The Lopez Effect

Every now & then things get tough for a lot of organisations. This may be caused by technology, competition, recession or whatever. When the nasty stuff hits the fan, this is what typically happens at large organisations;

The CMD (Chairman & Managing Director) will call a meeting and scream and rant on how useless and lazy his entire management team is and how they have let the organisation's profitability slide. blah, blah, blah!!!!

The boss desperately searches for a scapegoat. Sometimes sacrificial lambs are found and a few heads roll and the situation only deteriorates because attacking people rather problems never helps. Sometimes the boss realises the truth, that there is no one individual or department or function that can be specifically blamed except the boss himself.

After venting his ire, the boss will issue a diktat to the management team. "I want my organisation to return to high profitability so this is what the team is going to do. I want you to reduce costs by 8%."

Bingo!! within a few short months the management team pulls an ace from their sleeve and the target is achieved. Buyers and procurement staff get promoted and maybe even a handsome bonus. The CMD appears before the press and analysts, beaming and grinning from ear to ear, announcing a spectacular performance in spite of the downturn. In the meantime the organisation's vendors moves ever so closer to insolvency and cardiac arrest.

Crudely put, this spectacular performance by the customer organisation is achieved simply by financially assaulting their vendors. How so?

This is how events are likely to unfold.
Any practitioner of management can tell you that it is best to start with the highest cost items on the list. Let us take the case of an automotive manufacturer. For most vehicle manufacturers the bought-outs, or outsourced products and services constitute approx 80% to 90% of total costs and this is the most logical place to target for getting the 'best bang for the buck'.

Targets for cost savings can be achieved either by collaborating or by imposition.
Unfortunately many individuals and managements lack an important quality which could be described as 'intellectual integrity' so they merely flex their muscles and bludgeon the vendors. These organisations are lazy and impatient therefore they resort to a win-lose strategy. They merely inform their vendors that procurement prices had been reduced by say 12%. To add insult to injury the price reduction is often imposed with retrospective effect.

Vendors feel cheated and trapped. A majority of vendors reluctantly fall into line. The tragedy is that a price reduction dictated by customers on their vendors does not require any great management knowledge or skill.
Top managements at most organisations offer only lip service as to to their loyalty and commitment to their vendors. They do not realise that this weakening the vendor base is weakening their own long term health. The myopic approach is like cutting the limb of the tree on which they sit and on which their long term health and survival depends. Most leaders and stock market analysts mistake bullying for intelligent procurement.

Who cares about the demise of their vendors who are structured to be dispensable. The mess if any will be cleaned up by successors long after the 'terminator' has moved on to another organisation to spread the malaise. It would serve customers well to learn from history. A system of injustice will be thrown off at the earliest opportunity the exploited have a chance to strike back or when they have a chance to get into bed with the customer's competitors.

If you as a vendor feel you may get some solace to learn that you are not alone to be exploited. Even the largest automotive companies in the world also adopt this style. Here is a giant size example from GM (General Motors.

GM had been losing money for a long long time. In 1990 The board of directors at GM brought in Dr. Ignacio Lopez as director of General Motors' Worldwide Purchasing operations. He followed the same rape strategy imposing arbitrary price cuts and saved GM a whopping US$ 1.1 billion in 1991 & US$ 2.4 billion in 1992 from the US$ 50 billion purchase budget.
The savings lasted a couple of years. Thus the term 'Lopez effect' was coined. GM did get a steroid type boost in profitability, for a while at least.

In Feb of 1993 Automotive Industries magazine inappropriately named Lopez as the man of the year for his contribution to automotive industry health. In March of 1993 Lopez quit his job and joined Volkswagen AG in Germany.

In hindsight it is clear that he long term damage to GM was immense. GM went from being the most preferred customer to becoming the least preferred customer. In the changing scenario where technology leadership has shifted to vendors GM became the last customer to receive innovative products and technologies. This was a major contribution to GM's accelerated descent into financial turmoil.

If you are thinking of criticizing customers, beware, it might not go down well with customers and buyers. They have extremely fragile egos and it is unwise to comment on the Emperor's clothes.

There are some exceptional companies and many of them of Japanese origin that partner with vendors and work continuously to reduce actual costs. The savings are shared between vendors and customers. Where such relationships exist, it is not unusual to see in times of a downturn for the vendor companies themselves pass on voluntary price cuts to their customers, till the period of the crisis lasts. These companies share both in the gain and in the pain.

What can you do?
It is helpful to remember that when business is good there is a tendency to pick up flab and even get complacent. In a dynamic and competitive world not doing anything translates into falling behind the pack or loss of position and market share etc.

If you are a vendor and wish that your head does not come under the guillotine during the next downturn then the time to act is NOW. When things are going well, you have the resources and manoeuvring space for innovation and initiating improvements in quality, costs and responsiveness, but in a downturn you will find it harder to act and with fewer resources. When the business environment turns nasty, you are unlikely to have the luxury of time to respond leave alone react.

Smart vendors can reduce the impact and even avert crisis caused by business downturns by ALWAYS and continuously seeking to reduce costs by innovating,eliminating non value add activities and never allowing their products and services to become commoditised. To survive and progress vendors must not make the same mistake as their customers.

Vendor or customer, the winners will be those that constantly innovate, eliminate waste and non value add activities to reduce costs continuously. This is possible only if managements invest in harnessing the maximum potential of their employees and associates. This is so obvious but yet so often it is a neglected policy.

If you are a customer and pay handsome salaries to your team of buyers, operational staff, and product development people, you may want to ask yourself if your team is getting you real cost reductions and not just price reductions by merely squeezing your vendors.

Unfortunately human nature is more inclined to assault rather than to seeking cooperation.