumanizing, the tactics were demeaning. They were no longer important, and this kicking down of the evolutionary ladder was part of the process to subjugate the salesperson’s place in the order of this industry. They brought up examples of professional “partner” relationships they had with the Japanese transplants. They boasted that they were in control – they were easing out of the most demeaning relationships and improving their business mix with the transplants. They said:
  • Build quality would suffer as suppliers exited or would “give em what they are asking for.”
  • Suppliers would increasingly become bankrupt and chaos would rule.
  • Costs would increase as quality plunged and sources of supply dried up.
  • Production economics would become un-Toyota-like from increasing supplier disruptions.
Each session was identical. It was so troubling that I did not sleep for 4 nights in a row. The next week, I was tasked with writing my “opinion” as to whether these new demeaning purchasing tactics were sustainable. During that week, I received anonymous phone calls from focus group participants threatening legal action if I did not destroy the audio and video tapes from the sessions. They had second thoughts about what they said.

So, what was my opinion? Fifteen years ago, I said the new processes were ugly, but sustainable. I still feel that way. For the few truly evolved OEMs, they really are no longer ugly. Life his simply changed for the supply base. All those old salesmen are now dead.

15 Years Later – What Do We See?

Insiders to the unfolding evolution of purchasing saw a lot of ugliness in the transformation. The quest for a global supply base surfaced a lot of “eligible” suppliers who simply were not qualified – landed cost-wise and aftersales service-wise. But, I ask: How would you generally characterize the current state of Chinese, Korean, and Indian automotive suppliers? Pretty good, eh?

Purchasing’s squeeze of Delphi was counterbalanced by well publicized billions of dollars of flow-back to Delphi. But, should purchasing take the hit for a failed divestiture strategy?

And, what about all those wonderful Japanese supplier relationships? Hmmm. Indeed, many of these are civilized, gentlemanly, and have the smell of warm apple pie on a Thanksgiving morning. But, are they better and have they produced a better result? I see no evidence to support this.

Looking back at fifteen years of evolution, I see that the threats voiced during my focus group sessions simply did not materialize. Production costs have been significantly reduced, and product quality has improved. Even Power admits the quality gaps are shrinking. "No one is building junk anymore - those days are over," said David Sargeant, Vice President of Automotive Research at J.D. Power and author of the IQS study. "We're really talking about the difference between a really good car and a great car these days." Supply chains have been made much more efficient. Supplier disruptions have been better managed. Further, the Chrysler and GM bankruptcies have proven another point – given the severity of this recession, relatively few suppliers have been so damaged by these new purchasing processes that they have surprised us with Chapter 11 filings. OK, Barrack helped a little here with about $5Bn. But, supplier bankruptcies have become a steady-state way of life, and the world has not come to a crushing halt as predicted by many.

The Bottom Line on Bo Andersson

I never met Ignacio Lopez, but after reading sections from his Warriors Diet, I would never drink the Kool Aid offered by that man. I met Harold-the-Hun once and took a shower shortly after the meeting. I never met Bo; only spoke with him once on my cell. I am a supplier and generally hate this new era of de-personalized purchasing. So, I have no hidden agenda that makes me a natural fan. But, I have to admit Bo Andersson did a remarkable job. GM’s purchasing practices have evolved further than any in the fifteen years since Lopez left. Under Bo Andersson GM has indeed made a, well, call it “Rayon” purse from a sows ear. Many others are still in the sows ear stage of development. Bo is a professional and a gentleman. Bo’s cost cutting staved off GM’s bankruptcy for years … furthermore, GM’s purchasing practices are partially responsible for saving many other players in this industry. Bo Andersson is one of the few modern heroes of this industry.

Just looking at the data, I’d say we have seen an incredible evolution in the industry’s supply base – mostly for the good.

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