Aubrey Daniels’ Blog

In a USA article about GM’s decision to close 15 plants for 9 weeks, Stephen Spivey, a senior auto analyst for the research company of Frost & Sullivan is quoted as saying, “Production has to be slashed to match the sales trend.” My reaction: What a novel idea! Why have they only decided to do that at this point in time? GM has been losing money since 2005. One would think that matching production to demand would be one of the first things that a company would do when sales drop.

While I understand that there were many considerations involved in making the decision to close the plants, the question still remains, “Why did they not do it earlier?” The answer may lie in the fact that automakers book revenue when they produce and ship cars to dealers, not when the dealer actually sells the car. What crazy accountant convinced them to do that?

What this accounting practice means is that the reinforcers and rewards in GM are for making cars, not selling them. Under this accounting system can you understand why managers and executives want to continue to make cars, even when no one is buying them? Is it possible that some manager and executive bonuses are dependent on the number of cars that are made?

It occurred to me that when GM says it made a quarterly profit, what it really means is that it was efficient in producing cars that quarter. The good news is that GM is making a lot of cars; the bad news is that no one is buying them. This reminds me of the traveler who says to a companion, “We are lost but we are making good time.”

While GM’s accounting practice focuses employees on short-term efficiency, long term efficiency is harmed. In the long run GM only makes a profit when someone buys a car. When cars pile up dealer lots, it ultimately creates a bottleneck that ultimately cannot be ignored. When you have a production bottleneck, the most valuable behaviors to reward are not those related to efficiency but behaviors that clear the bottleneck. Of course, the “Big 3″ auto companies have traditionally tried to clear their bottlenecks by pressuring dealers to take vehicles they did not want and could not sell at a profit.

While GM made the right decision this time to clear the bottleneck by stopping production, the problem will reoccur down the road when production resumes and cars don’t sell.

I do not want to minimize the impact of the economy on GM’s current problems, but I suspect that many of them go beyond current economic conditions. I am betting that the company has serious misalignment of reinforcement, recognition and rewards. Fixing the contingencies of reinforcement should be a primary concern of executives if the company is going to survive because we know that what gets reinforced get done even when it is not efficient or effective.

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