Tuesday, March 13, 2007

Getting the Goods Where They Are Needed

“Purchasing is the big dog — logistics is a support function,” says Bo I. Andersson, who has been running General Motors’ global purchasing and supply chain since 2005. It’s his job to bring in the stuff GM needs for production and get the products out to the dealers. The process has changed drastically over the past decade, thanks to free trade and technology, Andersson says.

“We buy parts for $86 billion a year, $15 billion’s worth of supplies, machines and equipment, fuel and natural gas, and so on. On top of that we spend $6 billion on logistics, $4.5 billion of which is for North America. So if you look at the big picture, purchasing has a much bigger impact on our profitability, while logistics is more of an operational issue.”

But as every general knows, weak logistics can undermine even the loftiest plans (just think of the failed attempts to conquer Moscow made by Napoleon and Sweden’s Charles XII). Andersson, a former army officer, doesn’t take logistics lightly, even though it only counts for a small fraction of the $105 billion in total expenditures he handles (revenue was $193 billion in 2005).

“Around Christmas 2005, after Hurricanes Rita and Katrina, we had 250,000 units in the pipeline on outbound logistics, and the railways and waterways were down,” he recalls. The circumstances forced Andersson and GM to find new solutions. “We started to ship short sea in the U.S.,” he says, referring to short-haul sea transport from Mexico to San Diego, which takes 30 days. “It was time consuming, but cost effective.”

The second solution to the crisis was “drive-aways,” the hiring of young drivers to deliver new cars to dealers within 50 miles of a GM plant. “They can sell these cars as new as long as the odometer reads less than 50. It costs $200 to $400 to send a car by truck or rail, but a drive where away only costs $50 per car. We saved a lot of money that way,” he says, noting that having this option also keeps some healthy pressure on water- and rail-transport companies.

At GM, logistics is increasingly being seen as an integral part of the supply chain, which is reflected in the fact that the term was dropped from Andersson’s title in 2005, when he became GM’s top general for global purchasing and the supply chain.

“I’ve spent a lot of time on logistics over the last two years, because of its complexity. We buy 160,000 parts globally and ship 9 million cars a year. Here in North America, we ship 19,000 cars every day, seven days a week. Material supply, production control, and logistics are all part of the supply chain.”

It’s been said that the earth is flattening, business-wise. But is it really that flat from a logistics and supply management perspective? Or is this just another media buzzword?

“I think it’s very real,” Andersson says. “If we take an example from components, 66 percent of our aluminum wheels, of which we buy more than a billion dollars every year, come from China. By [buying from China], we’re saving over 20 percent on a landed basis. If you take a $100 aluminum wheel, the logistics cost for me to bring it from China is $16. It’s not something I want to ship, but on the other hand, the shipping cost for the $3 billion of radios I buy, half of which come from China, is $2 per radio. That’s $2 out of $100. Ideally, I would like to ship more radios and fewer wheels.

“The earth is very flat, but on the other hand, we make all our decisions on a total landed cost, so it’s not that many parts costing $100 where you can allow $20 in logistics cost.” (Total landed cost = all costs to make and deliver a product to its revenue-generating stage.)

Bo Andersson came to the U.S. in 1993 as head of Worldwide Purchasing Electrical; a $15 billion unit that included Delphi, which was spun off in 1999. In 2001 he became number two in purchasing and joined the company’s 15-member board, where he is the only non-American. What do you see when you look in the rear-view mirror?

“The first thing is that competitive pressures have changed dramatically as a result of the various free-trade agreements. For example, we used to be the biggest player when it came to vehicles, but there were only 33 vehicles sold in Mexico then, as they had to be produced domestically. Today there are 133 vehicles sold on the Mexican market, which has been opened up more than anywhere else.

“The second thing is that the logistics and transportation industry has become globalized, and we have more people with full-fledged capabilities. Just look at FedEx and DHL, and shipping companies like the Norwegian Höegh and the Swedish Wallenius. Competitive pressure has created new needs for transportation solutions, and for tools and visibility. We are focusing very much on supply-chain visibility. We might tell suppliers, you can manage the supply chain, but we want visibility. We want to know where the 15 containers on the way from China to the U.S. are right now. We have an advanced control center in Detroit for the supply chain, and when we go into crisis mode, it becomes more like a military organization.” (Andersson notes that the retail giant Wal-Mart’s supply chain dwarfs that of GM and even the Pentagon. In 2002 Wal-Mart imported 292,000 forty-foot containers, compared to 182,000 by Home Depot and close to 100,000 by Heineken. GM imported 11,000, one quarter of Toyota’s exports to the U.S. Today, GM’s number is around 100,000, he says.)

The rise of China has been one of the biggest shifts in the world’s supply chain since you started at Saab in 1987.

“We’ve been in China for eight or ten years now, and we’ve been active in purchasing for export over the past five years. A lot of people are saying, Bo is buying everything from China, but what I am losing sleep over is how to supply parts to China domestically, because the Chinese automotive industry is growing by 100,000 units a month. We estimate it to be 8 to 8.5 million vehicles, and we have 10 percent of that market. We believe we will sell over a million vehicles in China in 2007. We sold 856,000 units there last year, and we are profitable. We make much more money in China than in any other country in the world. My primary focus is to supply China’s domestic market. My second is to export out of China, to Korea, Australia, India, Europe, and finally to the U.S. This is something we look at every day.”

Globalization is not the only global trend. Do the counter-forces increase the risk for a company such as GM? Does it affect your planning?

“Yes, and no,” he says. “I run a huge operation and we have purchasing people in 40 countries, but we run it in a both centralized and decentralized way, which means that I have four people sitting in Mexico buying seatbelts for the whole world. That doesn’t mean that they buy them from Mexico, but that they have centralized control of all the seatbelts we buy, and they figure out the best place to buy them from, whether they’re going to Europe, North America, Asia, or Latin America. We also do contingency planning every day. We use airplanes and helicopters somewhere in the world every day, because something always happens, whether it is a fire, a tornado, or a bankruptcy. We are very good at handling disasters, because if you move 35,000 vehicles and get 160,000 parts in every day, something will always happen somewhere.

“People are often very surprised over that we have such short product pipelines and never have more than one or two days’ inventory at our assembly plants,” he says, but adds that the auto industry still has far to go in taking advantage of the flattening earth compared with the white-goods industry and Wal-Mart.

New and tougher rules and inspections from the Department of Homeland Security (DHS) have not been a big problem for GM. Andersson says that the company has been working very close with DHS for three years and has been proactive; whether it concerns the $10 billion shipments the company receives from Canada every year or the container traffic it operates on its own from South Korea.

Andersson has won many battles to rein in and control GM’s costs, but there are areas that have stumped even this hard-charging Viking.
“We have not been successful in pharmaceutical, and healthcare costs are going up 15 percent a year. We are the largest buyer in the world of Viagra.”

Why — because it makes the cars go faster?

“No, it’s part of the union contract! UAW won free Viagra in the 1999 negotiations. I don’t like it, but that’s the way it is,” he says.

Well, it’s probably not something to lose sleep over, and certainly not a Waterloo.

Hans Sandberg

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