J. Ignacio Lopez de Arriortua, once on a trajectory to become an all-time purchasing guru, set himself on a self-destruction mission that tainted his work portfolio. Lopez's professional career spans several global companies, including Firestone, General Motors (GM) Europe's Spanish facility, GM North America offices, and Volkswagen AG. His practice is accentuated by a cost-cutting principle and approach that formed the basis of his purchasing prowess and later downfall following a lawsuit informed by his unethical practices. Principally, Lopez's contributions to the field of purchasing can be traced from the procurement practices he oversaw in Europe, expertise which he brought to GM North America plant. Together with Jack Smith, Lopez is credited with consolidating through cost reduction approaches the expensive operations which defined GM’s profitability performance.
Lopez's appointment to the position of Vice President for Worldwide Purchasing was preceded by the 1991 dismal performance of GM under the leadership of Roger Stempel. During that year, GM made record losses amounting to $4.5 billion, which forced the company to replace Stempel with Jack Smith. Upon his appointment, Lopez immediately undertook to streamline the purchasing activities of the establishment. First, the Vice President ordered that all already awarded contracts with GM be bid again. Second, he annulled the favor-culture GM had with its internal manufacturers. Lastly, Lopez required that a 50 percent improvement in GM's productivity be achieved within three years. These stringent measures were latter to lay a foundation for the bad relationship that GM had with suppliers.
Delegate your assignment to our experts and they will do the rest.
The Vice President's cost-cutting principle in purchasing was far-reaching in that it affected GM-supplier relationships and car production. The measures mentioned above aimed to reduce the costs of supplies that GM sourced from its internal partners. One area that Lopez earmarked for radical changes was 70% of suppliers bestowed to GM's internal units. Lopez believed that these provided a great opportunity for cost reductions by prioritizing tier-one suppliers such as TRW and AMP. The Vice President thought tier-one suppliers could offer low costs coupled with excellent deliveries and design abilities. Although some internal supply unit executives felt that Lopez's approach would only bear fruits in the short-term, he believed that this was the best solution to avoid the company making huge losses, such as the one recorded in 1991. Consequently, GM's purchasing methodology with Lopez as the head of purchasing led to the severing of relationships with suppliers. Many suppliers began contemplating dropping GM as their leading client because of the aggressive attitude the Worldwide Purchasing division had with them. Concerning car production, Lopez’s tactic affected joint production, which GM previously had with its suppliers. The Vice President favored external suppliers over internal ones and who were taken through an unduly strict bidding process.
Lopez’s thirst to reduce GM’s purchasing expenses forced him to use unorthodox and unethical practices on the company’s suppliers. The entire chain of actions on the supply side had, including the defection to Volkswagen AG, had profound ethical implications. For example, it was unethical for Lopez to breach the intellectual properties of GM's suppliers. Suppliers could develop proprietary production plans in their collaborative efforts with GM. However, Lopez could disclose these to their competitors with a view of attracting low bids. However, it was his defection to Volkswagen that was defined by high levels of ethical depravity. Lopez shifted with critical informative documents, which were instrumental in GM's operations. As a professional, Lopez's actions were misplaced and triggered a long-standing and costly legal battle between GM and Volkswagen. In the process, Lopez's career that could have been glorious to the end, was adversely affected.
Strategy and Purchasing
The reason for bringing in Lopez to GM’s North America offices was to institute radical changes to its purchasing strategy. For a business enterprise, purchasing function plays a crucial role in how it performs in its efforts to actualize its core objective. Thrulogachantar and Zailani (2011) found that purchasing strategies play a pivotal role in establishing a positive influence on manufacturing companies' performance in different spheres. Similarly, the management under Smith envisioned that the company's profitability could be strengthened by leveraging Lopez's purchasing expertise. Before Lopez's appointment, GM heavily relied on internal manufacturers for supplies. These internal GM's units accounted for about 70% of the supplies that the car manufacture needed. The company had a collaborative approach with its internal suppliers, who had a 70% stake in GM's total purchasing endeavors ( Moffett & Youngdahl, 1999 ). Internal suppliers partner with a company in producing products that the firm uses to actualize its primary objective (Baelde, 2018). The key advantage of having a collaborative partnership with internal suppliers is that they help lower the company's expenses when sourcing for supplies externally. Also, an organization can secure critical information concerning its manufacturing and engineering techniques.
Nevertheless, Lopez felt that internal suppliers were responsible for high purchasing expenses that GM incurred, thus worsening the financial losses it registered in past years. Therefore, he thought that changing GM’s supply approach would effectively lower costs, which at the time of his appointment were astronomical ( Moffett & Youngdahl, 1999 ). As mentioned above, a manufacturing firm must identify factors that contribute to its loss-making trend, and a key area to focus on is its purchasing culture. Failure to focus on such a crucial functionality will derail the company in achieving its goals, such as maximizing its profitability levels.
For an organization such as GM, purchasing function is central to its central mandate. The purchasing division is central to cost-cutting undertakings, thus enhancing the profitability of a business establishment. When purchasing decisions are made appropriately, it will be possible to reduce financial wastage by dropping expensive and unnecessary suppliers (Lawson et al., 2009). The principle of cost-saving was central to Lopez's appointment to head GM’s Worldwide Purchasing. The Vice President observed that it was ideal for dealing head-on with the internal supply approach he believed to have played an instrumental role in GM’s past losses. It should be remembered that Lopez's appointment to head the purchasing unit was to help Smith return the company on a profitability track.
Appositely, the purchasing function in a company includes verifying suppliers, assessing the quality of material, and ensuring resources are provided in time. Regarding cost control, the purchasing unit must analyze and decide on the most suitable supplier depending on the quality and pricing. Hence lowering production costs was a key agenda for Lopez in his mission to stabilize procurement prices, which is evidenced by his objective to attain 50% improvements within three years ( Moffett & Youngdahl, 1999 ). Slightly, one identifies with the thought Lopez's thought process that culminated in his drastic methodology to cost-saving. Other factors like timely shipments, relevant experience, and the ease of integrating the suppliers in the production process also impact the profitability of a company. Such an endeavor cannot be alienated from the purchasing function of an organization.
After Smith hired Lopez to the position of Vice President Worldwide Purchasing, the latter focused on radically changing GM's purchasing approach. First, he sought to place all awarded supply contracts on bid. In this move, Lopez eyed removing internal suppliers who he deemed as being too expensive for GM. Lopez's second action was to withdraw favor accorded to GM's internal manufacturers whose supply accounted for 70% of the total procurement needs of the motor vehicle assembler. The first and second decisions effectively shifted GM’s focus from internal to external suppliers. Last, as a goal, the Vice President required that GM's productivity between 1992 and 1995 should have improved by 50% ( Moffett & Youngdahl, 1999 ). One recognizes that Lopez's plan was for the short-term instead of establishing a foundation for the long-term. In the event of a recession, his actions could have been catastrophic for GM’s ability to procure products externally.
If Lopez was the Vice President of Worldwide Purchasing during the Great Recession, his approach could have had a detrimental impact on the achievability of GM's core objective. The 2008-2009 recession had a constricting effect on the supply chain globally, which effectively created a downturn effect on the demand for supplies by businesses ( Lynch, 2017 ). As a result, there were significant supply shortages in some industries as orders were canceled. With the frosty relationships that Lopez's radical measures created between GM and suppliers, the company could have exacerbated its ability to source supplies. Consequently, its productivity and, therefore, profitability could have suffered greatly.
Purchasing in GM
A manufacturing enterprise must consider lowering its costs of purchasing while also maintaining healthy relationships with its suppliers. Before Lopez joined GM, the company significantly depended on German suppliers. Experts in the motor vehicle industry believed that this purchasing culture was divisive and made the company's operations expensive. GM's purchasing accounted for about 40% of its cost structure for the entire manufacturing process ( Moffett & Youngdahl, 1999 ). Indeed, these were exorbitant expenses that required someone with purchasing expertise such as Lopez to streamline the company's procurement spending culture. Contrary to the impact of his purchasing knowledge in Europe, Lopez's tactics provide a short-term glimpse of hope to GM North America. The Vice President established an antagonistic relationship with suppliers as he moved to enhance the company's profitability. To execute this move, Lopez aimed at enlisting external suppliers instead of the traditional internal suppliers.
The decisions overseen by Lopez effectively led to severed relationships with suppliers, many of who felt that the Vice President was pushing for short-term savings. The three-faced directives that he gave after taking over Worldwide Purchasing were punitive to the suppliers. While Chrysler moved to cement long-term associations with suppliers, GM’s purchasing unit worked hard to alienate its suppliers from the core company mandate. Moreover, the move to limit minimum bids per supplier to ten aimed at reducing the number of suppliers that engaged with GM ( Moffett & Youngdahl, 1999 ). One acknowledges that Lopez aimed at implementing a lean approach to procurement by recommending stringent rules. Haugland (2015) notes that lean procurement methodology can be made effective if a buyer and supplier establish close relationships, thus allowing for collaboration. However, the approach by Lopez, as indicated above, worked to severe these associations. The ten minimum bid per supplier criterion was solely based on cost, a deviation from Chrysler's approach, informed by different factors. For example, the 1990s Chrysler purchase division selected suppliers not only on a cost factor but also on their ability to contribute to the entire product development cycle. While GM was isolating suppliers, Chrysler involved them in the manufacturing endeavors, thus striking an even cost-saving relationship between the company and its suppliers ( Moffett & Youngdahl, 1999 ). The concurrent engineering practice used by Chrysler had other benefits such as quality and delivery advantages. Concurrent engineering allowed suppliers to produce their products while Chrysler focused on assembling the final motor vehicles. While Chrysler’s concurrent engineering was long-term benefit laden strategy, GM’s only achieved short-term cost benefits.
Another aspect of Lopez’s leadership while at Worldwide Purchasing was his pricing strategy. While concurrent engineering principles advocated for suppliers working collaboratively with a company, Lopez tactics worked to scatter any form of such cooperation. If Lopez could have executed a pricing strategy founded on concurrent engineering, he could have achieved cost reduction, thus laying a price competitiveness foundation. Fundamentally, the central idea behind this strategy is that constituent prices should be based on a projected cost for a new model, effectively achieving reverse cost-engineering ( Moffett & Youngdahl, 1999 ). Digressing from this approach, Lopez developed a pricing strategy by pitting one supplier against another to obtain low-cost contracts for the company. Resultantly, Lopez's plan could not achieve any meaningful relationships between GM and its suppliers because it was punitive to the latter’s profitability goals. From this, there were no notable joint production efforts nurtured that could have propelled GM to better profitability levels. Thus one could agree with the argument that the approach to achieving short-term cost reduction was expensive in the long-term. This is because it invokes little commitment by suppliers as pertains to quality, delivery times, and flexibility. The primary contribution to this is the strained relationships that resulted between GM and its suppliers.
Supplier Relationships
An organization's relationship with its suppliers is critical to attaining its objectives, including maximizing profits. Sriyakul et al. (2019) concluded that how an organization treats its suppliers impacts its achievements both in the short- and long-term. Before Lopez's appointment to the position of Vice President for Worldwide Purchasing, the suppliers were internal operating units; as such, they could only supply to the GM North America plant. The internal suppliers' role was to make the required parts within GM facilities and supply to the firm's assemblage floor for the final manufacture of vehicles. Such an arrangement allows suppliers to engage their customers on day-to-day decision-making, hence creating an opportunity to reduce their expenses. When suppliers’ expenses are lowered, they will price their products in favor of their clients. Fundamentally, before Lopez became the head of Worldwide Purchasing, the firm focused on sourcing about 70% of components from in-house suppliers. It is the intention of Lopez to change this arrangement that strained the GM-supplier relationships, which consequently reduced the pool of available and viable suppliers. Accordingly, the role of GM’s suppliers metamorphosed to allow them to have a dual relationship. Contrary to his approach, Lopez could have focused on restructuring the internal supply strategy by introducing the concept of concurrent engineering, which could have been more productive than his lean purchasing ideology.
The opening of Volkswagen’s Resende, Brazil branch happened parallel to the launch of a revolutionary concept, which the giant company named Modular Consortium. The idea allowed Volkswagen to break down the traditional Taylorism and Fordism structures deemed as exhausted and inflexible to rapid changes happening in the global economy. Modular Consortium was characterized by the transfer of all assembly operations to a small number of suppliers selected from a larger pool of suppliers. These suppliers would be responsible for designing and assembling truck and bus modules ( Pires & Simon, 2020 ). Also, the suppliers would be reliable for module assembly in the Volkswagen production line. Hence, the concept allows a company to rely on its suppliers on its human resource needs. The partners are also mandated with providing capital investment and day to day management of the production processes. Differently, a company such as Volkswagen is required to provide land, buildings, and other critical infrastructures.
The advantage of this concept is that it lays a foundation for cost-cutting in terms of time and finances. Modular Consortium allows a company to partially transform the serial times that define a high-level manufacturing facility into parallel times characterized by make-to-order low volume and sophisticated assembly operations. The model also frees the owner of a factory by requiring him to concentrate on the coordination of production functions, internal supplier networks, and other critical service providers. However, the concept's major demerit is that it results in reduced investment so that goal of controlling the business core can be attained ( Marx et al., 1997 ). Based on this concept, one would argue that Lopez's attitude towards the suppliers was misplaced in that his tactics only added undue pressure to suppliers make it hard for them to do business with GM. For example, Lopez could coerce and intimidate suppliers into lowering the prices of their products, thus granting his company an improved margin to make profits through cost-saving techniques. The Vice President relied on GM's financial muscle to take advantage of the suppliers, although his tactics were legally questionable.
Legal and Ethical Issues
There are two major instances of ethical and, thus, legal contraventions associated with Lopez's approach to handling GM's purchases. The first entails how the Vice President dealt with suppliers’ intellectual properties. For example, any manufacturing or engineering plans that a supplier developed as a co-production effort with GM were revealed to their competitors by Lopez so that they could place competing bids ( Moffett & Youngdahl, 1999 ). Saha and Bhattacharya (2011) write that intellectual properties have legal rights attached to them, and any dynamics surrounding them should be for the public good. In disclosing suppliers' manufacturing and engineering ideas, Lopez worsened their ailing relationships and abused the dictates of ethical practice. Consequently, if the suppliers had the financial muscle to face GM in a legal battle, it could have resulted in hefty fines for the latter. The other instance of ethical practice was when Lopez defected to Volkswagen with crucial documents from GM. The four sets of informative material from GM were used to establish Plant X by Volkswagen. Similar to the issue of intellectual properties, Lopez demonstrated that he was unethical to the core by revealing the trade secrets of one company to its competitor. An employee of a business is bound by ethics to refrain from disclosing any critical information to people outside that particular company, especially its competitors. Resultantly this was a foundation for a fierce legal battle between GM and Volkswagen that cost the latter hefty fines while the mastermind was forced to resign from his position at Volkswagen. Principally, Lopez's actions amounted to espionage since he leaked crucial information belonging to GM to Volkswagen.
Since litigation resulted in heavy fines being imposed on Volkswagen in favor of GM, the former could have sought an out of court negotiation by seeking a neutral third party's services. Mediation, which uses a third party, is a great tool defined by different factors ( Searle, 2010 ). Some of these include characteristics of the disputing parties, nature and history of the dispute, and the mediator's attributes. As an alternative to litigation, mediation has been used in several high profile instances such as IBM versus Fujitsu, where the former was implicated in copying IBM's operating system.
Conclusion
As the Vice President of GM's Worldwide Purchasing, Lopez's era oversaw the nastiest corporate fight between his company and Volkswagen. The latter was charged with theft of crucial documents, which amounted to corporate espionage and patents breach. Consequently, a series of criminal and civil suits were filed in the US and German that culminated in Volkswagen being heavily fined. Due to his fanatical energy and catastrophic policies, Lopez managed to revolutionize the automotive purchasing and production by severing long-standing contracts, ending collaborative relationships, and pushing suppliers to offer extremely low prices. In the short-term, Lopez achieved better quality and faster deliveries; however, he staged an assault on traditional methods of purchasing, which was informed by his lean production ideology. This ideology was the triggering factor for his shift to Volkswagen, a GM's rival. Although his strategy was punitive to suppliers, it has been modified over the years, becoming viable in the modern automobile industry. Lopez's case is riddled by serious ethical and legal issues that taint his once glorious career. The use of coercion and intimidation on suppliers to offer low prices majorly due to GM's financial might was not ethical. However, the wrongful disclosure of patents belonging to suppliers to their competitors exhibits how unethical Lopez was during his tenure at the helm of Worldwide purchasing. These patents arose from agreements between GM and suppliers, and as such, they were the foundation for purchasing activities between the two parties. It is thus agreeable to note that Lopez's conduct was ethically unprofessional and unwarranted. Last, when leaving GM for Volkswagen, Lopez took critical documents detailing plans by GM for future manufacturing endeavors. His actions later formed the basis for corporate espionage and patent infringement criminal and civil cases that cost GM a lot of money.
References
Baelde, W. (2018). An internal supplier is also a supplier. Retrieved 23 September 2020, from baelde.nl/en/an-internal-supplier-is-also-a-supplier/
Haugland, J. (2015). Towards lean procurement: Challenges and opportunities (Master's thesis, University of Stavanger, Norway).
Lawson, B., Cousins, P. D., Handfield, R. B., & Petersen, K. J. (2009). Strategic purchasing, supply management practices, and buyer performance improvement: an empirical study of UK manufacturing organizations. International Journal of Production Research , 47 (10), 2649-2667.
Lynch, K. (2017). Impact of the Recession on Global Supply Chains | American Express. Retrieved 23 September 2020, from https://www.americanexpress.com/us/foreign-exchange/articles/recession-impact-global-supply-chains/
Marx, R., Zilbovicius, M., & Salerno, M. S. (1997). The modular Consortium in a new VW truck plant in Brazil: new forms of assembler and supplier relationship. Integrated Manufacturing Systems .
Moffett, M. H., & Youngdahl, W. E. (1999). José Ignacio López de Arriortúa. Thunderbird International Business Review , 41 (2), 179-194.
Pires, S. R., & Simon, M. L. (2020). Twenty-two years of the modular Consortium in the automotive industry. International Journal of Logistics Research and Applications , 1-12.
Saha, C. N., & Bhattacharya, S. (2011). Intellectual property rights: An overview and implications in the pharmaceutical industry. Journal of advanced pharmaceutical technology & research , 2 (2), 88–93. https://doi.org/10.4103/2231-4040.82952
Searle, N. C. (2010). The economics of trade secrets: evidence from the Economic Espionage Act (Doctoral dissertation, University of St Andrews).
Sriyakul, T., Umam, R., & Jermsittiparsert, K. (2019). Supplier Relationship Management, TQM Implementation, Leadership, and Environmental Performance: Does Institutional Pressure Matter. International Journal of Innovation, Creativity, and Change , 5 (2), 211-227.
Thrulogachantar, P., & Zailani, S. (2011). The influence of purchasing strategies on manufacturing performance. Journal of Manufacturing Technology Management .
