General Motor Decides Smaller is Better

Syndicate-1

BLEMBA-18

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)

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

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

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.

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

Thank You Syndicate-1