By combining integrated supply and the knowledge of skilled tradespeople, the General Motors plant in Lordstown, Ohio, built a powerful procurement model.

by Paul V. Arnold

The saying goes that what’s good for General Motors is good for America. Well, what is good for GM? And, is it also good for you?

At the company’s small-car assembly plant in Lordstown, Ohio, “what’s good” is commodity management, a two-pronged initiative that decreased the site’s total procurement costs and helped it become the company’s lowest-cost domestic producer based on indirect material spent per vehicle. Plant employees cite the other standard features: job security and a future.

If saving money and your job are important to you, grab a highlighter and a pen to take notes. Or, fax this story to the decision-makers at your company.

The key players
The critical elements that drive GM Lordstown’s indirect material procurement initiative are:
1) integrated suppliers that have representatives work full-time inside the plant to manage assigned commodity categories; and,
2) skilled tradespeople (GM millwrights, pipefitters, electricians, etc.) that manage supply cribs and oversee the commodity managers.

Larry O’Melia, the plant’s general supervisor of indirect materials, is the initiative’s humble director. He works with both groups and makes sure commodity management hums like the 140-horsepower engines housed in Lordstown-built Chevrolet Cavaliers and Pontiac Sunfires.

For 95-year-old GM, commodity management was a radical step, but one that the folks in Lordstown needed to take. The bottom line was the bottom line.

Facing reality
It’s a fact that GM makes a slim profit margin on small cars. Cars such as the Cavalier and Sunfire are seen as entry-level vehicles for consumers. The hope is that if the experience is good, the consumer will stick with GM through the major stages of his or her life: married (mid- or full-size), family (SUV or van) and professional achievement (Cadillac).

A few years back, GM started to question that truism.

“GM pondered whether it made sense to build small cars in the U.S. Is it even worth doing?” says O’Melia. “Why invest a half-billion dollars (in a new small-car launch) when you only make a few bucks per car?”

When GM decided to phase out the Cavalier in 2004, Lordstown employees needed to make small-car production worth the company’s while, or face job cuts or a plant closure. The only way to turn heads was to drop the total cost of making a car.

“In doing that, the largest, ripest opportunity for cost improvement existed in the usage and application of indirect materials in the plant,” says O’Melia.

Apples and antacids
Indirect/MRO was actually overripe, partly because there were too many apples to pick. Prior to the mid-1990s, the plant had more than 1,000 suppliers and countless want-to-be suppliers.

“We’re located right off the Ohio Turnpike, so anyone seeing the smokestacks would stop by and try to sell us something,” says O’Melia.

The purchasing department spent a sizeable amount of its time screening visitors and hunting down others that sneaked into the plant.

If that didn’t get the stomach acid bubbling, adversarial relationships with some accepted suppliers did. The give-and-take revolved around piece price for products, and supplier salespeople focused solely on making a sale.

With all these transaction-based relationships, O’Melia and his crew handled thousands of invoices and thousands of receipts every month.

Slicing up the pie
Lordstown plant leaders and GM’s corporate purchasing organization decided progress would come through reducing its supply base and by working closely and strategically with a limited number of survivors. 

To get there, it took the $25 million indirect materials pie and cut it into 10 commodity slices:
• Industrial, safety and die supplies
• Building and janitorial supplies
• Fluid power and power transmission
• Electrical and electronic
• Resistance welding
• Business supplies
• Chemical management and filtration management
• Janitorial management
• Mobile equipment fleet management
• Repairable asset control

It sought to have one supplier for each commodity slice, with winning suppliers responsible for placing highly skilled employees (called commodity managers) on site full-time to handle sourcing, purchasing, technical support and cost reduction for that category.

“Suppliers doing volume business with us already had an inside sales representative dedicated to our account,” says O’Melia. “So, we asked them to move that rep into our plant at no extra cost to us.”

For the cutdown process, Lordstown used a standardized template.

“Chrysler got into commodity management before we did. Our selection criteria and surveys closely resembled what it did,” he says.

GM also utilized Chrysler’s idea of natural work groups made up of blue-collar employees. If cost-savings opportunities stem from product usage and application issues, whom better to involve than the people using the products?

Lordstown assembled natural work groups for each commodity category. The groups’ first assignment was to examine a list of standard questions and rank them by importance to GM plant-floor needs.

“They were looking for a quality organization,” says O’Melia. “The criteria didn’t focus on pricing as much as the supplier’s health and safety record, its training processes, how it handled warranty issues and what it was willing to do for the customer. ‘What’s your price?’ wasn’t a question.”

After the interview process, the top-scoring supplier for a commodity category could work out contract details with GM corporate purchasing. Single-sourcing enabled GM to negotiate lower markups and write in performance targets that support its business objectives.

While the Chrysler model had merits, Lordstown knew when to make a left turn. After its supplier selection process, Chrysler disbanded its work groups and effectively cut off the plant-floor worker’s voice in the initiative. Lordstown not only kept its groups together but made them the direct contacts of the eight companies that won the 10 commodity categories.

“They manage the commodity manager,” says O’Melia.

Each work group meets monthly with its assigned commodity manager to examine performance and discuss issues and opportunities.

To assist in the process, commodity managers provide performance charts that track order and purchase totals and compare the month’s figures to past months. Charts also provide a breakdown of purchases by product grouping. For industrial supplies, that includes gloves, power tools, material handling, tape, laundry services, safety supplies, hand tools, lab supplies and “others.” The charts also track total hard-dollar and soft-dollar cost savings, and hard-dollar and soft-dollar savings per car built that month.

To increase contact and communication, many work group members have responsibility for running their respective skilled trade’s supply crib. Tagged with the title of expediter, they look out for the supply needs of fellow millwrights, electricians or pipefitters and work openly with the commodity manager on projects to increase product life, reduce cradle-to-grave costs, troubleshoot problems and reduce inventory.

“Every company should go to this kind of a setup,” says William “Boo” Mauzy, a work group member responsible for chemicals and safety. “Working together makes sense.”

A very different relationship
In Lordstown’s version of commodity management, working together means rolling up sleeves and getting dirty.

Perhaps the most visible example of the evolution from transactional relationships to strategic partnerships is when skilled tradesmen and commodity managers unite to solve performance issues and save money.

Plant workers tell a few of their favorite stories.

Roy Hartman, millwright expediter: “A conveyor system in one assembly line area has thousands of metal wheels that move the product along. When product stops at a station, the conveyor wheel stops but the axle keeps turning. The OEM (original equipment manufacturer) conveyor wheel, sintered from bronze, was lasting 90 days. The tops of the wheels were getting cut off because the metal was soft. The (fluid power/PT) commodity manager and I brought in a different manufacturer of rollers and wheels. We examined the whole process and the manufacturer returned with a beefed-up, heat-treated steel wheel with the same composition bushing.”

 That wheel company put a small quantity of prototypes on the line, free of charge, to test. Five years later, the wheels are still in operation. The plant eventually converted the entire line to this product. Besides longer life, the wheels are $22 cheaper than the OEM. For every 1,000 wheels, that’s a $22,000 savings, not to mention the reduced labor costs from fewer changeouts.

Mauzy: “In the paint area, the buildup on the walls is susceptible to fires. Therefore, we use solvent to remove it. We used to go through a ton of solvent during this cleaning process. We’d let it pour. But working with the supplier, we got it down to a science of how many gallons it takes to clean that paint booth. We meter the solvent and instruct people on how much to use. We saved more than $100,000 because of that.”

Jim Gettings, pipefitter expediter: “The painting department uses valves that were costing us $163.65. Working together with the commodity manager, we found a different supplier and got a similar valve for $46.77.”

At times, the supplier has an idea and runs with it.

O’Melia: “Our laser scanners had a plastic lens that abraded easily. The lenses cost $16 and the plant was buying 50 of these at a time. The electrical/electronics commodity manager remarked that the lens looked like simple plastic, so she sent a sample to a local plastics company. They developed a lens for us that costs 28 cents. Our $800 lens orders now cost $14.”

A very different skill set
To jointly make such changes requires a commodity manager with purchasing knowledge and plant-floor knowledge.

“At most plants with integrated supply, the on-site staff tends to be clerical,” says O’Melia. “We really don’t want salesmen and we don’t want clerical people. We want real technical expertise. We have 11 full-time people on-site here and, in that group, three have engineering degrees and others are college graduates. The ones that aren’t have 20 or more years of experience in their piece of the business. They can go out with a skilled tradesman and troubleshoot a job. Then they can come back and make sure we get the right parts to do the job.

“One of our on-site people was a regional sales manager. He has been all over the state and in many different industries. He has seen so many applications of products. When we have a problem on the floor and he goes out there, he brings that expertise with him.”

Another unique aspect is how one supplier pays its reps that work at the plant. Instead of a traditional sales commission model where a rep is paid by sales volume, the industrial supplies provider pays its personnel on salary and offers incentive pay for achieving cost-savings goals for the plant.

“They actually make money if they can get the plant to use less,” says Steve Luteran, the industrial marketing manager for this regional supplier, which is a member of the Industrial Distribution Association. “In this relationship, GM is buying cost reduction and savings.”

Another money- and time-saver comes in the billing process. Suppliers bill the plant on a monthly basis for products and services. That means eight invoices per month instead of the thousands handled monthly prior to commodity management.

The ultimate reward
With initiatives like commodity management, the Lordstown plant saved millions of dollars and drove down its costs to manufacture a car. Out of more than 20 General Motors plants in the United States, it now has the lowest per-car indirect material spend. That pleased the corporate office so much that it awarded the plant $560 million last August to retool the assembly and fabricating areas for production of its next-generation small car, which will debut in 2005.

According to acquisition process analyst Ben Lambert, the launch will reinvigorate the supply initiative.

“The low-hanging fruit is gone and everyone is comfortable, but the changeover will create new situations and problems,” he says. “With our experience, it should be quicker to get back to this point.”

Thus, continuing supplier partnerships is good for Lordstown and good for General Motors.

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