Pressurizing the Partnering Prerogative

Ever since product and service commoditization became legislated by customer insistence on open standards, supplier control has been inevitable as a logical extension of customer dominion over supply chain management. The PICOS program of General Motors shows how product-based vendors are being pressured to relinquish their partnering prerogative.

PICOA stands for GM's Program for the Improvement and Cost Optimization of Suppliers, a politically correct manner of describing the continuing thrust to reduce the costs of all the parts that go into each GM car.

1. Overall Strategy

   1. Get immediate price reductions.

   2. Secure longer-term price reductions from all suppliers

   3. Sort out the first and second tier suppliers.

   4. Only single source with significant price reductions (18 to 40 percent) that are firmly baked into fixed-price, long-term contracts.

2. Tactical Overview

   1. Establish well-qualified, well-trained, and articulate purchasing clones in all business units to implement these practices.

   2. Plan extensive supplier price reductions for each car model.

   3. Send out inquiries around the world in search of the lowest unit price.

   4. Establish short- and long-term price reduction targets and go very low.

   5. Know your potential winning suppliers and their competitors inside and out before you begin to negotiate and play first and second tier suppliers against each other.

3. The Underlying Themes

   1. Identify and parade the enemy as Japanese companies, not GM.

   2. Understand the balance of power between each supplier and GM.

   3. Keep taking the temperature with vendor ratings and supplier council meetings.

   4. Offer exaggerated growth and future order quantities as bonuses.

   5. Start working with the likely winning suppliers as early as possible on price reductions that are termed "cost reductions improvements."

4. Before Awarding the Deals

   1. Establish long-term contracts as the ultimate goal.

   2. Establish the long-term contract rules.

   3. Establish that nonprice factors like tooling costs and R&D are not allowed.

   4. Resist all suggestions that some supplier costs are not controllable (i.e., raw materials).

   5. Focus all activity on dramatically and immediately reducing the unit price.

5. The Agreements

   1. Tie up the short-term unit price.

   2. Keep nibbling away at the price and terms even at the midnight hour.

   3. Always appear to be in a desperate hurry, but in reality take as much time as needed.

   4. Pull the long-term deal out of the cupboard.

   5. Intensely squeeze some more out.

   6. Get the supplier to sign.

6. Managing the Chosen Suppliers

   1. Introduce the suppliers to our corporate commodity councils and our advanced purchasing product development teams.

   2. Totally involve each supplier's top and upper management—get commitments that the supplier's middle management would never make.

   3. Request that each supplier provide you with detailed information on the cost-profit structure of the products it currently or proposes to sell us.

   4. Don't accept raw material indexes as cost information when a supplier proposes a price increase; get the cost-profit information.

   5. Establish a friend-buddy relationship with middle and lower-level supplier people to pass cost-profit and competitive information to us.

   6. Be prepared indirectly and under pressure to bluff.

   7. Destabilize each supplier's people with many urgent meetings and many demands for information.

   8. Set new deadlines for suppliers to meet but defer decisions to increase their anxiety.

PICOS programs are becoming epidemic. As they proliferate, their impact is becoming predictable. A supplier's margins go first, followed by investment in R&D, plant and equipment, and in the sales force. Noncore assets are cut back and outsourced and the number and quality of supplies that go into a product are cut down.