How one procurement manager’s vision shook the auto-industry
By Bernie van Niekerk
March 1993. The New York Times reported that the Vice President for Worldwide Purchasing at the world’s largest Automotive Company was leaving. As a result General Motors (GM) lost 3.5% of its market value in one day!
Jose Ignacio Lopez de Arriortua, was credited with saving GM more than $4bn during the 1992-1993 period. He controversially decided to move along with 7 of his staff (and, allegedly, lots of confidential information) to Volkswagen (VW) as its Chief of Production Automation and Purchasing. This ultimately resulted in a courtcase that dragged on till January 1997. The final settlement called for VW to pay GM $100 million in damages, purchase over $1 billion in parts from GM over the next seven years, exchange letters off apology, and bar López from working for VW in any capacity until the year 2000.
Interestingly enough, Lopez’ vision – and the subject of his negotiations with GE and later VW – was later realised. In the end, Lopez saw his ”Plant X” dream realized in the form of VW’s new truck and bus plant in Resende, Brazil, in the state of Rio de Janeiro.
On the one hand, Mr Lopez was an excellent example of the massive difference that procurement can make to the organisation. He came to GM at just the right time. It was rumored that at one point in 1991 GM came within 16 hours of not meeting payroll! (See abovementioned link) The billions that he returned to the bottom line have certainly assisted GM in turning achieving 8 years of consecutive earnings growth.
On the other hand he is also credited with potentially causing irreparable harm to the long-term supplier relationships key to GM’s future competitiveness. And his alleged unethical behaviour in passing trade secrets from GM to VW is certainly not the type of “mis – leading practice” to emulate.
But the fact is that the man had a compelling vision for what he wanted to achieve. He was adept at communicating this vision to all involved including: senior management, union representatives and suppliers.
The proverb states that “Without vision, the people perish”. And if procurement leaders do not have a compelling, appropriate and comprehensive vision, the procurement function will remain as corporate “backwater.”
Control your destiny or someone else will” said the well known ex-CEO of General Electric, Jack Welch. In procurement this is especially true. There is no end to the number of people in the organisation who would rather you stay away from their key areas of spend such as IT, Logistics, Marketing etc. “What value can purchasing really add?” they would ask.
Fortunately the concept of how to build a vision for a world-class procurement function has been successfully developed and implemented by other procurement leaders. We can benefit from their learnings – both mistakes and successes – in how to turn the function around.
Firstly the vision has to be Compelling.
I’m not only referring to the fact that the vision has to motivate the procurement function into action but that the rest of the organisation must find it incredibly motivating. The procurement function often does not have sufficient resources. As a result people are unwilling to make great claims about what they can achieve, and so the goals communicated to the organisation are often greatly tempered by caution. However, if the vision is presented in a conditional fashion (see point four below) one can promise the organisation the world and not lose your shirt.
Secondly, the vision has to be Appropriate
The vision also has to be articulated in the language of the other key stakeholders in the business. Instead of just mentioning the fact that procurement will be adding Rx million to the bottom line, how we are going to create sustainable competitive advantage for the organisation. What will the impact be on earnings per share, company value, supply chain performance, environmental compliance, BEE development and so forth.
Thirdly, the vision has to be Comprehensive
The goals and objectives within the vision is really just the tip of the iceberg. The real work lies in figuring out what needs to be put in place in order to achieve the vision. Do we need to implement Strategic Sourcing, World-Class Supplier Management, Effective Contract Management, Advanced Planning and Control and efficient day to day procurement processes? What about the required technology, organisation and performance measurement to make sure the whole thing work? How much would it cost? When would the benefits start appearing etc.
Fourthly, the vision has to be Conditional
When is the last time that the savings that you put on the table were REINVESTED into the procurement function? The magic words here are IF and THEN. Example: “IF we are able to appoint the right people, technology and implement strategic sourcing, THEN we will be able to save the company R50m pa in three years time.” Its basically a service level agreement between the procurement function and the organisation. IF you invest this much, THEN we will deliver the following. This is diametrically opposed to the status quo where the procurement function puts savings on the table and HOPES that the organisation will invest some of it back into the function!
And Finally, the vision has to be Pragmatic
We might sell the organisation on a grand dream and this is appropriate (see first point). But we need to ensure that the planning of how this will be achieved is pragmatically orchestrated. Try and schedule the drawing down of resources (be it cash, people, technology etc) to coincide with benefit being produced by the function. In this way the function “pays” for its resources as and when it is required. Ensure that the gap between the resources you require and the time that it will take to benefit is as short as possible.
In short “Plan to be a Hero!”
Joel Barkers described the philosophy behind developing a vision quite aptly: “Vision without action is daydreaming, but action without vision is just random activity.”