Research Paper on General Motors

In early 1993 a scandal erupted, which would have far-reaching effects for the parties involved on a scale so grand that it is still reverberating to this day. Jose Ignacio Lopez de Arriortua, a Spanish executive with General Motors, became embroiled in a scandal that left an already struggling Volkswagen with a $100 million fine, as well as other claims against it. The fiasco started in late 1992, early 1993 when Lopez was working for GM. In the 1980’s Lopez, along with GM CEO Jack Smith, were able to revive its European subsidiary Opel. The economic slump and competition from the Japanese forced it to look for any way to lower costs; this is where Lopez came in. Smith’s decision to bring in Lopez, stemmed from the fact that approximately 70% of GM’s expenses were in purchased goods, services and logistics. Smith knew that Lopez had the abilities to minimize costs, so a new era had begun.

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Lopez was able to cut production costs for GM by approximately four billion dollars in the time he was there. This was a significant amount of money, considering that GM was in financial trouble, and the investors were beginning to worry. His approach was simple. Immediately following his promotion, Lopez effectively, tore-up countless contracts with first-tier and second-tier suppliers. Many of them had contracts with GM for many years, totaling millions upon millions of dollars. He immediately proceeded to renegotiate with the suppliers for significant cost reductions from 20-50%. The ruthlessness of Lopez can be seen in his various handling techniques of the suppliers, with whom GM worked for many years. They had become insignificant to him if they were not willing to play ball. Many times the suppliers were GM subsidiaries, which did not faze Lopez in completely renegotiating the contracts. Those wanting to do business with GM were put through numerous bidding rounds for new contracts. When the various bidding rounds were over, Lopez had the winning bidders lower the prices even more, thus saving GM even more money. Many suppliers began to complain that the prices demanded by Lopez were impossible for them to meet, being that the manufacturing costs were high. In response, Lopez proceeded to bring in efficiency experts to the factories of the manufacturers to show them how to streamline the manufacturing process. When that was complete, he managed to secure long-term contracts that guaranteed price reductions on the part of the suppliers. Unfortunately for GM, Lopez had other intentions in mind, which GM was not ready for. (Youngdahl, 1999)

Lopez’s tactics managed to please investors, and GM started to see significant returns and profits. He became the new strong symbol of GM and showed how things are supposed to be done. Eventually, however, it became known that Lopez was negotiating with Volkswagen, Opel’s rival in the European market. This started to worry the management as well as investors, so in order to save the company from regressing back to its old negative habits, Smith quickly promoted Lopez to keep him on board. Although this pleased Lopez, he made an announcement that he will be leaving GM soon afterwards. After a couple of more back and forths, Lopez left a high-ranking post with GM and went to VW. Soon after a few of his associates followed him to the German automaker with more than just their packed-up offices. It had turned out that Lopez and his associates stole company secrets for GM that were vital for its future plans. Lopez took the plans to VW where he implemented them, like a streamlined, efficient factory in Brazil. Not surprisingly, this infuriated GM and a legal battle ensued. High courts in the United States as well as Germany, made ruling after ruling about the thefts, who’s right, who’s wrong and where does Lopez fit in with all of this. Eventually, VW was forced to pay GM one hundred million dollars and promised to buy parts from it totaling approximately one billion dollars. The legacy, however, left by Lopez at GM resonated thorough the company, even to this day. (Burger, 1993)

Lopez’s plan for GM entailed many complex steps in order to attain the profit margins the company was seeking. He established well-qualified, well-trained and articulate purchasing clones in all business units to implement these practices. Each car model at GM was made from materials that were supplied with extensive price reductions. The lowest unit prices were sought after around the globe by him in order to achieve these goals. He also, did extensive research on the suppliers and their competitors before he did any negotiate. These were necessary steps for him, to restructure the buying mechanisms at GM. When the suppliers were established, Lopez created a plan to manage them that would benefit GM. First, he had the purchasing teams and the corporate commodity councils at GM meet the suppliers. He then, had the supplier’s top and middle management involved in the process, as well as having commitments from them that were not usually made. A supplier was then required to provide detailed information on the cost-profit structure of the products that it proposed to sell to GM. Raw material indexes were not accepted as cost information when suppliers proposed price increases, the cost-profit information was required. In ingenious step was made to buddy-up to the lowest and middle echelons of the suppliers in order to obtain cost-profit and competitor information. He also instructed his employees to be prepared to lie and bluff indirectly and under pressure. He then had them “Destabilize each supplier’s people with many urgent meetings and many demands for information…” and “Set new deadlines for suppliers to meet but defer decisions to increase their anxiety” (Hanan, 1998)

Although Lopez was successful in tackling budget problems head-on by bullying and lying to the suppliers, his tactics were far from ethical. It is unlikely that an executive will be able to get away with the actions that made Lopez so famous today. By departing GM, Lopez created a supply vacuum that had to be filled with new ideas. What Lopez started, however, reverberated throughout the company and its supply chain management ideology. His initiatives helped GM streamline the supply process in such a way that it was still used by the company at the time that Rick Wagoner stepped in to take the reins of GM as its new CEO. A new strategy called the OTD was implemented within the network of the company and stretched throughout the globe. Following on some of Lopez’s principles, it proved successful in cutting costs for the company, at a time when it was again struggling to with rising pension, health care and other burdening costs. This time, the operation was more about the customer than anything else. It was a way to look at a situation from a different angle. As opposed to looking at it as saving money for the company, the program sought to lower costs for the customer in order to attract him to GM’s new models. (Nichols, 2002)

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