The automotive industry is big and visible; it has historically been the bellwether of manufacturing; it is the essence of manufacturing, in fact. With thousands of components and dozens of subassemblies, spanning the entire spectrum of manufacturing process technologies from machining and stamping to electronics and composite materials, it embodies just about everything manufacturing does. And it is the industry in which Toyota plays. Finally, just about all of us own a car so we have a personal interest in the industry and many of like to think we are somewhat knowledgeable about it. All of these things combine to make news out of Detroit a big deal – probably a bigger deal than it should be since most of us work in manufacturing areas other than automotive.
However, there is a very fundamental lesson to be learned from watching the continuing failure of automotive to right itself and embrace lean manufacturing. The common thread in my blogs over the past few days is volume.
Bob Lutz actually sees himself as a turnaround guy – someone with a track record of restoring companies to profitability. His claim is based on leadership of product development efforts at Chrysler, Ford and GM. True enough, in each instance sales and profits improved dramatically once the new models were rolled out. In each instance, unfortunately, the ‘turnaround’ fizzled when the new products had run their gamut. In a similar vein, Bill Ford expressed complete confidence in his plan and in Mark Fields based on the success they had in turning around Mazda – another effort driven by new products.
Contrast that with the real turnaround at tiny DeCardy, which was driven by flexibility and customization. Minimum order quantities for die cast products were reduced from 1,000 to 25; and through lean manufacturing DeCardy has managed to become profitable with many small orders rather than fewer big orders.
The Detroit fixation on new products as their salvation – and their fixation on new products as the key to restoring profitability using "product development" and "turnaround" as though they are synonymous – is their ruin. Bill Ford and Mark Fields may well drive the company to create the 21st century Mustang or Taurus and sell staggering quantities of their new product – for a while. During that ‘while’ they will in all likelihood be very profitable. They and Wall Street will likely crow about the success of their turnaround strategy. Then the luster of the new product will wear off or the market will become saturated and the competition will have responded, and the ‘turnaround’ will come crashing back to earth.
The only way Ford, GM and Chrysler are able to succeed – that is to make any money – is with very high volumes. They still think like DeCardy did when they thought they could only make money on orders of 1,000 parts or more. Toyota thinks like DeCardy does now. The world has changed. The Ford and GM turnaround plans should have begun with an assumption that they would have no volume superstars and that long term success demands the ability to make money manufacturing a broad range of products at average sort of volume levels. Then if that next Mustang comes along, it is so much icing on the cake.
There have been years when Toyota products were hot and sold in great volumes, and of course Toyota made money. There have also been times when Ford or GM products were hot – such as the great run Ford had with the Taurus – and Toyota still made money. Toyota’s business model – and lean manufacturing – are based on an assumption of lot sizes of one.
Bob Lutz thinks he is a turnaround whiz because he drove the market to the point where lot sizes were in the hundreds of thousands for a few models. He and the rest of GM cannot conceive of making money with lot sizes of one – or even of 25,000, let alone the 25 DeCardy targets. Bill Ford thinks Mark Fields is a turnaround genius because he created the situation in which Mazda enjoyed huge lot sizes. What none of them understand, however, is that superstar new products are not sustainable. Every product has its life. As a result, they do not drive any permanent business turnaround.
So long as Detroit sees new product innovation as the essential driver of restoring long term profitability, they will fail. Their history since Toyota exploded onto the scene has been two steps forward and three or four back. They have great results for a few years with a hot model, then even more disastrous years. Meanwhile, Toyota, like the legendary tortoise, keeps plodding along making money whether their cars are the hottest on the market or not.
Having good products is obviously essential to any business’ success, but a long range business plan based on an assumption that every year new products will roll out that will stun the customers and shatter the competition is plain foolishness. Babe Ruth struck out more often than he hit a home run; Michael Jordan missed almost half his shots; Joe Montana threw 123 interceptions; and Bob Lutz and Mark Fields are going to roll out a few model years that fall flat. Without lean manufacturing, their companies will lurch back into junk bond status, close more plants and restructure themselves again. DeCardy, on the other hand, will keep making money – a lot of it when someone comes along and orders 1,000 like the good old days – but enough to keep going when the customers take them up on their 25 part order policy.
Until Detroit understands that, in the 21st century, mass production is dead, the theory of economies of scale is on the scrap heap, and profitability in manufacturing is driven by flexibility and customization, they have no chance at all to survive. This lesson applies to all manufacturers. Just because your company is not in automotive, there is no excuse for not cloesly watching Detroit and learning from their appalling unwillingness to accept this reality. It is the imperative for lean for every manufacturer, everywhere.