The Transformation of the American Automobile Industry

A Perspective from a Supply Chain Professional Over the past six months or so we have witnessed a series of truly remarkable events in the American auto industry. After much consternation, evaluation and debate the Administration and Congress have decided that we the people will, indeed, sell Chrysler and rescue General Motors. Fair enough. However, as a supply chain professional for nearly 40 years, I have serious reservations about how this is unfolding. Apart from the obvious issues associated with capital and liquidity, General Motors is facing a classic supply chain strategy problem. Over the next few months they must decide which suppliers to cut loose and which to retain, which worldwide manufacturing facilities to close and how best to utilize the survivors, how they will continue to distribute product (railheads, distribution centers, ports and so on), which brands, models and dealers to retain and which to close, how much inventory to slash. Not the stuff of spreadsheets to be sure, although they will probably try. Frankly, I am personally and professionally offended at what I have been reading about the likely go-forward strategy of GM. In particular, I was appalled when I saw decisions already taken to relocate much of the manufacturing to offshore locations, ostensibly because of labor costs. This fundamental management error has all-to-often been encouraged by analysts on “The Street” whose experience with operations is too often limited to ratios derived from financial statements. It is only now being rectified at many companies, years after they disastrously followed the outsourcing lemmings over the cliff. This is most assuredly not a “made and buy in America” polemic; artificial protectionism went out with the great depression, mass merchandisers stomped on its grave and worldwide enterprises require worldwide solutions. Rather, it is a plea that the analysis be conducted in a thoroughgoing manner that is consistent with the true bottom line, not one component of it. Simply put, there is significantly more to worldwide supply chain/operations strategy than manufacturing labor costs. Procurement, manufacturing, transportation, warehousing, various types of inventory, duties, taxes, port handling charges, flexibility, responsiveness, risk…all of that and more must be considered, more or less simultaneously. Regardless of the merits, it is impossible for anyone to reach any conclusions in such a short period of time, given that they conduct the analysis properly. I have no use for analysis paralysis. However, I passionately believe that we owe the country, its taxpayers, and the various stakeholders of General Motors no less than the best possible effort accomplished as expeditiously as possible, not some sophomoric rush to judgment that we will come to regret. Along the same lines, I am equally appalled at the speed with which the dealer closure decisions have been made. Once again, there are proven, rigorous, objective techniques for addressing such matters but it is a virtual certainty that they have not been employed in the spectacle that we have witnessed thus far. Late news flash: we are now being treated to the specter of various members of Congress strong-arming management regarding various facility closure actions (as in blocking them). Somehow I cannot bring myself to believe that their reasoning is consistent with that offered above. This might be entertaining were it not so destructive. Memo to the members: this is not the Department of Defense. First you excoriate the industry for inefficiency and then you compound the problem. The very worst thing you can do is meddle with a corporation that you wish to see return to profitability. You can’t have it both ways. Please do the country and the company a favor and back off. With respect to the bailout itself there are seemingly irreconcilable perspectives. On the one hand, there is surely the temptation to let capitalism work its supposed rational course: the trio of inferior products, woeful management and myopic unions should be punished in the marketplace via bankruptcy and probable liquidation and the underlying resources redeployed to better effect elsewhere. On the other hand, the genesis of the current economic crisis is clearly not with this industry and there are a huge number of largely innocent victims, including suppliers and dealers, whose communities will be severely impacted. Nevertheless, should the government pick winners and losers, even for something we used to call a prime example of a “basic industry?” Nothing is ever as simple as we might idyllically and naively wish. It is that rational, unfettered capitalism which has presented us with the detritus of markets run amok: the savings and loan crisis followed by successive tech, internet, and financial market meltdowns, none of which should have happened, all of which occurred in the space of about two decades and wrought serious economic damage. Where were the promised built-in self-correcting market mechanisms? Sorry George Will, Adam Smith is a hopelessly overmatched opponent for good old-fashioned greed. There is an important national security issue in play as well. Suppose, just suppose, that Pakistan melts down and/or North Korea follows bellicose with equally irrational action and/or the Middle East really lights off or…the list is sobering. What if we truly had to mobilize and one of our most fundamental weapons…our industrial might…had essentially vaporized, piece by piece, as it now seems to be doing? As a veteran and a father of two children in the military, I have more than an academic interest in such questions. I am the President of a software and consulting firm, as well as an adjunct professor at two universities. I teach both clients and MBA students the value of comprehensive supply chain analysis and how it relates to overall corporate strategy. The practicing supply chain professionals have understood the underlying principles for a long time. We should demand no less of our new auto industry caretakers. Jeffrey J. Karrenbauer, PhD President Insight, Inc. www.insightoutsmart.com