In response to what General Motors Corp. sees as a changing customer base that is demanding more control over the purchasing experience, the auto maker announced this week that it will outsource the management of its US$5 billion in logistics spending. The aim is to shorten the time it takes to deliver a customized car to a buyer.
However, GM's outsourcing effort will take a unique approach. Rather than signing a deal with a logistics company, the Detroit giant will form a new company called Vector SCM (Supply Chain Management) in partnership with CNF Inc., a 70-year-old logistics and supply chain management company. Vector SCM will have a single customer -- General Motors.
CNF, based in Palo Alto, currently has three major operating companies in the logistics business -- Con-Way Transportation Services, Emery Worldwide and Menlo Logistics, with total revenues in 1999 of $5.6 billion, almost the same amount that GM spent last year on logistics alone.
CNF will have majority ownership but not majority voting control at the boardroom level through an arrangement that gives GM what officials called "super majority voting rights."
Revenue and profit sharing will be based on the ability of Vector SCM to reduce costs directly attributable to logistics, such as inventory levels and order cycles.
"The problem is we can't afford to take 11 to 12 days to get a car to a customer," said Harold Kutner, GM vice president of worldwide purchasing and production control and logistics.
The way to reduce order to delivery times, according to Kutner will be by increasing "visibility" or knowledge about the location of vehicles and parts.
"There are thousands of vehicles around the world in transit going to dealers for inventory. If we get a specific configuration request from a customer and can match that to a car en route to a dealer, we can relocate that vehicle from the point it is going to, to where the customer is. That would be a major part of the process of a build-to-order environment," said Kutner.
One of the first goals of build-to-order is to cut deliver times down from 12 days to eight days next year to four days in three years, added Kutner.
"It all ties into the transformation of General Motors from a brick and mortar company to a brick and click. OTD (Order-to-delivery) will transform our company," said Kutner.
Successful or not, the deal is huge. Greg Quesnel, president and chief executive officer at CNF called it "the largest supply chain management contract in history."
It appears to be at least one of the largest and most complex projects ever undertaken according to Gary Kowalski, Vector SCM president. The goal is to create complete visibility, worldwide, for incoming and outgoing supplies and finished vehicles according to Kowalski.
"GM has shipping at any one time 80 million pounds of freight from over 12,000 global suppliers to over 70 final assembly plants worldwide," said John Gough, executive director, GM global logistics in Detroit.
The company produces 8.3 million vehicles annually or approximately 35,000 vehicles a day.
"It is a tremendous job to manage this in a systematic way with visibility," said Kowalksi.
Vector SCM will be given total responsibility for logistics around the world.
Typical of the benefits of outsourcing, GM officials said that over the next three years it plans to reduce its own 800 employee logistics division drastically through attrition and redeployment, keeping only a core staff in-house.
"Our logistics organization will become smaller but significantly more strategic with time spent on visioning other type of strategic technology needs as we develop more customer-centered build-to-order systems," said Kutner.
"If we were to do this ourselves the IT investment alone would be upwards of $100 million," he added.
As an outsourced company, however, Vector SCM will not be what is traditionally called a 3PL (3rd party logistics) company, said officials at the announcement in Detroit at GM headquarters. Rather Vector SCM will be a '4PL', an outsourcer managing and outsourcing logistics services to 3PLs.
Vector SCM's own logistics companies, Emory, Con-Way and Menlo Logistics will be awarded contracts if they prove to be best of breed, said Gough.
In order to make a significant impact on cost reduction on a company the size of GM, CNF's Quesnel said Vector is looking to cut GM inventory carrying charges, measured in the billions of dollars, by 50 percent.
"CNF is a text book example how sophisticated global supply chain management can add significant value to a well established company," said Quesnel.