D.F.

Krause

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August 18, 2008

‘Aggressive and Arbitrary’: Chrysler’s Crazy Cost-Cutting Plan

I want more profits. So do you, right?

Now usually when you start thinking how you want more profits, you immediately say to yourself, “If only it were that easy,” and then you immediately go back to working as hard as you can at whatever plan you have to get said profits. (Of course, if the plan’s not working, you might need to work hard instead at developing a new one, but that’s not our point here today.)

The point is that it’s easier said than done. At least I thought it was. Then I read what John Campi did.

OK, John Campi is vice president of procurement for Chrysler LLC. You probably know that Chrysler’s losing money, losing sales and will be lucky to survive the current downturn in the U.S. automotive market. You may not know that Chrysler recently came in last in a survey of auto suppliers concerning their relationships with the OEMs.

So not only are they bleeding cash and facing potential extinction, but their suppliers can’t stand them. And I’m looking to their procurement guy for profit ideas? I really do need a vacation. But I found this quote fascinating in a hilarious sort of way:

“I’ve set an arbitrary aggressive target of 25 percent cost out of the supply chain.”

That’s what Campi says. Here’s why I think it’s funny.

Why 25 percent? No reason! It’s completely arbitrary. You have to have a goal, so why not 25 percent? Then again, why not 50 percent? Why not 200 percent? Get the suppliers paying you! They already don’t like you, so why not give it a shot?

It’s also “aggressive,” and there’s no denying that, but it’s an interesting thing to do at a time when Chrysler is also vowing to improve relationships with suppliers. How do you square the two? According to Campi, the 25 percent reduction in supply chain costs will not come from price-squeezing.

“It means, between us, we have to find ways to improve our supply chain operations,” Campi said. “Much of which is driven by what we at Chrysler do. How we act drives your cost.”

OK, now I see what he’s getting at. This is the classic call to efficiency, waste-reduction and all that kind of stuff. Using fewer resources to produce the same product. Putting more stuff on the same truck to cut delivery costs. It does work, both in theory and in practice, if you do it consistently and systematically.

But let me throw out some numbers for you: 1980. 1983. 1987. 1991. 1996. 2000. 2003. 2005. 2007. “Those are years,” you’re thinking. Nothing gets past you! You’re right. They’re years. I picked them arbitrarily! Now I want you to look at all these years, and tell me the ones in which Chrysler wasn’t undertaking some sort of effort, big or small, to be more efficient, save costs, improve supply chain operations, etc.

The answer? None of them! Chrysler is always trying to do something like that. So is GM. So is Ford. So is my company. So is every company. I’m not saying you can’t make any progress in this area. I’m just saying that it’s not as simple as, “Before we weren’t trying to improve supply chain operations, and now we are, therefore we will save 25 percent.”

Uh uh. Never that simple. You’ll make some progress in one area, and while your back is turned, someone will start sending out Class 8 trucks each loaded with a single cup holder, and then you’ll have to work on getting that under control.

The only ways to cut 25 percent out of your supply costs are to a) buy less; b) buy cheaper stuff; or c) pay less for the same stuff. There’s no way for Chrysler to do C, because their suppliers are lucky to break even on their contracts with Chrysler now. B might be an option, since you don’t need expensive parts for cars no one buys anyway.

And as for A, Chrysler’s sales were down 23 percent last year. Why not just make 23 percent fewer cars? Then all you have to do is revise your arbitrary cost-saving goal to 23 percent, and whammo! Problem solved.

OK, I know, it’s never that simple. Hey! If Campi can pull numbers out of thin air, why can’t I? Then again, if we just wait a year or two, Chrysler’s supply costs might reduced by 100 percent.

Now that’s what I call an aggressive goal! But not the slightest bit arbitrary, and for the current crew running Chrysler, very achievable.

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