The Lopez Effect
Snow covered the grass and rooftops on a typical cold November day in Wolfsburg, Germany as reporters surrounded the gated entrance to Volkswagen (VW) headquarters. It was a Friday, and VW’s board of directors was scheduled to meet. It was anticipated that the board would accept the previously tendered resignation of Jose Ignacio Lopez.1 Earlier in the week, federal courts in the United States had ruled that rival car company General Motors (GM) could summon racketeering charges against Lopez, their former chief purchasing officer, who had been courted away to VW just three years earlier.
Lopez made a name for himself at GM by taking an axe to supplier costs, an area of the company that was previously thought to be unmanageable. Lopez was so successful in his efforts that he saved the company approximately $2 billion a year, unheard of in the late 90s.
Many of GM’s suppliers, however, have relayed stories of Lopez using coercive tactics such as claiming suppliers’ work was subpar or that they were paid too much and failed to meet pricing objectives. Both tactics would result in cancellation of contracts.2 Lopez would also demand hefty discounts from suppliers under the guise that he was going to order a larger quantity than was actually purchased.3 None of this would matter to GM, however, as profits climbed.
In an interesting turn of events, Lopez announced his resignation from GM in March of 1993 mere hours before GM was set to announce his promotion to president of North American auto operations.2 Lopez had a desire to build a new state-of-the-art manufacturing plant dubbed “plant X”. When Lopez left GM for VW, he took the secret plans for the plant as well as thousands of pages of highly sensitive GM pricing documents.4 Infuriated by this move, GM launched the aforementioned lawsuit against Lopez and VW. Feeling the pressure of the lawsuit, VW accepted Lopez’s resignation in the hopes it would facilitate a smaller settlement with its rival, while Lopez hoped it would put an end to criminal investigations against him.5 Neither effort was successful.
The Aftermath
Within weeks, prosecutors filed criminal charges against Lopez in both German and American courts. VW was forced to settle with GM for a whopping $100 million dollars as well as agree to buy $1 billion in auto parts from the company between 1997 - 2004.6 The controversial cost-cutting techniques Lopez employed at GM and VW left many suppliers to distrust GM so much that the company is still working to repair the damage done with its supply base - known inside the industry as the “Lopez Effect”.5
Lopez left Germany for Spain after German courts fined Lopez a substantial amount of money and dropped all criminal charges. The Spanish high court refused to extradite Lopez to the U.S. for trial and he still resides there today.
While the cost reductions helped the car company’s bottom lines, they often led to faulty components, leaving the consumer to pay for maintenance and ultimately resulting in reputational damage.6 Furthermore, many suppliers are still very distrustful of GM to this day because of Lopez’s strong-armed tactics.7
A Different Approach
Around the same time, rival auto-maker Chrysler embarked on cost-cutting measures of their own. The difference between their cost-cutting measures and GM’s or VW’s couldn’t be more striking. Instead of forcing suppliers to drastically reduce costs, Chrysler reduced its supplier base from 2,500 companies to 1,140 and drastically changed the way they worked with their critical suppliers.11
The focus shifted from treating vendors as partners rather than just suppliers. Instead of forcing bids every few years, Chrysler decided to give suppliers business for the life of the model. Also, instead of keeping suppliers locked out of the inventory management, Chrysler allowed its partners uncensored access to manage their own inventory levels. Chrysler moved from a model where they dictated pricing to their suppliers to one where the suppliers are incented to work with them to find new ways to reduce costs.11
How successful was this change? The timeframe to develop a new vehicle went from 234 weeks down to 160 - a decrease of more than one year. The costs to develop a new vehicle also dropped an astounding 40% on some vehicle models and the overall profit per vehicle set a record for all U.S. auto-makers during this era.11 Perhaps most importantly, the company completely turned around the negative perception many of their critical suppliers had of them. Their suppliers became partners and shared the many of the risks by managing their own inventories.
Why Supplier Relationship Management Matters
In July of 2016, a longtime sole-sourced supplier for GM filed for bankruptcy and threatened to halt the auto-maker’s North American production.9 The supplier, Clark-Cutler-McDermott (CCM), provided components critical to the production of many of GM’s vehicles and could not be easily replaced. CCM blamed the bankruptcy filing on an unprofitable contract with GM that cost them $30,000 per day.8 GM was able to avoid the catastrophe of having to halt production by winning court approval for immediate access to CCM’s tooling and parts inventory while securing other suppliers to satisfy demand. GM did not leave the situation unscathed, however. CCM became insolvent and creditors of the company sued GM claiming fraud and deceptive business practices, which resulted in expensive legal fees for GM.10
Regardless of fault or if merit exists in the creditors’ lawsuits, it’s apparent that GM has suffered reputational damage that could have been avoided by supplier relationship management best practices. Failing to understand the financial health of a critical supplier is evidence of a lack of vendor management oversight.
Since this incident, GM has undertaken a dramatic turn in the supplier management field. The company has started to engage suppliers earlier, transformed supplier scorecards and allowed suppliers to rate GM. There is also top-down executive support for the vendor management program.
The successful result of this shift in vendor management approach is once again in the numbers. GM improved margins several consecutive quarters and increased business with its most critical suppliers. The stronger the relationships with suppliers have become, the more cost savings have increased along with the profits per vehicle.6 GM truly turned a corner with its suppliers and is finally starting to shed the negative reputation brought on by the Lopez Effect.
Supplier relationship management is much more than just drilling critical suppliers for a decrease in costs. It’s about creating meaningful relationships that spark innovation and create a unified approach to sharing not only the risks of business but also the rewards of success.
ABOUT THE AUTHOR
Andy Atkins is a professional commercial contract manager with a decade of experience negotiating and drafting complex financial, information technology and telecommunication agreements. He is an IACCM Certified Contract and Commercial Manager as well as a Certified Professional in Supply Management and Certified Professional in Supplier Diversity by the Institute for Supply Management (ISM). His broad array of industry experience has empowered him to become a subject matter expert in supplier management, including intricate multi-million-dollar transactional agreements.
End Notes
1) VW Official is Expected to Resign, By Edmund Andrews, The New York Times. November 29, 1996.
(https://www.nytimes.com/1996/11/29/business/vw-official-is-expected-to-resign.html)
2) Former GM Executive Jose Lopez Quits VW, By Frank Swoboda and Warren Brown. The Washington Post. November 30, 1996
3) 3 Tips on How to Negotiate with the Tiger, By Jim Camp, Forbes, December 20, 2012.
4) GM Never Wavered in Its 4-Year Fight Over Executive Who Defected to VW, By Edmund Andrews, The New York Times, January 11, 1997.
5) Last day at VW for Jose Ignacio Lopez, By History.com Editors, History.com, January 27, 2010.
(https://www.history.com/this-day-in-history/last-day-at-vw-for-jose-ignacio-lopez)
6) How General Motors Has Turbo Charged its Supplier Relations, By Geraint John, May 26, 2017.
(http://www.scmworld.com/general-motors-turbocharged-supplier-relations/)
7) Opinion: It never rains but it pours, By Henrik Bohme, DW, August 19, 2016.
(https://m.dw.com/en/opinion-it-never-rains-but-it-pours/a-19488731)
8) Another automotive supplier victimized by General Motors’ purchasing strategies, By Claire Goldsberry, Plastics Today, July 13, 2016.
9) GM North America output at risk by supplier bankruptcy, By Jack Walsworth, Automotive News, July 12, 2016.
10) GM sued for breach of contract by supplier’s creditors, By Jack Walsworth, Automotive News, September 7, 2016.
11) How Chrysler Created an American Keiretsu, By Jeffrey H. Dryer, Harvard Business Review, August 1996.
(https://hbr.org/1996/07/how-chrysler-created-an-american-keiretsu)