GM implements cost reduction program in effort to boost margins

In an effort to implement a cost reduction program, General Motors hired a management consultant, Bloomberg reports.

GM, along with Chrysler and Ford, is a member of the so-called 'Big Three' U.S. automakers. GM battled back from insolvency with the help of financing from the federal government, and its sales have surged over the past few years, prompting company officials to take the firm public once again.

However, GM is still indebted to the government, and it has struggled to repay much of the massive debt it accrued during its decades-long decline. Now, the company will work with outside companies in an effort to fine-tune supply management, establish strategic sourcing best practices and rework spend management.

GM officials are hopeful that by working with an outside procurement agency, the company can increase profit margins. GM, which has not commented publicly about what firms it is working with in its quest to fuel profitability, has been cutting white collar jobs, according to company spokesman Jay Cooney.

Under chief executive Dan Akerson, GM has aggressively pursued an uptick in profit margins, particularly over the past few months. The Detroit-Free Press reports Cooney did concede the automaker – the recipient of $50 billion in total government loans in 2009 – is working to trim jobs across a number of departments as it works to increase competitiveness.

"We are looking to streamline our business, looking for efficiencies, and to this extent, there will be some headcount reductions and it will be on a global basis," Cooney affirmed. "GM is continually seeking ways to improve our operating performance and reduce complexity to deliver a world- class cost structure and profit margins."

In the first nine months of this year, GM reported an operating margin of 5 percent of sales. That figure lags behind a number of its biggest competitors, including Volkswagen and Hyundai. The former posted an operating margin of 7.7 percent of sales, while the latter's financial statements peg the figure at 10 percent.

Akerson and GM chief financial officer Dan Ammann have ardently worked over the past few months to convince company officials that the automaker needs to boost its margins through hard line business cost reduction measures. GM has scrutinized spend management and indirect spend, while eying other possible areas ripe for efficiency improvements.

"The number one challenge has been margins," Jefferies & Co. analyst Peter Nesvold said. "Margins peaked in 2010. It has been down ever since because of vehicle launches and rising materials costs."

GM is using an accounting model to help ascertain how cost-cutting initiatives will impact profit margins and its bottom line, according to Bloomberg. The Detroit, Michigan-based automaker is using a forecast of its fiscal year earnings before interest and tax (EBIT) relative to revenue from Morgan Stanley Investment Banking to measure margins.

Under such a model, if the company posts $150 billion in revenue, it could successfully increase its EBIT by 1 point for every $1.5 billion it logs through its cost reduction initiatives.

The total number of employees working at GM has declined precipitously over the past 12 years. In 1999, the carmaker counted approximately 594,000 workers among its ranks; by 2010 that number had dropped to roughly 202,000, according to the Free Press. Still, the company has added 8,000 workers since then, and now has an employee pool of 210,000.

As it works to catch up with rivals such as Hyundai, GM has its work cut out for it, Morgan Stanley analyst Adam Jonas contended, noting that Hyundai benefits from the weak Korean won and an innovative manufacturing model through which it builds many different cars on only a handful of structures.