By Kevin Meyer
I've been keeping a pretty close eye on GM since I recently became an unexpected investor in the company thanks to the government bailout. Some good signs, some bad, but the news yesterday was more than a little troubling.
Starting Jan. 4, General Motors Co. plans to do something unprecedented
in the U.S. car industry: It will run its assembly line here [Kansas City] around the
clock on a permanent basis.
It's not just unprecedented in the U.S., but in many such industries worldwide.
While common in other industries, not even car-efficiency benchmark Toyota Motor Corp. operates its plants routinely with more than two shifts.
Car-assembly lines need too much scheduled maintenance and restocking
for such intensive production to make sense, many industry experts say.
For a company long bloated with unused capacity, GM's third-shift
strategy is a radical—and risky—departure. Unlike other cost-cutting
moves made during its trip through bankruptcy court last summer, such
as halving its brands to four, the third-shift plan could make GM a
model of car-industry efficiency—or end up a failure like its 1980s
drive to let robots run its factories.
So why would they do it?
The Obama administration auto task force that oversaw GM's
reorganization last spring was startled to learn that the industry
standard for plants to be considered at 100% capacity was two shifts
working about 250 days a year. In recommending that the government
invest about $50 billion in GM, the task force urged the company to
strive toward operating at 120% capacity by traditional standards.
But industry manufacturing experts are skeptical, noting that the
federal task force had limited automotive experience. "Do those guys
understand the business?" asked Ron Harbour, whose Harbour Report is a
widely followed analysis of auto-plant efficiency.
The article points out one good reason for not running three shifts.
A few idle hours between shifts also enables a plant to perform
cleaning and restocking. A plant's paint shop alone generally requires
about four hours of cleaning a day, said Mr. Harbour, adding that the
efficiencies of a third shift can disappear quickly amid slowdowns for
"If running three shifts means you're moving [the line] at only 60% of capacity, then you haven't gained anything," he said. In all industries, moreover, midnight-shift workers are prone to
above-average rates of on-the-job errors, absenteeism and illness.
I've personally run 24/7 operations a few times in the past and can vouch for how tricky they are. Maintenance becomes a serious issue, and without a laser focus and commitment from the very top, quality will suffer. If a mold goes down a few cavities, the almost overwhelming desire is to keep the press running, even if the mold is unbalanced. If I knew GM had that total commitment to quality I might buy into this. I don't. At least not yet.
But as I implied, the article mentions one good reason for not doing three shifts. There's another, one we've talked about before, and that's the distortion of reality caused by traditional accounting.
Traditional accounting creates the desire to fill unused capacity in order to absorb overhead, depreciation, and other indirect costs. Usually regardless of whether demand actually exists for that capacity. Last time I checked GM still had a much larger inventory than other auto companies, spread out through a still too large dealer network. Improving, but a long ways to go. They are also going to pay $30k per employee to relocate, plus retraining and retooling, and tons of time trying to figure out how to manage a third shift. With traditional accounting those dollars and costs aren't in the same bucket (let alone the bizarre concept of a "sale" being when the vehicle has left the factory, not when money transfers from a real customer). In reality, bucks are bucks.
It may look like a bold, risky move but is it? How risky? How bold? Appropriately risky? Interesting how GM's move that effectively risks the company's viability is portrayed as a good thing by the Obama overseers, but Wall Street's risk-taking is a bad thing. Go figure.
In reality there are several other bolder moves that could, and should, be taken. Ones without the risk of destroying my unintended investment. Here's a very simple one: have all the managers and execs go stand in an Ohno circle on the factory floor, a few times a week. Of course you'd have to educate a lot of them to just recognize a factory floor… or perhaps even their own cars for that matter. But I bet they'd have a lot of "a ha!" moments and realize how the could vastly improve efficiency and reduce waste.
Without putting the entire company, my investment, at risk.