When asked why American automakers struggled and/or failed just a few years ago, many will tell you that they simply grew complacent and didn’t do enough to innovate and stay ahead of the competition when they had the opportunity.
The executives at General Motors know this, which is likely why they recently notified their suppliers that in an effort to remain competitive it will automatically award current suppliers future contracts if agreed-upon costs are met with existing vehicles, according to Automotive News.
The program proves that GM is serious about remaining competitive well into the future by providing performance-based incentives that will both help to keep costs down through innovation and efficient work, as well as to drive suppliers to continue innovating and performing at peak levels on a continuous basis into the future or risk losing contracts.
While the idea may seem fairly basic, it actually is intended to address misaligned incentives that the automaker has operated under in the past. Historically, GM would set cost targets prior to beginning production for vehicles and then once things were underway, the automaker would come back to suppliers seeking cost reductions.
The result? Suppliers sandbagged the introduction of cost savings so that they could have something else to offer when GM returned asking for concessions or savings. Now, suppliers and GM are setting price targets with the intention of actually honoring them from both sides – allowing suppliers to introduce innovations and savings immediately.
So how important is a simple policy change of this nature? Consider the fact that GM currently spends about $77 billion on parts and materials on an annual basis amongst 3,200 suppliers and you will understand the scope of potential for savings and competition-driven improvements.
References
1.’GM to suppliers…’ view
