The latest issue of Target, the award-winning publication of the Association for Manufacturing Excellence, has a cover story on Delphi’s pursuit of excellence. Written by Delphi division president Jeff Owens, the article details the company’s culture that supports and strives for excellence. Delphi has won numerous awards for manufacturing excellence, including a large number of Shingo Prizes in 2004 and 2005.
But wait a minute. There are many people, including my father-in-law who recently retired from Delphi, who would dispute those accolades. The company has just slashed medical insurance for retirees and has a severely underfunded pension plan that will probably lead to pension cuts. There is even talk that the company may file for bankruptcy.
This is excellence? This is the result of impressive efforts to implement lean manufacturing methods? Actually Delphi is operating in a very difficult business environment… internally and externally. Legacy union agreements require that idled workers be paid almost 80% of their active wages, incredibly generous health care plans have created a huge cost burden, and accounting irregularities dating from 1999 have cast a dark cloud over the company.
Lean manufacturing is a tool, and a process… but not the answer. It also takes leadership. And leadership can be tough.
The May 9th edition of Business Week has a cover story on "Why GM’s Plan Won’t Work… and the Ugly Road Ahead." Pretty brutal, but unfortunately accurate. Like Delphi, GM suffers from legacy costs due to union agreements. But it also has too many like car models, too many divisions, significant overcapacity, and too many businesses that distract from its core automotive activities. Market share continues to decline, with GM executives claiming that it’s going to turn around… every year for the past fifteen. The only good news is that GM has considerable (but eroding) cash in the bank, and it has successfully revitalized its Cadillac line with innovative styling and technology. Lean manufacturing efforts have cut costs, but not nearly enough.
GM can survive. But it will take a lot of guts. Executives must have the guts to consolidate car models and divisions in the face of opposition from dealers. Unions must have the guts to bring health care benefits back in line with the norm. And shareholders must have the guts to allow the company to spend some of its cash to close plants, idle workers, and therefore reduce overcapacity.
As the Business Week article pointed out, GM has been the number one auto seller for a very long time… so long that no one at GM has ever experienced GM being anything except number one. Being able to envision, let alone create and effectively manage, a GM that is in second or third place will require a very difficult culture change.
That will take guts. Serious guts. But that’s the essence of leadership.
Bill Waddell says
In your recent blog questioning the dismal results generated by the folks at GM and Delphi, you raised perhaps the most important issue facing the lean community. You are absolutely correct – GM and Ford were punched squarely in the nose by Toyota thirty years ago, and they still have been unable to respond. Article after article mentions the lack of sustained success lean manufacturing has experienced, especially in the big companies who once ruled their worlds.
You will have to excuse me if I do not join the rest of the world on the GE/Jack Welch bandwagon. They are supposed to be the poster boys for Six Sigma, which was originally created to be a largely mathematical version of the Toyota Production System. The objective was to drive the variability out of manufacturing processes. “The best quality producer is the shortest cycle time producer, and the shortest cycle time producer is always the best cost producer’, at least that is what Smith and Stork and the original gurus of Six Sigma said back in the 80’s. GE, however, has a stated goal of outsourcing 70% of everything they do. The guy in charge of their once great locomotive works in Erie brags that they now manufacture less than half the content of a locomotive, well on the way to reaching the 70% goal. The once great manufacturing works at Appliance Park in Louisville and the aircraft engine plant in Cincinnati are now hollow shells. Six Sigma at GE is not a tool to optimize manufacturing. Instead it is a grand Value Stream Mapping exercise that enables them to identify plants, businesses and operations to outsource or sell off. GE is getting out of the manufacturing business in the US as fast as they can. What they do not outsource, they move to GE owned plants in China, India or Malaysia, or wherever cheap labor can be found. That business strategy is fine if you are a GE stockholder, but it is not lean manufacturing and it is not Six Sigma as originally conceived. In the long run it is not even good for the investors. GE’s current kick is to outsource engineering, as well as manufacturing. That road leads only to a point where GE is adding no value at all – then they will serve no useful purpose and go the way of everyone who attempts to get something for nothing.
Motorola is no better. This is the company that came up with Six Sigma and they still offer training and Black Belt certification at Motorola University. At the same time, they have farmed out almost all of their manufacturing to contractors. Flextron and Spectron have been the big winners. According to Chris Galvin, their chairman, outsourcing manufacturing increases their “agility” and “flexibility”. That is one hell of a note – the founding fathers of Six Sigma believe that manufacturing is more flexible and agile when performed somewhere other than in their Six Sigma culture.
The big steel companies are all but gone. IBM first moved virtually all of their manufacturing to Guadalajara, then turned it all over to a third party, so they are just about out of manufacturing all together. Emerson Electric also claims great lean results; at the same time they rush to move all manufacturing out of the US. Steve Stewart, their great lean leader and champion in the early 90’s now runs an Emerson Division from an office in Hong Kong. RCA and the consumer electronics companies were slaughtered by Sony and the rest of the Japanese long ago and there is no longer a television made in this country. On and on it goes. None of the great manufacturers, whether they are telling the public how lean they are, or about their commitment to Six Sigma, are investing in their manufacturing business. None of them can point to factories that are performing at world class levels as a result of their management.
Returning to GM and the auto industry, one can only scratch their head and wonder how, with the Toyota Production System in their own front yards, can they have accomplished so little in the last thirty years. How can GM declare a profit of $2.7 billion in 2004, pay their top guy $10 million for doing such a marvelous job, then five months into 2005 say they cannot meet their pension and health care debts and be put on junk bond status? Ford paid their leader over $22 million last year and they find themselves in the same boat. At the end of the day, it is apparent that what lean meant to these companies is that their stakeholders all had to change, while they remained the same. Lean was the tool to leverage better labor agreements and a number of concessions. Lean was the rationalization for demanding Just In Time deliveries from all of their suppliers, along with price concessions. But the Ford and GM plants all operate about as they did before. More important, the thinking and procedures in the headquarters of these companies has clearly changed not one iota. Ford’s brightest profit center is Ford Financing, GM’s is GMAC.
In fact, it is not that hard to understand. The tough fact to accept is that these companies were never well managed. The vaunted Sloan system never accomplished much. These companies all rode the great World War II boondoggle, and called it management. For thirty years, from the end of the War until the early to mid-1970’s Europe and Asia were digging out of the rubble and attempting to rebuild with scarce capital. Once they were back on something close to an even footing with the US competition, they dominated. Sloan and GM made money hand over fist as long as their only competition was Ford and Chrysler, who ran their businesses in exactly the same manner as GM. With all three virtually mirror images of each other, the only thing separating them was marketing. Ford leaps ahead with the Mustang, GM counters and regains the lead with the Camaro. It did not matter that the plants churning them out were inefficient, costly and had extremely poor quality. Both companies were equally poor.
They deluded themselves into believing that their success was the result of brilliant management, rather than the absence of competition. Marketing and finance were the critical success factors and the path to the top went through those disciplines. Manufacturing was the purview of the lesser intellects, without MBA’s, unable to grasp the intricate nuances of clever marketing and Wall Street maneuvering. Sadly, they were following a management illusion that was stifling and killing the factories. They were giving away the store to the unions, because a labor strike was the only thing that could derail the gravy train.
This management philosophy has not changed. Frederick Taylor created the concept of standard times and standard costs, mindless workers and managerial control in 1903. Pierre DuPont bailed out GM with the stipulation that the DuPont ROI formula be there guiding star. That was because he was a temporary investor and was willing to sell out any time the price was right. So the company’s mission was to keep his stock value high at all times. The “genius” of the Sloan system was in the structure that traced labor efficiency at the machine level all the way up to the ROI numbers for DuPont. Minimize direct labor and maximize the immediate stock value. Flow, cycle time and quality had no part in the arithmetic. Lack of flow was just inventory, which was an asset, so it does not hurt ROI. So if plenty of inventory keeps the labor efficiency numbers and the ROI calculation high, then by all means build inventory. Most telling was the fact that Sloan’s “decentralization” did not include accounting. Every accountant in every plant in every decision reported up through corporate – not through the plant or the division. The role of accounting was audit and control. Manufacturing was an activity to be controlled by corporate management, not assisted or managed.
That has not changed to this day. When Jack Welch preaches about cost, he is speaking in the same terms as Sloan. The executives at Ford and GM were made millionaires for their performance last year, because they delivered to the stockholders last year. The fact that their ships were bearing down on the rocks mattered not a whit. The longer term has no place in the equation. Cost to these folks means labor. Their entire system is built around that premise. Their goals are centered on stock prices, which are tracked hourly in their offices.
To people who learned the details of this system of management in the most prestigious business schools in the land, and who have risen to lucrative, senior management as a result of their demonstrated mastery of this system, they simply cannot grasp the concept of lean manufacturing or six sigma. Katrina C. Arabe, a Wall Street “expert”, in Industrial Trends wrote, “Lean manufacturing is in, while vertical integration is out. That’s why companies are outsourcing manufacturing—to stay focused and profitable.” This sort of convoluted thinking is what the lean proponents are up against. The folks at the top latch on to tools like Value Stream Mapping and turn it into a device to help them do the same old thing: outsource, downsize, rationalize. They simply do not and cannot understand.
What the lean proponents are up against is a management system that (1) is firmly entrenched, (2) is fundamentally incompatible with lean, and (3) does not work. Few people understand that the Ford Motor Company, from 1903 when it was created, until 1947 was operated under an entirely different management system. Cash flow was paramount – not direct labor cost or stock prices. The time study department at Ford was calculating Takt times (although they did not call it that) while the time study department at GM was calculating direct labor rates. Modern day experts and academics pooh-pooh Ford management because of the lack of regard for cost accounting. They simply don’t get it. The company was not for sale, unlike the stock of GM, so they could not have cared less what the book value was at any point in time. Nor did they care about an isolated element of cost at any particular point along the way. They cared about flow, and they understood that inventory flow equaled cash flow. The assembly line was nothing more than one piece flow, which was the goal all along.
Not too surprisingly, cash flow was the predominant concern at Toyota in 1950 when the Toyota Production System was launched. Their factory was bombed in the last days of the war, there were no capital markets in Japan to fund an automobile venture. The company was launched with bank loans. Bankers only care about book value as it relates to their need for collateral. What they really want is cash flow to be sure their loans are repaid. Taichi Ohno acknowledges that Just In Time was born from the fact that they struggled to pay their suppliers, so they needed parts delivered at the very last moment.
With manufacturing flow as the cornerstone, rather than cost accounting and Wall Street satisfaction, the road to the top in those companies went through manufacturing. Accounting was a dead end career. So what happened to Ford? How did they go from a lean driven company to the mess they are now? Ernie Breech.
When Henry left for the last time in 1947, with Edsel Ford dead and Henry II taking over at the ripe age of 25, Clara Ford (Henry’s widow) called GM and asked for help. Alfred Sloan recommended Ernie Breech, a master of GM cost accountant and a sort of a trouble shooter for under-performing GM divisions. While the “Whiz Kids” got all the press, Ernie Breech in fact came in as the CEO of Ford. He immediately set out to put the GM accounting and management system in place. Within a few years, Ford quality was shot and the factories were as clogged as GM’s – but labor cost was being tracked religiously. Concurrently, Ford became a publicly owned company. And that was the end of the lean journey in the U.S.
It was lucky for the world – although some people at GM may disagree – that the Toyoda family spent a considerable amount of time at Ford in 1929, and established a particularly good relationship with Charles Sorenson, the Ford production head. This was at the end of the heyday of the Highland Park plant, and near the launch of the River Rouge plant. They learned Ford management in detail. The Toyoda family came back in 1950 for another visit, but the game was up by then and their visit taught them very little. That 21 year gap from 1929 to 1950 is what the War set them back. Without the War, the Toyota Production System would have been launched on the U.S. in 1950, instead of 1970. If that had happened, Alfred Sloan would be just another failed American manager.
So what does all of this mean? I believe it means that there is no future among publicly traded manufacturing companies for lean. GM, GE. Ford. Delphi and the rest cannot become lean. If they have not learned yet, despite Toyota’s continued success, despite Kapaln’s Relevance Lost, despite all of the logic behind Activity Based Costing, then they never will. I believe the future for lean manufacturing and for American manufacturing lies in the small, privately owned businesses, who largely manage themselves the way Ford did and Toyota still does. Let the big guys outsource, and we in the lean community should focus on this willing audience to build a competitive manufacturing base in this country again.
Kevin Meyer says
One fundamental difference between Toyota-lean and all the other attempts
at lean by GM/etc, is Toyota’s emphasis on the importance of culture. I
get the strong sense that most non-Toyota implementations are simply
patchwork buzzword type things… not a completely different way of
managing a business. This is also why I don’t think Dell and especially
Wal-Mart hold a candle to Toyota.
GE is a little different. I agree with you on the six sigma aspect, but
at the same time they have become extremely good at fundamental execution.
Of course that doesn’t mean that they are executing on the right things,
but simply executing in a disciplined fashion is rather unique.
What I like to hear about are examples like New Balance, Jostens, etc that
are moving operations back to the U.S. to shorten supply chains to U.S.
customers… they get it. The total supply chain cost includes far more
than simply cheap labor and sometimes cheaper materials.
Bill Waddell says
With regard to culture, I agree that culture is clearly a huge driver of success or
failure. But I think culture is essentially the result of the business
infrastructure. If department, plant or individual performance is measured
primarily on the basis of production volume and labor efficiency, then all of the
lean talk cannot counter the anti-lean message this sends. How many companies out
there have some nice statement to the affect that people are their most important
asset in their values statement, or posted on the wall for the employees and
customers to see; then list the workforce reduction statistics as one of their great
achievements in their annual report. My dispute with culture is that many folks
seem to define it in terms of talk and attitude. Actions speak infinitely louder
than words. The culture is set by what managers and supervisors do in the thousands of little decisions they make every day – not by what they say in occasional
meetings. And I think that the
thousands of decisions are driven primarily by the performance measurements in place.
At Ford, in particular, the key people were not very nice guys. You would not want
Henry Ford, James Couzens or Charles Sorenson at your family picnic. They were a
bunch of grouchy old curmudgeons, if the truth were known. From what I have read,
Ohno and Shingo were a couple humorless guys too. They were clear on what was
wanted, though – flow and quality. There were no disconnects between what they
said, what they measured and what they did. I think that firm, fair minded
consistency was the essential cultural bond between the two companies. As a result,
I think that as long as GM and Delphi have a formal infrastructure that places a
premium on direct labor cost control, ahead of cycle time and ahead of quality, they
will not have a culture that enables lean, no matter what else they may say or do.
A quick Henry Ford story:
According to Charles Sorenson, once in 1913 or 1914 when they were constantly
pushing flow at the relatively new Highland Park plant, James Couzens (head of
accounting and administration) went into the plant looking for Henry Ford for some
reason or another. While there, he noticed for the first time a conveyor that was
taking assembled radiators directly to the assembly area (this was before the full
blown assembly line was in place). He was furious that the money had been spent
without anyone having talked to him. He asked an employee who had put it in and was
told, “This is one of Sorenson’s accomplishments”. He went looking for Ford to
complain. A little later, Ford ran into Sorenson and told him, “You’d better be on
the lookout for Couzens. He is on the warpath. It’s this radiator conveyor – he
doesn’t like it. But don’t take him too seriously.”
I cannot imagine anyone in manufacturing at any GM facility putting in any sort of
capital improvement without first going through the process of justifying it to the
finance department and obtaining their approval. And if someone were crazy enough
to do it, I cannot imagine the head of GM telling them to not take the VP of finance
too seriously. That, I believe says a lot more about culture than anything else.
Finally, with regard to GE, I certainly agree that they are very, very good at what
they do. I just don’t think that what they do has much to do with manufacturing any
China Sourcing says
Based on your post, it sounds like GM attempted to run their business like the US government, i.e, deficit spending and with the mindset of “hey we can just keep raising the prices” mentality just like the government when they tell their employees to spend more than they were allotted or you will not get as much next year or automatically allotting 10% increase in budget. Well at least in the governments case they can just raise taxes.