By January 28, 2007 1 Comments Read More →

"The Vicissitudes of Over-production"

Why U.S. automakers like GM and Ford are losing money – Jan. 26, 2007

Wow, leave it to a professional journalist to spin a phrase like my headline for this post. We don’t really need another post or discussion here about “how to fix the auto industry” but I couldn’t resist posting that phrase. Vicissitudes, now that’s an SAT word.

We could debate this until the cows come home, are GM, Ford, and Chrysler’s problems externally driven or self imposed?

These costs are often used as excuses:

Health care is the biggest chunk. GM, for instance spends $1,635 per vehicle on health care for active and retired workers in the U.S. Toyota pays nothing for retired workers – it has very few – and only $215 for active ones.

Other labor costs add to the bill. Contract issues like work rules, line relief and holiday pay amount to $630 per vehicle – costs that the Japanese don’t have. And paying UAW members for not working when plants are shut costs another $350 per vehicle.

And whose fault are these costs? These are contracts that GM freely agreed to with the UAW. You could view those costs as a “tax on bad management.”

Here are some scary numbers that show why it “makes sense” to keep the plants running even without orders. I hadn’t seen it broken down with precise numbers like this before:

If an assembly plant with 3,000 workers has no dealer orders, it has two options. One is to close the plant for a week and not build any cars. Then the company still has to give the idled workers 95 percent of their take-home pay plus all benefits for not working. So a one-week shutdown costs $7.7 million or $1,545 for each vehicle it didn’t make.

If the company decides to go ahead and run the plant for a week without any dealer orders, it will have distressed merchandise on its hands. Then it has to sell the vehicles to daily rental companies like Hertz or Avis at discounts of $3,000 to $5,000 per vehicle, which creates a flood of used cars in three to six months and damages resale value. Or it can put the vehicles into storage and pay dealers up to $1,250 apiece to take them off its hands.

It’s “cheaper” to keep the plants running, building up inventory. Yikes. I wonder how aggressive the Big 3 will be in their UAW negotiations this year, particularly about overly restrictive work rules. I remember, in my GM days 10 years ago, that if we needed a pipefitter to do one small task, we couldn’t have an electrician do it. If it was Saturday work, we had to pay that pipefitter a minimum of 4 (or maybe it was 6) hours of work to do one motion with a wrench. Crazy. Have these rules gotten any less restrictive over time?

Is there a broader lesson to apply if you’re working on lean? Maybe the lesson is to treat employees with respect, treat them fairly, use lean to avoid layoffs, and avoid unionization if you don’t already have it. Any other lessons? Or are we just watching a train wreck and can’t take our eyes off of it?

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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1 Comment on ""The Vicissitudes of Over-production""

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  1. JWDT says:

    Mark,
    Thanks for posting this. One thing I never quite understood about the auto industry until now. Amazing the rift between the Union & Management built this “culture” (could call it of death).
    I remember my short stint with Delphi, never amazed me that I had to bring in & pay someone for four hours of work to replace a light bulb.

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