Case Jose Lopez de Arritoua

Overview The case study “Jose Ignacio Lopez de Arriortua” outlines the automotive’s executive success and tribulations among GM and Ford, known for his charismatic, competitive, innovative and controversial manufacturing practices and sourcing strategies. Lopez was responsible for the emergency of GM as one of the most cost competitive operations in Europe, by working with suppliers to cut component costs. Companies selected to do business with GM would have to bid among each other, being the lower bid the winner. This tactic enabled GM to build a large network of suppliers from an operation that was before limited only to German companies.

After working for GM in Europe, Lopez was appointed as Vice President for Worldwide Purchase in Detroit, where he worked closely with his assistants who he called “warriors”. Cost cutting was at the center of his tactic, and it was somewhat controversial to some that believed that he was eliminating GM core capabilities. Lopez developed the PICO (Program for Improvement and Cost Optimization of Suppliers) where suppliers would work against each other to achieve the lower costs as opposed to the lean manufacturing concept where suppliers work closely to manufacturers to lower costs.

Lopez had low regard for intellectual property, taking his suppliers plans and research to its competitors. Suppliers were forced to take the losses as for most of them GM was their main source of revenue, and as time passed they were getting more and more unhappy with GM practices. On 1993, Lopez left GM to join Volkswagen as Chief of Product Optimization and Purchasing and also nominated for the company’s board. At Volkswagen, Lopez dream, The Plant X, had been given more attention by Ferdinand Piech the CEO of the company.

In the past, he had presented the project to GM, but was refused. He envisioned a manufacturing facility such as the modular consortium where suppliers would perform the actual production assembly. This plant was later build by Volkswagen in Brazil. Lopez created a battle between GM and Volkswagen where GM accused Lopez to take proprietary material from the company and taken to its competitor. It also procured legal measures to avoid Lopez from taking any more employees with him. He was charged of industrial espionage and racketeering.

They finally settled the charges with Volkswagen having to pay over 100 million in damages. Lopez and the Field of Sourcing Jose Ignacio Lopez de Arriortua was born in the city of Amorebieta in Spain in 1941. In 1966 he received his doctorate in industrial engineering from the school of Industrial Engineers in Bilbao, Spain. From 1969 to 1980 he worked for Firestone, moving to GM in 1980 in the city of Zaragoza. Ignacio had the nickname the “Grand Inquisitor” of the auto industry due to his innovative sourcing practices (Moffett & Youngdahl, 1999).

His focus was on cost cutting saving techniques on procurement, applying global sourcing, and bidding techniques to realize the most cost reduction. Purchase components are the major part of car manufacturing, therefore once this process is improved higher profits can be realized by the company. Ignacio sourcing method consists of: •Analyze the potential savings • Implement Global Sourcing • Implement Purchasing System Matrix • Measure success (wikipedia. org)

In the article by Moffet and Youngdal (1999), the authors emphasize Lopez new sourcing techniques brought to GM where the buyer has the ultimate power over suppliers, driving the prices down and saving the company billions of dollars over the years by breaking the long standing relationship that GM had with supplier. Inaki, the name he preferred to be called, was then very successful at GM in reducing cost and improving the quality of General Motors procurement practices, envisioning one day to build a plant called Plant X, where suppliers would be responsible for parts of the manufacturing process.

Lopez was promoted to head of purchasing operations for Europe and along with Jack Smith, GM emerges as a powerful company after abandoning its old purchasing tactics consisting of solely German suppliers to a diversified supplier chain. In 1998, Lopez left GM to join Volkswagen, bringing along a chain of deception by the former that lead to lawsuits against Lopez and Volkswagen in the basis of industrial espionage. Legal and Ethical Issues Trade secrets problems emerged when Lopez left GM to join Volkswagen, as it was found that he took with him proprietary information.

GM investigation leads to believe that he took with him four sets of materials: •A 3,350-page listing of the 60,000 parts, their suppliers, their cost, and their delivery schedules for GM-Europe; •A collection of materials detailing GM-Opel's future product lines; •A detailed manufacturing and cost study on the prospects for Lopez's Plant X; •A portfolio of presentation materials used by Lopez in cutting supplier costs (Moffett & Youngdahl, 1999) There were also the issue of employees that worked for Lopez, his warriors as they were called, leaving GM to join Lopez at Volkswagen.

If they joined Volkswagen because of their expertise, the move should not be considered unethical, but it was believed that they had followed Inaki and brought with them the insights from the competitors. GM followed a lawsuit to prevent Lopez from taking any other GM’s employees with him in addition to that seven ones that have left, and a racketeering lawsuit was also filled. Ethically, it was a wrong action by Lopez to take the documents with him as it affected not only himself but also both companies and their stakeholders. Lopez past track record indicate that he did not regarded loyalty as a virtue, but a cause of his own work.

When working at GM he had shared supplier confidential information with other suppliers, and suffered no harsh consequences at the time. This makes one believe that GM is also guilty for not correcting his acts in the past and have some kind of legal cause to avoid future happenings. In the United States there is a federal law The Economic Espionage Act that considers a crime to mishandle a trade secret. This law makes firms liable for their employee actions and may prevent them to hire experienced workers, what can reduce employee mobility.

Trade secrets should be governed by patent laws as opposed to criminal penalties as those can become part of public domain (Moohr, 2002). If GM had developed patent protection on their process, Lopez would be unable to use the information at Volkswagen. The case has settled with Volkswagen agreement to pay $100 million to GM to settle its accusation of espionage. The company has also agreed to buy $1 billion in auto parts from GM . Volkswagen however did not admitted that had done anything wrong but exploited the possibility that some illegal activities was brought in by the defecting GM executives when joining the company (Meredith, 1997) .

GM Purchasing Practices General Motors procurement practices before Ignacio joined the company consisted of a chain of local suppliers, mostly all from Germany, and it was based in a strong loyalty and cooperation between them and the company. It was a divided, expensive, and efficiency was measured by process time. Actual improvement process was made inside the plant, which accounted for only 7% of the cost of the car as opposed to concentrate on suppliers which accounted for the majority of production costs.

Ignacio new cost-cutting methods are called PICOS (purchased input concept optimization with suppliers), (Economist, 1993). Lopez purchasing new practices at GM emphasized supplier’s bids as the main idea of cost cutting and consist of the following: •All contracts with GM suppliers were to be put up for bid; •GM would no longer favor its internal manufacturers (who were currently supplying 70% of the components used in GM vehicles); •50% improvements in productivity were expected by 1995 (Moffett & Youngdahl, 1999)

The new strategy puts suppliers at the mercy of the company, leaving them no power to negotiate, what caused much controversy among American companies that were used to faithfulness from the buyers, now forced to comply with low prices or get out of business. This tactic follows the law of natural selection where only the strongest suppliers would survive the cost cutting practices or one also can think of the stock market law of supply and demand where buyers and sellers would compete for the best bid.

Lopez was then just following a business pattern used for many years, but new in the procurement industry, what steered many controversy. Another measure taken by Ignacio was to strengthen teamwork and cooperation among GM various units Opel and Vauxhall He had however, no loyalty, to GM internal suppliers, which wages of $50 per hour, believing that internal suppliers were important but external ones would also represent savings and ones such as TRW and AMP could bring great opportunities for production.

By his innovative techniques Ignacio was able to think outside the box and produce never heard industry profits with his new system, he was an innovator, as many before him and nothing wrong with this idea (Moffett & Youngdahl, 1999). Modular Consortium The Modular Consortium concept is based on Lopez vision of his Plant X, and was adopted by Volkswagen to its new truck and buses plant in Brazil. The scheme involves Volkswagen the manufacturer being responsible for vehicles design, supplier selection, and the maintenance of the manufacturing facility.

The assembly of the parts in the plant is performed by suppliers instead of company employees. The floor of the plant is divided by yellow lines that separate the various suppliers working in the diverse processes within the facility. Volkswagen workers are responsible for quality control, marketing and engineering (Moffett & Youngdahl, 1999). This system allows for huge savings in production since suppliers are knowledgeable with their processes and parts, having core competencies and can apply that to the business. Moreover, it leads to diminished assembly times and capital expenditures.

In the Brazilian plant, suppliers invest not only capital but also its own tools and fixtures to the process, which represents cost savings for Volkswagen. Suppliers are fully committed to the process and assure it success since they depend on them for revenue, also assembly quality is improved. Furthermore, by working together the diverse supplier companies can share ideas and practices. A disadvantage of the modular system is that by having suppliers doing the work, the company is not having innovation and learning sources , that are a common form of competitive advantage.

Furthermore, these suppliers can turn around and leave the company to work for competitors. Another problem that can emerge in these factories is problem solving, since there is no union worker involvement, decision must be made by the few participants. Building on this idea, decisions can be complicated since there are several managers within one plant that can have different ideas and cultures (Correa, 2001). Conclusion The current recession has causes large losses to car manufacturers, and cost cutting procedures such as those proposed by Lopez would be benefit manufacturers.

Lopez had the correct production ideas and was the leader in cost savings, his mistake was to dream bigger based on his vision of Plant X, which caused him to leave General Motors and move to Volkswagen where his vision was given consideration. However, during this transition he made unethical decisions that brought harmful consequences for all involved. Ignacio not only brought with him to VW proprietary information belonging to GM, but also his key players, causing a web of legal suits and settlements.

If Lopez had known of the recession maybe he would have made different decisions, as the lawsuits were costly for both parts. Loyalty nonetheless was not part of his main character, making difficult to predict what would have occurred in the hindsight of a recession, as he took the ideas as his own, and did not considered them being stolen. GM was also to blame for not have patents in place to protect the ideas or have corrected Lopez in the past. In this case, monetary profits were valued higher then ethical decisions.

In the current economic situation, Lopez procurement practices would be of benefit for the company but would be controversial to the country economy since the method outsources many of the manufacturing parts to foreign countries and companies, in expense of the local economies. Many workers in the United States have loss his jobs to outsourcing, where companies search for cheaper labor costs, is the same with automobile suppliers as local suppliers can lose the bid to foreign companies. Are companies better off with long outstanding relationship with suppliers or by taking Lopez approach to global sourcing?

Both methods have its advantages and disadvantages in creating or eliminating jobs at expense of the company, its stakeholders and the economy as a whole. To survive during the current economic condition companies should take measures that enable survival, if outsourcing is the right strategy it should be pursued. Many would argue that Lopez procurement strategy are not adequate for this economic times, as it transfer local jobs to other countries, but one has to think that if the company fails, then no jobs would be available Therefore, some jobs are better than none.

Procurement and supply are becoming increasingly important in corporations, where they will shift its activities from engineering and manufacturing to purchasing, embracing Lopez concept. Suppliers are now in charge of the latest technologies and development of the product, being then a fundamental instrument in many automobile companies. For example, following Lopes GM procurement design, many others are appointing their heads of supply and procurement more important position within the board of directors within the company (Sharf, 1998).

Correa, H (2001). The VW Resende (Brazil) plant modular consortium SCM model after 5years of operation. Department of Production and Operations Management. Fundacao Getulio Vargas Business School. Retrieved November 25, 2010 from http://www. fgvsp. br Economist (1993). Why Jose's dream car matters. Vol. 328, Issue 7821, 65-66. Meredith, Robyn (1997). VW agrees to pay GM $100 Million in espionage suit The New York Times Retrieved November 27, 2010 from http://www. nytimes. com/1997/01/10/business/vw-agrees-to-pay-gm-100-million-in-espionage-suit. html?

ref=jose_ignacio_lopez_de_arriortua Moffett, M & Youngdahl (1999). W Jose Ignacio de Arriortua. Thunderbird International Business Review 41, (2), 179-194 Moohr, G (2002). The Problematic Role of Criminal Law in Regulating Use of Information: The Case of the Economic Espionage Act. North Carolina Law Review, Vol. 80, No. 3. U of Houston Law Center No. 2009-A-5 Sharf, S (1998). Change of Control. Ward’s Auto World. (34), 2 Wikipedia . Jose Ignacio de Arriortua. Retrieved November 27, 2010 http://es. wikipedia. org/wiki/Jos%C3%A9_Ignacio_L%C3%B3pez_de_Arriort%C3%BAa