Bo Andersson's Supply Strategy Collides With Vladimir Putin's Russia: The Performance Triangle Collapses

Automotive news seems to be coming up a lot lately.  A story in the Wall Street Journal revealed that Bo Andersson, the current CEO of Russia’s largest car maker AvtoVAZ, plans to step down. The Renault-Nissan Alliance is the majority owner of the firm.  According to the story, Mr. Andersson joined Renault in 2013 after he helped turn around Russian truck maker GAZ Group.  He started at AvtoVAZ in early 2014 and slashed tens of thousands of jobs at its main Togliatti plant. He also renegotiated contracts with local suppliers in a bid to cut costs.

Further details were provided in a story in today’s edition of the WSJ.  When he arrived, the company was, in his words, “the biggest mess I’ve ever seen in my career.”  Upon arriving he found low morale, rampant corruption, theft of parts from the plant, a reputation for poor quality and a Soviet-style employee culture that rewarded seniority over job performance.

Today’s story notes that “The cost-saving moves angered many in Togliatti, a one-industry city some 500 miles east of Moscow. Discontent trickled up to the highest echelons of Russia’s political elite and prompted a warning shot last spring from an ally of President Vladimir Putin.  “You’re playing with fire,” Sergei Chemezov, a friend of Putin, recalls telling Mr. Andersson. Mr. Chemezov runs a state-owned defense and industrial company that holds a minority stake in the auto maker, OAO AvtoVAZ.”  Industry experts note that “the Russian government wants it both ways—AvtoVAZ as a social project and a competitive business in the modern era. It’s impossible.”

Let’s see – what exactly did he do that was so horrific, that he deserved the wrath of Putin to descend on him?

Well, he made the horrible mistake of laying off workers, even though the layoffs were formally approved by the AvtoVAZ board.  He then went about renegotiating contracts with suppliers to set a target of 5% cost reductions (a target that, by the way, is considered a year over year requirement for suppliers in the automotive industry).  Such targets are typically discovered through value analysis, productivity improvements, application of  cost models, and material substitutions.  He also sought to improve quality.  (AvtoVAZ vehicles are known for spending more time in the shop being repaired then on the road).  He worked with Renault to invest another $448M in new technology in the company.  He even required the filthy facility toilets to be cleaned on a daily basis!  In Bo’s words, “The only way we’ll become world-class is if we’re clean—toilets and floors, too.”

This story reminds me of my visit to General Motors in late 1999, when I was working with their senior automotive team prior to an education session I was helping them organize in China.  At the time, I had the opportunity to interview most of the major executives leading their supply chain.  My arrival occurred just after the departure of the infamous Jose Lopez.

The Purchasing  revolution occurred at GM in the early 90’s with the appointment of Jack Smith, CEO, and Jose Ignacio Lopez as Vice President of Purchasing. Despite his bad reputation, one the things that Lopez should get credit for was raising awareness around  quality, service, and price (or QSP, a “mantra” at GM). By creating an internal culture focused on driving improved internal integration between purchasing, engineering, logistics, and operations, Lopez turned around GM around at a time when it was literally on the verge of bankruptcy. During his brief two-year tenure at the head of GM’s purchasing organization, he established a different mindset and raised the importance of purchasing and supply chain management as a core contributor to GM’s competitive success. On that visit I was able to also conduct interviews with top-level purchasing executives at GM during this period, including Harold Kutner, Tom Fabus, Bo Andersson, Woody Williams, Bob Burkhart, and John Calabrese.

After leaving GM, Lopez was replaced by Harold Kutner. Kutner took Lopez’s concepts and extended them beyond the simple mantra of QSP, to include T: Technology. Kutner and Jack Smith realized that to truly be successful, global integration across all of GM’s product lines and platforms would be required. To do so, they created a new purchasing organization called World Wide Purchasing (WWP). WWP was a matrix-based structure developed across product lines and commodity groups, that enabled vehicle platform teams to scan the entire globe for leading-edge technologies at the best quality, service, and price. A new measurement system for certifying and selecting suppliers in QSTP was instigated, with commodity managers and product platform managers working hand-in-hand. Every Friday morning, leading executives from all four corners of the world gather around a satellite camera for a global teleconference. Information shared includes updates to product development efforts, changes in market conditions, pricing updates, and new developments. This helped to ensure that on a weekly basis, all parties throughout the world are up to date and on the same page.

When I interviewed Bo Andersson during this period, I recall that he drew a triangle for me, and stated that there were three elements of supplier relationships represented by the three sides of the triangle:  Price, Performance, and Place.  Performance related to the QSTP dimension, and Price was obvious – but Place referred to the local relationships that existed between suppliers and purchasing.  Bo emphasized that all three dimensions needed to be in balance, but that what had happened at GM was that the Place dimension (e.g. the relationship that existed between suppliers and purchasing) had gotten too important, resulting in a “squashed” triangle.  He emphasized that purchasing often got too comfortable with their current suppliers, and developed a personal relationship with them, that sometimes got in the way of price and performance.  “Competition is a good thing”, Bo emphasized to me.  “It doesn’t hurt to shake up these relationships from time to time so we don’t get too comfortable with our suppliers.  They need to know that performance and price is important, and that we must be globally competitive to succeed and grow.”

Evidently that is also what Bo Andersson was seeking to do at AvtoVAZ.  But it didn’t work so well.  I will note that when these principles were introduced on my visit to China with Shanghai Automotive in 2000, the Chinese were very receptive to the concept, and recognized the importance of competitive sourcing to drive cost, quality, service, and technology improvements.  Not so much in Russia at the moment.  Putin just got his wish by driving out Bo Andersson, and ensured that Russians will be driving shoddy cars for some time to come.