General motor decides smaller is better Case Study SBM-ITB
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General Motors was facing huge losses due to diseconomies of scale resulting from a bloated workforce and management structure, low capacity utilization, and too many divisions and models. To contain costs, GM shed 74,000 workers between 1992-1994, outsourced more assembly tasks, and closed 21 plants. A comparison of sales per employee at GM, Ford, and Chrysler showed GM's workforce was larger than optimal, suggesting GM could cut costs by reducing employees from 756,000 to a more efficient 464,239. GM took additional steps to cut average manufacturing time and reduce the number of models produced through downsizing.
General motor decides smaller is better Case Study SBM-ITB
- 1. General Motor Decides Smaller is Better Syndicate-1 BLEMBA-18
- 2. Problem: Strong Diseconomy of Scales • Cause: • Bloated workforce and management • Low capacity utilization • Too many divisions and model • High cost of supplier • Result: Huge losses of $2 bio (1990) and increasing to $4.5 bio (1991)
- 3. Ways to contain or cut costs popular during the past decade: •most common: reduce number of people on the payroll Shed 74,000 workers (50,000 blue-collar & 24,000 white collar (1992-1994) •outsourcing components of the business Outsourced more of the assembly task
- 4. Peers Comparison: GM, Ford & Chrysler Sales Employees Sales/Employee General Motors $ 123,100,000,000 756,000 $ 162,831 Ford $ 88,300,000,000 333,000 $ 265,165 Chrysler $ 29,400,000,000 123,000 $ 239,024 Sources:The Economist (May 2, 1992) Assuming that Ford had the ideal of Sales/employee, then the ideal number of GM’s Employee is 464,239
- 5. Optimal Use of Labor MRPL = MRCL (MPL)(MR) = TC L If the MRPL > MRCL Firm could increase number of labor until the MRPL = MRCL achieved.
- 6. Ways companies cut costs to remain competitive • reduction of process costs Cut average manufacturing time (34 30 worker day / vehicle) • layoffs and plant closings closed 21 plants • subsequent downsizing Reduced number of model which was produced