Thursday, April 1, 2010

Looking at Recession Hurricane Damage – Sleuthing Into What Happened to GM’s Back Orders in 2009?

A lot of things that were supposed to happen, did. And a few things that were supposed to happen, didn’t. The Keynesian Paradox of Thrift was predicted to cause dealers to order less, bullwhipping to the OEMs who were supposed to order a lot less, and ending with the crack of the whip causing parts suppliers to buckle under and cease doing business. Or at the very least, cease doing business very well. Back orders were assumed to be a problem once the recession set in, and the hardest hit would be a company like GM that went into bankruptcy.

Well, that story didn’t play like we imagined. Not that many suppliers ceased doing business. GM, who was the big guy on the block, was supposed to get thrashed by supplier terminations and blasted by suppliers’ lack of performance. Didn’t happen.

Sherlock Holmes would have gauged the extent of GM’s recessionary “hurricane damage” by looking at back orders. “It’s elementary”, if you do not have the part and a dealer orders it, it goes on back order. If you have supplier problems, you can see it in your back orders.

Well, you all “know my methods”, let‘s first search for clues in the NASPC Parts Manager Satisfaction Survey (PMSS). Dealers hate back orders. Traditionally, the biggest driver of dealer parts manager satisfaction has been parts availability. Back orders certainly aren’t available. When the 2009 PMSS was published in October 2009 (reflecting September survey responses), we saw that GM’s parts manager satisfaction was down. This was not surprising – it could have been due to poor supplier performance, resulting in excessive back orders. That would have nicely fit the “driver” theory. OK, there are really two drivers of parts manager satisfaction – the other one is cash flow (call them “terms and conditions” and “returns”). When an OEM makes any significant change in these, they get clobbered by their dealers and this has a nuclear sunset halo effect that touches nearly everything and lasts about 2 years. We all know this. What happened to GM’s 2009 PMSS?
  • Dealers clobbered them on their material return program.
  • And, they clobbered them on their ship-direct program.
  • Satisfaction with back orders was caught in the overall negative “availability” halo, but was more an “orange” flag than a red flag.
  • But, they gave GM big high-5’s on a few investment programs – huge satisfaction increase in training, good scores for all forms of phone support, and an increase in satisfaction in parts marketing.
  • So, looking at the PMSS details, we could not pinpoint back orders as being a torpedo that would sink GM more than anybody else. We needed to look further.
“When you have eliminated the impossible, whatever remains, however improbable, must be the truth?” Let’s look at the 2010 NASPC Databook (it will be available to members in a couple of weeks). The NASPC sets a level playing field and re-states all the OEM’s back orders to eliminate as many apples from the oranges as possible. Here’s what we do: we take the average of how many lines are on back order for the calendar year, and divide this by the total lines shipped in the same period … then multiply this by 365 days in a calendar year.

Example:
  • OEM shipped 365,000 order lines in 2009 (could be multiple pieces in a line – for example, if a dealer ordered 5 screws of Part # 12345 in an order, this would be one order “line”)
  • OEM has, on average, 1,000 order lines on back order (this number fluctuates from day to day, so we take the average of several snapshots over the course of the year)
  • 365 * (1,000/365,000) =1 calendar day’s business on back order
Of all the automotive aftersales entities reporting to the North American Service Parts Conference (NASPC) with 2009 data, all but one experienced year-over-year increases in back orders expressed as a percentage of a single calendar day of business. Hmm.

GM was one of the 16 who experienced increases.

Time out: Sherlock would not look at the absolute numbers reported (see the chart titled “Change in Backorder Queue”) because GM’s back orders are somewhat inflated by RIM and ACDelco. Let me give an example. If a dealer receives notice that a part is backordered, he/she can call up their ACDelco WD (located close by) and order the part. If the ACDelco WD has it in stock, they can deliver it to the dealer same day – no sweat on this one. Now, if it is a RIM part, the dealer can delete the order … but it will be re-ordered next day and create another back order … so why bother deleting it. No other OEM has this second channel idiosyncrasy. Bottom line – you need to use a windage estimate for GM’s back orders and look at year-over-year differences.
However, GM’s proportional increase from 2008 to 2009 was less than the average auto sector increase (look at the top chart).
Time out: To put this into perspective, OEMs typically have on back order less than one third of one percent of their annual dealer order lines. This is a very, very small number – think about it in comparison to what you’d expect when you get your washing machine fixed. (I don’t think I’ve ever had a home appliance repair where some part was not on back order.)
Why was GM’s proportional increase less than average? We would have expected them to be “Katrina’d” … flooded with back orders. Why didn’t that happen?
  • We all saw what was coming by the last quarter of 2008, and we all knew that suppliers were going to get squeezed at best, creamed at worst. GM knew that with all of their problems, they could not be passive about this. So they planned and acted very swiftly.
  • To tell the truth, all the OEMs planned and acted swiftly … GM had their entire company riding on how well they reacted to the recessionary hurricane of 2009 … so, they may have been swifter than most others.
  • GM cut back spending, but they were smart about it. You can see from the PMSS that they continued their investment in technical support, training, and marketing.
  • Everybody knew GM was going to make it – so suppliers cut their biggest customer some slack during the dark days of the bankruptcy.
  • Comparing the above two charts, the HE sector (that got severely blasted last year) fared better than Auto. HE and Auto largely have different supply bases. Auto OEMs more commonly share their own supply base.
  • GM had more experience with their supply base, had more clout, and was more willing to refine terms and conditions that were more conducive to what suppliers needed to produce and ship parts.
  • The other Auto OEMs had less experience with problematic domestic suppliers, had less clout, and were less likely to be flexible.
  • GM’s supply chain team is pretty smart – so, they acted quickly and didn’t need to commission two studies to give them a solution that was “precisely late.”
  • GM’s purchasing organization is the most evolved – they have progressed beyond the dark-Kutner days to now being better to work with than some of the cut-throat purchasing organizations that the other OEMs have recently cultivated. So, who do you cut some slack for? Purchasing organizations that treat you like a commodity and strip out your sense of self-respect? So, it is safe to conclude that GM’s purchasing organization worked better with their supplier base than other OEM purchasing organizations.
Bottom Line: So far this year, GM’s customer back orders are down 24% and all of this is a non-problem. Their floodgates held and they survived.

All of this was pretty obvious when we considered all the facts. “They were the footprints of a gigantic hound!”

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