Case Study General Motors Brazil Service Parts Business Case Study: General Motors Brazil – Service Parts Business DO NOT NEED TO ANSWER QUESTIONS 5 &

Case Study General Motors Brazil Service Parts Business Case Study: General Motors Brazil – Service Parts Business

DO NOT NEED TO ANSWER QUESTIONS 5 & 6 – do questions 1 through 4 only

3-1 General Motors Brazil – Service Parts Business.pdf

You need to read and understand the attached Case study carefully, then write your response to the discussion questions of the case study (questions 1 through 4).

Additional credit will be given for quantitative or qualitative analysis, and for added value from documented sources, so please take that in consideration

This must be done with less than 24 hours from now. Part 3
Operations Issues
Case 11
General Motors Brazil –- Service Parts Business
Case 12
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55
11
G e n e r a l M o t o r s B r a z i l—
S e r v i c e Pa r t s B u s i n e s s 1
“Ok, folks, coffee break time!”
The announcement broke the silence in the audience of principals and owners of 30
of the most important Brazilian GM Chevrolet dealerships. They stood up and headed to
the next room where a neatly set-up finger food table waited. That was the ten o’clock
break of the first day of a series of seminars scheduled to inform and secure the commitment of the dealers to the new AutoGIRO program, a revolutionary new service parts
management system, which had been carefully developed by the GM Brazil team during
the past two years.
Over the past 75 years, GM Brazil and its dealers established a relationship in which
dealers were relatively independent in their management practices. GM was proposing a
new system in which GM would start managing the service part inventories of the dealers
and replenish items automatically. Denio Nogueira Jr., the AutoGIRO project manager,
had decided that before implementing the program, it would be necessary to gain the commitment of the dealers. As one initiative, he hired a university professor to run a series of
one-day seminars to go through, including concepts of inventory management and supply
chain management, and the details of the AutoGIRO logic, rationale and economic justification from the standpoint of the dealers. So far, everything seemed to be going smoothly.
The audience seemed very interested, although the themes dealt with were somewhat
technical. The professor was having his first sip when the owner of one of the largest
GM dealers in São Paulo approached him and started to chat about the seminar. Denio
watched the scene from a certain distance and liked what he saw; this seemed to be a
sign of interest of one of the most important opinion leaders in the group. The businessman went on, “Professor, this seminar has been very interesting, you are touching very
relevant points, the forecast of the demand, and the management of inventories . . . .”
The professor was happy to hear that, since very few questions and comments had
been made during the first part of that morning. “Thank you, and please feel free to
address any questions and make any comments for they will be very useful to the whole
group.” The entrepreneur went on, “And it was a good thing that GM decided to invite
someone from the ‘external world’ to address us . . . .” The professor was increasingly
enthusiastic with the chat, thinking, yes, they found it would be appropriate to have
someone not directly involved with any of the parties speaking about this new project.
The following comment of the dealer-owner showed the professor that maybe things
would not be as easy as they expected. The dealer said, “You know, whenever we are
invited to a GM-sponsored seminar like this, we are always sure of two things. The first
one is that we will have wonderful coffee breaks; the second is that GM will screw us up
once again. By the way, since you are not part of GM, could you please tell me in
advance when and how they will screw us up this time so that at least I am not taken
by surprise?”
1. © Prof. Henrique Correa, Crummer Graduate School of Business, Rollins College, Winter Park, Florida,
hcorrea@Rollins.edu; and Denio Nogueira of General Motors Brazil. Used with permission.
57
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Part 3
Operations Issues
The professor started to have a real grasp of the complexities of the long-lasting lovehate relationship between GM Brazil and its dealers and started to understand that
changing the management model of that supply chain would take much more than
good ideas and good information systems. Indeed the task ahead of Denio Nogueira
was both challenging and difficult, and it was only the beginning.
GM Brazil
General Motors Brazil started operations on the January 26, 1925, assembling 25 CKD
(Completely Knocked Down) vehicles per day, with complete kits of parts (sufficient to
assemble a whole vehicle) imported from the USA, on rented premises. At the end of the
20th century, 75 years later, GM had four large industrial complexes in Brazil producing
light commercial vehicles: one in São Caetano do Sul, near São Paulo, one in São José
dos Campos, between the cities of São Paulo and Rio de Janeiro, one in Gravataí in the
Southern Region and one in Mogi das Cruzes, also near the city of São Paulo.
The Service Parts Business
The service parts business is increasingly important to GM on at least two accounts:
first it is a profitable business. Although GM Brazil’s overall income is around
U.S. $3.2 billion a year, only around U.S. $250 million relates to service parts, and the
margins for services are much larger. The automotive market in Brazil is largely dominated by the so called “popular” (very compact) cars, powered with 1,000cc engines
(which benefit from tax incentives from the Brazilian government) and represented 61.9%
of all cars sold in Brazil in 1999. Normally the “very compact cars” are low priced, aim at
relatively price-sensitive low-income buyers, and therefore normally have low contribution
margins. A more fierce competition for the Brazilian automotive market started in 1990
when the Brazilian government started to open up the market for both imported cars
(reducing substantially the import taxes) and foreign companies who wanted to start up
plants in Brazil. Before 1990, only Ford, GM, Fiat and Volkswagen were assembling large
volumes of cars in Brazil. By the year 2000, besides the 4 pioneers who had also built new
plants in Brazil in the 1990s, Peugeot, Citroën, Renault, Mercedes-Benz, Chrysler, Honda,
Toyota, Land Rover, Audi, to mention only a few, had major manufacturing operations
already established (or in late stages of completion) in Brazil. More than U.S. $13 billion
were invested by all the automotive industry players in Brazil in the 1990s alone.
Second, the service parts business has serious strategic implications for the new car
business because it can affect the level of serviceability (measured in time, speed, price
and dependability) of the car during its economic life and therefore the very attractiveness of the car from the point of view of the prospective new car buyer.
Both reasons encouraged GM to rethink the way they were doing business with their
main partners downstream in the supply chain: the dealers.
The GM Dealership in Brazil
In 2000, there were 472 GM dealers, nine GM authorized garages and ten GM parts
distributors in Brazil, or 491 service parts points of sale (p.o.s.). GM had 650 employees
allocated to the service parts operation in Brazil, three distribution centers all located in
Case 11
59
General Motors Brazil—Service Parts Business
the Southeastern state of São Paulo, a total of around 75,000 part numbers, with 700 high
turnover parts. Twenty vehicle platforms were supported by this operation.
The relationship between GM and the GM dealers had always been independent.
Consistent with most supply networks, the nodes of the network were managed separately,
favoring the zero-sum game. In other words, in many situations for one business partner
to gain in a negotiation, the other partner had to lose. This led to less than cooperative
relationships and to independent management systems with undesirable effects. One such
undesirable effect was the bullwhip effect, in which small variations in demand downstream caused increasingly large variations towards the upstream portion of the network.
Imagine, for instance, the supply network represented in Figure 1. Even if the demand
downstream, given by the rate at which the end customer buys from the dealer, is
reasonably stable per item, the demand perceived by GM’s (the assembler) distribution
center is dependent on the inventory management systems and inventory policies of
the dealers. Considering each item, if reorder point policies are used, dealer systems
will use EOQ-type (economic order quantity) logic to benefit from scale economies in
the logistics costs between themselves and the distribution center. This means that they
wait until the reorder points are reached and then issue replenishment orders. Thus, the
somewhat stable demand of the end user becomes the lumpy demand of the dealer. This
occurs because the distribution center will receive the orders from the dealers only at
certain points in time (the points in which the dealer’s “reorder point” is reached) and
not on a continuous basis, such as what the dealer receives from their customers at the
counter. In other words, the distribution center will receive zero orders from the dealer
between replenishments and will receive a lump of demand (the dealer’s EOQ) when the
replenishments are due. The distribution center will therefore perceive a lumpy pattern
of demand even when the dealer perceives a somewhat stable pattern of demand.
Now consider 483 p.o.s. with their inventory management systems issuing replenishment orders at independently defined moments, of independently defined quantities, and
Table 1
Production and Internal Sales (units) of Light Commercial Vehicles—GM
Brazil
Year
Production
(cars)
Brazilian Internal
sales (cars)
Production (light
commercials)
Internal sales (light
commercials)
1990
164,198
140,170
35,481
27,443
1991
162,012
143,575
31,064
26,616
1992
173,333
148,293
38,273
27,025
1993
236,900
217,867
35,714
35,438
1994
250,680
234,118
36,152
33,353
1995
290,332
296,460
51,904
50,468
1996
356,711
308,710
86,104
73,780
1997
404,842
331,432
100,258
74,733
1998
336,688
284,195
75,616
56,632
1999
286,242
239,180
47,723
36,616
Source: ANFAVEA, 2000 http://www.anfavea.com.br
60
Part 3
Operations Issues
Figure 1
Representation of the GM Service Parts Supply Chain
End customer
Dealers
GM parts
distribution
center
1st tier suppliers
2nd tier suppliers
Raw material brokers
Raw material suppliers
it becomes clear that the demand the distribution center receives bullwhips in an almost
random way. Considering also that the distribution centers have their own inventory
management systems with independently defined inventory policies and parameters,
and it is clear that the bullwhip effect will be passed on with an amplified intensity to
the suppliers, suppliers’ suppliers and so on. Because the amplified effect is random,
what normally happens is that the firms all increase their safety stock levels.
Slack et al. (2007)2 shows an illustration of the bullwhip effect in a very simple manner: let us imagine that we have the supply chain shown in Figure 2. Similar to the GM
Figure 2
An Illustration of One Fictitious Supply Chain
ROI
Costs
$
$
ROI
$
Supplier
Inventory
Policy
1 month’s
demand
$
Costs
$
ROI
$
Manufacturer
Mat
1 month’s
demand
$
Costs
$
ROI
$
Distributor
Mat
1 month’s
demand
Costs
$
$
$
Retailer
Mat
1 month’s
demand
Market
Mat
2. Slack, N., S. Chambers, and R. Johnston. Operations Management, 5th ed. Essex: Prentice-Hall Financial
Times (Pearson Education), 2007.
Case 11
61
General Motors Brazil—Service Parts Business
service parts supply chain, there is a flow of material moving from left to right and a
flow of money flowing from right to left. Notice that each player takes some of the
money they receive from the sales of the materials to pay their costs, pay back the
invested capital and passes on the rest, to pay the immediate supplier for the supplied
material. The exception is the end customer (represented by the box “Market”) who
actually does not get any payment for the goods bought; therefore they are the sole
“money feeders” of the chain.
Consider for the sake of simplicity that every business has an inventory policy that is
to start the month with the equivalent of one month of demand in inventory. Let us also
suppose that the market demand for the last months has been 100 units, stable, up until
month one. From month two on, there will be a slight change in the market demand that
decreases to 95, and remains stable. Follow what happens with the demand perceived by
each of the players upstream in Table 2.
Rows in Table 2 represent months; columns represent the nodes in the supply chain.
For each of the nodes and each of the months, the variation in inventory levels (beginning inventory and end inventory) resulting from the application of the inventory policies and the produced/purchased quantities are shown.
In month one, all businesses keep one month of demand in inventory (100 units) and
acquire 100 units. When the market demand falls slightly to 95 in month two, the
retailer seeks to adjust its inventory using the inventory policy—to start the month with
one month’s demand in inventory. So it purchases only 90 units, and this is the demand
received by the distributor in month two. Using this same inventory policy, the upstream
firms see the amplitude of the variation growing larger and larger. In the next month,
the opposite applies and the whip is now upwards. Graphically the effect can be seen in
Figure 3.
Although fictitious, the situation described in this illustration reflects what happened
in reality with the GM supply chain. The result is severe instability in production programs for the companies upstream, which negatively affect costs in the chain, with plants
having to work overtime when the whip goes up and having to face idleness when the
whip goes down. This raises costs, which are paid for by the sole money feeders in the
chain, the end customers. All these inefficiencies increase (see Figure 2) the final price of
the part. Not surprisingly, an original part bought from a dealer’s counter can sometimes
cost 50% to 100% more than a similar part bought from the so-called grey market (parts
Table 2
Illustration of the Bullwhip Effect in One Fictitious Supply Chain
Month
Supplier
Manufacturer
Distributor
Retailer
Market
Production
Begin inv/
End inv
Production
Begin inv/
End inv
Purchase
Begin inv/
End inv
Purchase
Begin inv/
End inv
Demand
1
100
100/100
100
100/100
100
100/100
100
100/100
100
2
20
100/60
60
100/80
80
100/90
90
100/95
95
3
180
60/120
120
80/100
100
90/95
95
95/95
95
4
60
120/90
90
100/95
95
95/95
95
95/95
95
5
100
90/95
95
95/95
95
95/95
95
95/95
95
6
95
95/95
95
95/95
95
95/95
95
95/95
95
Part 3
Operations Issues
Figure 3
Graphical Illustration of the Bullwhip Effect in One Fictitious
Supply Chain
Bullwhip effect illustrated
200
180
160
140
120
Units
62
100
80
60
40
20
0
1
2
3
4
5
6
Months
Supplier
Manufacturer
Distributor
Retailer
Market
sold direct from the part manufacturer bearing its own brand name and not GM´s). This
difference in price is at least partially responsible for the relatively low (estimated by GM
to be around 30%) market share of GM original parts (bearing GM´s brand name), as
compared to the overall market for GM service parts.
Needless to say, the dealers complained tremendously on at least two accounts: first,
they considered GM original parts to not be price-competitive. Second, they complained
that to become minimally competitive, they were forced to work with very low margins
that jeopardized their returns on investment.
To make the problem even worse, another effect of the zero-sum relationship can be
seen in another aspect of the GM–dealers relationship. The GM commercial department sets monthly purchase targets for the dealers based on past purchases. This
means that the dealer, based on past history, must purchase a certain dollar volume
of parts in order to be entitled to a cash bonus, paid to the dealer’s account. The following situation is the norm: by end of the month, GM sales executives start phoning
dealers to remind them that they still need to achieve the purchase target. Fearing loss
of the bonus, dealers purchase enough to achieve the quota regardless of whether the
purchased parts are sellable.
The result of this push-type relationship is that parts are bought, many of which are
never sold. In 1999, GM estimated that 30% to 40% of Brazilian GM dealers’ parts
inventories were obsolete (defined as “not selling for more than 12 months”). This
means that a medium-sized dealer, which holds around U.S. $500,000 in service parts
inventory, had something between U.S. $150,000 and U.S. $200,000 of their working
Case 11
General Motors Brazil—Service Parts Business
capital virtually unusable. This in turn forced GM to increase payment periods, putting a
financial strain on the whole supply chain.
Changing the Way GM Does Business
in the Service Parts Market
The idea of changing the way GM did business in the service parts market started in 1994
when a GM Brazil director, Steve Koch, got interested in introducing the concept of automatic replenishment in Brazil. Steve took a group of GM dealership owners who were opinion leaders (they were board members of the Brazilian association of GM Chevrolet dealers—
ABRAC) on a business tour in the USA, to see companies who were already using the
concept. The director already knew the system, and he was convinced that it could work in
Brazil, but he wanted to get the commitment of the opinion leaders who would have a very
important role in convincing the other dealers. One of the companies visited was Saturn, a
then recently launched GM division conceived to be a GM laboratory for innovative management practices. Saturn’s relationships with suppliers, unions and dealers were very successful
in those early years. They implemented VMI (vendor managed inventory), whereby the dealers’ inventories were managed by the vendor (Saturn). They also implemented the concept of
automatic replenishment, with frequent deliveries, in some situations, of the exact quantities
of the parts sold within three days. They had achieved very a high level of parts availability
(94%) and customer satisfaction impressed the visitors.
However, Saturn had been built from a blank sheet of paper. A brand new set of
entrepreneurs who had accepted all the rules and regulations to be granted a dealership,
free of a legacy of historical love-hate relations, were certainly easier to deal with than a
group of almost 500 Brazilian dealers with established practices and perceptions regarding GM. For instance, consider the issue of the inventory management systems. Saturn
dealers had all agreed to adopt the Saturn system, things worked almost as if they had
Saturn inventory systems terminals at their premises, and they all communicated easily.
The communications infrastructure was built from scratch with state of the art equipment and links. A very different situation could be found in Brazil, more than 120 different (usually incompatible) inventory management systems among the dealers, a poor
communications infrastructure and a heavy, problematic legacy.
Once the visitors came back with a preliminary approval of the new initiative, GM soon
noticed that the poor telecommunication infrastructure would be a problem for the whole
project. They decided to launch a satellite project to sort out infrastructure and communications required to support the project. Unfortunately, the satellite project came to a halt
some months after it was launched, to cut costs. What had already been done only allowed
for the partial exchange of information between dealers and GM, and this was insufficient…
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