Supply Chain Management Failure of Gm
General Motors 1. Describe three SCM practises use by GM that would have negatively impacted their return-on-assets. Define this impact in terms of specific ROA components (e. g. sales, assets)? The return on asset (ROA) is a percentage that measures how profitable a company’s assets in generating revenue. ROA can be computed as: Net Income / Mode of Total Asset. This number tells us what the company can do with what it has. Three SCM practices used by GM that negatively impacted their ROA are described below: Poor Inventory Management
GM offered a vast range of vehicles, which resulted in extra production lines and GM had to keep a track of larger number of models, different manufacturing facilities and large number of suppliers resulting in inefficiencies across the supply chain. This increased costs resulting in lower earnings and ROA. There was an absence of lean manufacturing compared to Japanese automakers. Forecasting Issues GM’s traditionally forecasted sales over a long time horizon compared their Japanese competitor. This was driven by the company culture and reliance on volume contracting.
Long forecast means that when the times were bad and sales dropped, GM was left with higher volume orders, which contributed towards excessive inventory. Legacy Payments Every year the cost of retired workers’ health care added $1,400 to the cost of each car compared with those made in the Asian and European transplants. So, GM kept production high and sustained sales with costly dealer incentives and heavily discounted fleet sales. GM’s liabilities in supplier payments, workers entitlements and dealership commitments would have led them to bankruptcy. 2.
Describe how the internal managerial culture at GM might have contributed to their bankruptcy? Lack of cohesion GM operated the different divisions of the company as separate, independent entities or business units. Although this structure was successful at times, it created a fragmented management mind-set. With a large number of autonomous units, it was difficult to reach agreement and rally behind one single idea. As a result, many strategies and plans were diluted or made overly complex. Bureaucracy GM had so many management levels and a top-down organisation structure coupled with seniority-based management style.
This was tough to make timely and effective decisions. GM’s committee often made inflexible decision and had to play catch-up to their more lean Japanese counterparts. Mismanagement & Management arrogance & complacency In the late 1980s, when the oil price declined, GM concentrated on building profitable pickups and SUBs rather than invest in low-margin cars. GM’s management spent a lot of time fighting change and were averse to risk; they obstructed new technology and were not quite ready to reduce complexities in their supply chains or to go lean.
They were in a state of denial due to past success, but did not see the need to change as the consumer demand has changed over the time. GM’s problems come over a long period; it was a slow erosion of market share. Forecasting Forecasting was a significant problem for GM. Long forecasting cycles were a traditional practice for the organization; which caused firms to miss important shift in the market demand. This has led to excessive inventory and sometimes stock-outs. 3. Describe how inventory turnover and cash-to-cash cycle time could have been used by GM to indentify supply chain management problems.
Inventory Turnover In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. GM’s offered a large variety and a complex range of vehicles, which meant that they were carrying excessive inventory. Also, their vehicles were less fuel efficient and were more expensive compared to Japanese vehicles – they were carrying not the type of vehicles that customers ideally look to buy at times of a financial crisis or rising petrol prices. As such, carrying higher inventory resulted in a lower inventory turnover ratio.
GM also did not foster strong supplier relationships. This meant that even at times of lower demand, GM carried excessive raw material and spare-part supplies. This adversely affected the inventory turnover. GM had a higher cost due to its large range offering. A higher cost base meant less competitive in the market; in terms of pricing resulting in lower inventory turnover. Cash-to-Cash Cycle Time Cash to cash cycle time is the ‘time taken to convert a dollar of inventory into a dollar of cash’. GM experienced low rates of cash-to-cash cycle time due to the following reasons; 1.
Low inventory turnover – GM took more days to sell their inventory since; * GM got their demand forecasts wrong * GM’s product mix was not ideal for the time of change * Pricing was not competitive since their cost base was too high 2. GM was taking more time to collect from the customer and their finance arm struggled to recover from huge losses on cars returned after lease. 3. GM could not practice JIT management practices, information management ; sharing with suppliers for efficiency gains.
