Breaking the Mold: Preparing Your Company for Innovation and Change
There Has to Be a Better Way
All the powers of management at the Chrysler Corporation were seated in the massive leather chairs of the Executive Conference Room1 on that still morning in 1990. The senior operating and administrative members of the company sat around the oval table, while various staff members eager to watch the show from safe positions (the peanut gallery, in company jargon) sat in chairs along the walls. At the head of the table was Bob Lutz, then president of Chrysler, who used this weekly meeting of his staff and others to review the operational and financial issues affecting the company in the short run. In short, this meeting was intended to cajole the functional areas under his command to update and inform each other on what was happening in their respective areas, even though information sharing was not an item that the Chrysler culture had previously encouraged. Lutz had arrived at Chrysler several years earlier from Ford, where he had been well schooled in the politics of command and control. At Chrysler, Lutz used his energy and personal enthusiasm to break down the silos of the separate functions and was beginning to build the team with which he would run the company successfully for the next eight years.
Jim Donlon, the corporate controller, who was not a part of the regular operating team but occasionally attended the meetings as an observer, had something urgent to say today. He rose from his seat in the hush to announce that the competition had launched a deadly new cost-reduction program that required an immediate response to keep Chrysler from losing ground.
It was a time of severely depressed demand and profitability for the "Big Three" manufacturers in the domestic auto industry, and Chrysler was perennially the weakest and most threatened of the bunch. The sit-up-in-your-chair heart of Donlon's report was that Ford was rumored to be implementing a forced mandatory price-reduction action on all its suppliers. The auto industry in Detroit is closely knit and the supply base members (and executive teams) were constantly comparing notes among themselves, so there were few secrets in town. Certainly, an action as drastic as this one could not be kept quiet for long.
Ford had electronically modified all its existing production purchase orders with its thousands of suppliers to pay only 95 percent of what had been previously negotiated with them. All invoices that the suppliers sent were factored to 95 percent of their value, and Ford sent the reduced amount as full payment. This action was both unorthodox and highly effective. Instead of having to negotiate with each of the thousands of suppliers and arrive at a potentially different answer with each, this mechanical method merely changed the prices at the push of a button, saving Ford millions in purchases. It also severely upset the supply base members. Because they were extremely fragmented and separate, they had no ability to resist as a collective group. Each firm was left to individually decide either to resist by not shipping and risk losing all revenue instantly, or to continue to ship and accept the new terms. The action was unpopular and created major issues in the press. But Ford used its own financial crisis to justify the action.
The Chrysler finance team's suggestion was that the company should take similar action immediately because the automotive supply base was very common across the Big Three manufacturers. If the supply base members conceded to the Ford action, Chrysler and GM would be at a competitive disadvantage unless they took similar actions.
At the time, I was heading up procurement and supply, as executive vice president at Chrysler. I took the floor and expressed the opinion that, although the Ford action was effective in the short term from their position, it would create more tension with the supply base in an already difficult atmosphere. It was unexpected in its timing, but not from its source; Ford had traditionally ranked low in surveys from suppliers for collaborative policies. Many of us had come from Ford to Chrysler during the dark days of the 1980 Federal Loan Guarantee Program, and we were familiar with the culture and attitude there that could produce such an unpopular and arbitrary action. I felt that if Chrysler were to follow, we would be endorsing a policy that seemed completely against the unique one we had been trying to build.
Fortunately, Lutz sided that day with my recommendation to break out on a different path, and we refused to follow Ford's action. We responded with a unique system built on mutual negotiation and shared savings that became a decade-long program at Chrysler. Known as the Extended Enterprise, it became a unique way to reduce costs and improve supplier relations at the same time. But on that day in 1990, it would be an understatement to say we had a few disbelievers in the finance office who wanted us to take the same short-term action that Ford had done to boost our earnings. The program we developed worked, though, and showed not only Chrysler, but also the rest of the industry, that following what appear to be industry trends doesn't always produce the best answer.
This book analyzes the predominant way business managers handle relationships with other companies in their daily operation. It is almost impossible to find a company of any size that can exist solely by itself. Our economy operates in a web of related actions. You will see how the manner in which companies deal with these important interrelationships is not always logical and that there are many different approaches. It becomes a question of whether to stay the course and take predictable and accepted actions, or to try something different. Often it also involves the struggle for control and domination that has come to characterize many business dealings.