Chrysler matches Toyota in a Single Skew-able Metric - Who Cares?

Chrysler matches Toyota in efficiency - Detroit News

I didn't mean for this to become "beat up on the Detroit Three" week... this comes in waves. If you don't like these posts, my short-term focus on the auto industry will probably subside for a few months again.

Chrysler is crowing about efficiency gains -- matching Toyota. That may be true if you're looking at a single narrow metric -- direct labor hours per vehicle. This metric isn't a proxy for a company's overall financial performance, as the long-term profit and outlook gap between Chrysler and Toyota is huge.

Hours per vehicle (or hour per anything) is easily skewed. You can add automation (which might cost more) or you can outsource work to vendors, so it doesn't count. Don't get me wrong, efficiency is important, but it's not worth fixating on any single metric. You can improve hours per vehicle in positive ways -- by designing the cars so they can be built easier or through shopfloor "kaizen" efforts.

Chrysler LLC tied Toyota Motor Corp. as the most efficient automaker in North America, while General Motors Corp. and Ford Motor Co. joined in virtually erasing the productivity gap between Detroit's Big Three automakers and their Asian rivals, according to the 2008 Harbour Report North America.

Matching Toyota's vaunted manufacturing efficiency stands in paradox to another report released this week showing Chrysler lagged the industry for initial quality -- even as Ford and GM made progress in that regard against Japanese companies.

That's why I would give the labor productivity news a big "Who Cares?" as a response. If Chrysler was doing so well with Lean (or the Chrysler Operating System), quality AND productivity would be improving together.

Chrysler says it's already rolled out quality-improvement initiatives so it can match its productivity gains. All three Detroit automakers are challenged to produce their vehicles in North America profitably -- something none achieved in 2007.

The fact that Chrysler focused on productivity and THEN rolled out quality initiatives... that seems like a bad sign. When I was at GM, circa 1996, we had a new NUMMI-trained plant manager. Our factory was at the bottom of the barrel, among powertrain parts makers, of productivity AND quality.

As a somewhat naive engineer, I asked the plant manager in a group meeting, "Which are we going to be focusing on first, quality or productivity??"

He answered in a very patient manner, "You can't separate the two. We'll be improving quality AND productivity. They go hand in hand. Safety, Quality, Delivery, Cost, you improve them all with these [Lean] methods."

I put "Lean" in brackets since that was a dirty word in GM at the time. We had to call it "competitive manufacturing" and we certainly couldn't call it TPS.

It's a shame Chrysler wasn't simultaneously catching up to Toyota's quality levels while they made isolated productivity gains.

I also want to point out what Kevin Meyer wrote on this topic.

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A "Lean" Article that Doesn't Mention Real Lean

Turning Chrysler Into Toyota

It's disappointing when a publication with the wide audience of BusinessWeek misrepresents the Lean and Toyota Production System concepts. But hey, at least they really are a weekly publication, unlike our pals at IndustryWeek (sorry, haven't made that joke in a while).

The article talks about attempts by Chrysler, with the leadership of Jim Press, formerly of Toyota, to turn the business around. Unfortunately, the article equates "leaner" with getting smaller -- fewer models, fewer plants, and fewer dealers.

The sub-headline reads:

By cutting models and dealerships, Chrysler aims to be a leaner, more productive, and more profitable business

It's all talk of "eliminating redundancies." Sure, Toyota only has one minivan and doesn't compete with itself, unlike Chrysler who competes with their own Dodge. It might be very necessary for Chrysler to take those actions, but couldn't someone other than a Toyota person have figured that out? It's a similar struggle that GM has had, with divisions and dealers competing with each other (hence the death of the Oldsmobile brand).

It's too bad that the article didn't talk about attempts to further transform the Chrysler culture and workplace. They already had a pretty good Lean leader in Tom LaSorda, now they have another in Press. Is Chrysler going to do more to motivate their employees to participate in kaizen (continuous improvement)? Can Chrysler get more customer focused?

The article *does* talk about sacrificing short-term sales for the long-term sake of the company (again, something that GM has also struggled with). Do you think that's the influence of Press or, again, is that something that other leaders (such as Nardelli) could have come up with on their own? Principle #1 of "The Toyota Way" does focus on the long-term, even at the expense of the short-term.

Adopting the Toyota culture might not be enough to save a business like Chrysler... but it would also be interesting to hear if they're trying to make the organization operate more like Toyota. Who is writing about that? Anyone have any articles or links to share?

Chrysler can get as small as they want (or as small as the market requires)... but that's not going to turn them into Toyota.

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What if Roger Penske *Had* Run Chrysler?

Roger Penske adds the Smart car to his $17B empire - Oct. 5, 2007

Good article here about businessman Roger Penske. I didn't realize that he once passed up the chance to succeed Iaccoca at Chrysler.

Back in 1992, Chrysler's Lee Iacocca asked Penske to succeed him as CEO, but Penske declined because he wanted to run his own businesses. Now Penske Corp. is worth more than several Chryslers.

I wonder how things might have turned out differently at Chrysler if he had taken that job?

Some Lean related tidbits and items of interest:

Penske is leading the effort to sell the tiny "Smart Car" here in the U.S. and he spent some gemba-type time on the road, ala the Toyota executives who drove minvans across the U.S. and Canada:

He drove a Smart the 200 miles between Laredo and Victoria, Texas, last summer.

"I just wanted to see what it is like on the highway going 75," he says. "I wasn't tired, I wasn't fighting a car that was moving all over the highway. At 65 to 75, it is very drivable."

I still don't think I'd want to be driving around in one of those in any traffic!

Every car for the U.S. market is going to be built exactly to order:

"...Penske was able to go to the first 1,000 reservation owners, find out exactly what features they wanted, and then place a detailed order. "It is entirely different from having John Doe waiting on the showroom floor for the customer to walk in," Penske says. "Those days are over." If all dealers did business that way, it would eliminate inventories and big discounts on orphan cars.

Penske is also making sure headquarters isn't a disconnected huge glass tower:

In a characteristic Penske move, he located Smart's corporate headquarters in the back of its Detroit dealership. That way, he says, everybody who works for Smart will have to walk in through a sales floor and not into a glass building.

"That will keep people in the game," he says.

Sort of like Gary Convis (formerly of Toyota) or any other top leader putting their office in the middle of the shop floor. It forces you to walk the the gemba. Smart.

I still don't want to drive one of those tiny mobiles though!! And that coming from a guy who drives a Prius from time to time.

Updated: Press leaving Toyota for Chrysler

Autoblog.com report

This is surprising -- Toyota's top U.S. executive, Jim Press, who had been the first American named as a Toyota corporate director, is leaving to take a top sales and marketing job at Chrysler.

Does this mean Tom LaSorda's days are numbered, as the Autoblog speculates? Or, do they have a perfect pairing of a supply chain wiz (Tom) and a demand side wiz (Jim), as the WSJ article suggested?

How will Press shift from working for Toyota leadership to working for Bob Nardelli and his GE style?

More news stories, courtesy of Google. Does anyone have some thoughts on this?

UPDATED: More familiar bloggers chiming in:

• John Hunter (Curious Cat)
• Matthew May (Elegant Solutions)
• Jon Miller (Gemba Panta Rei)
• Ron Pereira (LSS Academy)
  

Updated: Nardelli to Run Chrysler

I was completely stunned by the WSJ headline this morning that announced Bob Nardelli, formerly of GE and Home Depot, is going to be CEO at Chrysler. Many of the actual industry experts were stunned too, so don't feel too bad if you're in the stunned crowd, like me.

I've written about his management misadventures before, see the links below.

From the WSJ:

• Cerberus, the private equity firm that runs Chrysler, is full of ex-GE people. That must explain how Bob gets another shot here.
• The WSJ says "lean management" is a Six Sigma tool (ugh).

Nardelli was famous for, among other things, his $210m severance package. Why work, ever again? I guess a little ego goes a long way.

Good luck to the folks at Chrysler. Remember the quote from January criticizing Nardelli was "you can't sh** on your employees." He also sh** on the investors, but he doesn't have to deal with public stockholders at Chrysler, so maybe this is perfect for Bob.

Tom LaSorda, featured here for his support of Lean, will be Nardelli's #2.

Google News link for free articles.

Updated with additional articles:

For what it's worth, CNBC's Jim Cramer thinks Cerberus is "out of touch" and there couldn't have been a worse pick than Nardelli. "Couldn't they get someone better? Maybe they couldn't..."

The NY Times says he's no longer "tainted." Really?

USA Today has an unflattering article that calls him an "imperial CEO" and had a funny quote from Lee Iacocca that implied it was a bad choice in his eyes.

Former Chrysler CEO Lee Iacocca, watching the saga from retirement in California, said, "I'm shocked, and I'm going for a walk on the beach," according to his spokeswoman, Norma Saken. "He's as stunned as anybody."

Another quote:

Ken Siegel, an organizational psychologist who tracked Nardelli's path at Home Depot, called the choice "unfathomable," "stupefying" and "a supreme statement of arrogance" by Cerberus.

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Is China's Chery Lean?

Chrysler Chery-picks (commentary) | MSNBC article

So Chrysler is going the route of importing inexpensive cars from China. The deal was signed, in China, on the 4th of July, which is a curious date for finalizing such an agreement.

Chrysler chairman Tom LaSorda announced that the two firms would be exporting cars built by Chery to Latin America and Western Europe within a year and to Europe and North America by 2010. "We will combine Chrysler's research and technology and global reach with Chery's lean manufacturing," he said.

Interesting. By "lean" does LaSorda (who knows what true "Lean manufacturing" is all about) mean "cheap" or "low labor cost?" I'd have to presume he means Lean as in the Toyota Production System.

Chery is only about a 10-year old company. According to the Wikipedia Page, about the company:

In its relentless pursuit of quality, Chery hired a Japanese engineer from Mitsubishi to head Chery's Lean/Six Sigma production systems, which were first applied to their cars in 2003.

A lean and six sigma double threat! Can Chery, who has been at this for three or four years, be better at Lean than Chrysler, who has probably been working on Lean, to some extent, for 20 years? Is it about being "lean" or is this deal all about cheap labor?

What do you think? I'm asking because I honestly don't know the answers here...

Suppliers: GM better, rivals not

Detroit News Article

GM, Ford, and Chrysler are frequent targets here for their "beat up the suppliers" approach to supply chain management. Here's some encouraging news for GM (and for their suppliers)... not such good news for Ford

General Motors Corp. has substantially improved its rocky relationship with parts suppliers for the first time in 15 years, while the rapport has worsened at Ford Motor Co. and Chrysler, according to a study to be released today.

GM's improvement suggests the automaker's aggressive plan to work more harmoniously with its parts makers is gaining traction.

Comparing Toyota to Ford:

...82 percent of suppliers consider Toyota a preferred or very preferred customer, compared to 10 percent for Ford, which has the worst supplier relations, according to the survey.

This was true at some work I did with a Tier 1 auto supplier once... the same company made parts for Toyota and Chrysler, and they MUCH preferred Toyota as a customer, partly due to their attitudes and partly due to the fact that Toyota actually kept their production plan stable instead of changing it constantly (Beer Game, anyone?).

There are more metrics and examples in the article, check it out.

Toyota Way Principle #11 says:

Respect your extended network of partners and suppliers by challenging them and helping them improve.

Dr. Deming used to preach, as part of his 14 points:

2. Adopt the new philosophy of cooperation (win-win) in which everybody wins. Put it into practice and teach it to employees, customers. and suppliers.

4. End the practice of awarding business on the basis of price tag alone. Instead, minimize total cost in the long run. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.

Looking at the data, GM has a long ways to go, but at least they are improving.

On a scale of zero to 500 -- with zero being the worst -- the survey rated GM's overall relations with its suppliers at 174, up from 131 last year. "We've never seen that type of improvement before," said John Henke, president of Planning Perspectives. "They've just generally been doing things better from the standpoint of working with their suppliers."

As they have since the report began in 2001, the suppliers ranked Toyota and Honda the best companies with which to work.

Of the six companies ranked, Toyota had the best relations with suppliers with a score of 415, followed by Honda (380), Nissan (289), Chrysler (199), GM (174) and Ford (162). Ford and Chrysler fell several points from last year.

Henke called a Ford program to improve supplier relations a "disappointing failure."

Any suppliers care to comment on how the "Detroit Three" are doing?

Will the Chrysler Deal be Good for Lean?

You have probably read the basic news story on the Chrysler buy out deal (check out the latest on the Detroit News Auto Insider page).

On the way home, I heard this public radio Marketplace story about how Daimler is basically paying cash out to unload Chrysler. Not only did they sell Chrysler at a loss, but, again, they are PAYING to dump the company. It was cheaper than keeping Chrysler, analysts suppose. What's described as a "$7.4 Billion deal" doesn't mean Daimer is taking in $7.4 Billion in cash. Go figure.

It got me thinking, will Chrysler's new private equity ownership (80% stake held by Cerberus) will allow Chrysler to use Lean to improve the business or if they'll fall into short-term thinking to slash Chrysler and sell it off again (or take it public) at a profit.

The new ownership has given a vote of confidence to Chrysler CEO Tom LaSorda, who is a very vocal advocate of Lean, going back to this GM days, and we've written about him a lot on the blog (click here for previous articles including Newsweek's "The Blue Collar CEO" piece from 2005).

With the German ownership, Daimler quickly moved away from Tom Stallkamp's supplier partnership model (reminiscent of Toyota) and moved back to a more traditional "beat up your suppliers and demand price reductions" model. Additionally, even though LaSorda must know about the "Waste of Overproduction" (as described by Toyota's Types of Waste), the company still fell into a trap of overproducing vehicle configurations that dealers couldn't dump, just earlier this year (keeping factories running instead of building at the pull of the customer).

So you might say Chrysler doesn't have a perfect Lean track record, even with strong leadership. The company, in its struggles, has had to resort to massive layoffs (over 10,000 announced) and Daimler says the sale won't halt layoffs and the Canadian Auto Workers is calling for a pledge to avoid new layoffs. Update: The WSJ says LaSorda has pledged "no new layoffs."

LaSorda put out a statement with an optimistic idea that the new ownership will allow Chrysler to focus on the long term instead of quarterly numbers:

As a private (non-public) company, we will be better positioned to concentrate on our long-term plan for recovery, rather than on short-term results. With the financial strength and additional operational expertise brought by our investment partner Cerberus, Chrysler will renew its focus on what has always made us special: the passion, creativity and commitment of our employees, suppliers and dealers to delivering exciting Chrysler, Jeep and Dodge vehicles and quality Mopar parts to our customers.

What do you think about the deal? What does it mean for Lean at Chrysler, for it's employees, customers, and suppliers? Click "comments" to chime in. I'd like to know what you think.

Click on the "Chrysler" link below for historical Lean Blog posts about the company.

LeanBlog Podcast #24 - Jim Womack, State of the Auto World

Episode #24 of the LeanBlog Podcast is the 2nd part of my recent conversation with Jim Womack, of the Lean Enterprise Institute. In this episode, we talk about the state of the auto industry, from the time of The Machine That Changed the World through today. Who does Jim think is in the best shape among the "Detroit Three?" Jim also answers some questions from Lean Blog readers.

MP3 File (Right Click to Save-As)

Show Notes and Approximate Time, Episode #24

• 1:50 “We had some brief hopes for Ford in ‘Machine’”
• 2:20 “Mind of Toyota” book is a Womack must-read: “it’s a great book, harder than heck to read” Inside the Mind of Toyota: Management Principles for Enduring Growth
• 3:00 Womack on GM’s decline
• 4:15 What about the Ford Atlanta plant going from most efficient to shut down? The Taurus story, original development took 7 years when Toyota was taking only 3. At least it was what the public wanted and was easier to put together than the comparable GM product.
• 7:00 GM’s political footprint is shrinking as factories are closed outside of Michigan and Ohio, while Toyota’s is growing with factory expansion.
• 9:15 BBC series on the auto industry and lean production, pulling the cord much more at Toyota, and how people were scared at the Ford plant to pull the cord (mistrust between workers and management).
• 10:15 “If it were just a plant-on-plant competition, they [Ford] would be OK, they’ve learned enough… all over the company, the managers are not pulling the andon cords.”
• 10:40 More on Ford management and the “corrupt” Ford culture
• 12:10 How things stand with GM today, according to Jim
• 12:50 “Ford and Chrysler have a different magnitude of problem than GM.” If not for the legacy problems, GM would be OK, not a world-beater… “not as good as they should be.”
• 14:30 “Ford and Chrysler’s problem is management.”
• 14:45 Question from the blog, from John Hunter, “What 3 publicly traded companies have the deepest understanding and execution of Lean?” Danaher, “can’t vouch for it personally….” Tried to put them in the Lean Thinking, but was escorted off the property because the President declared they had deep secrets….
• 16:15 Article about Danaher from Business Week
• 17:00 G.E. has been a “make the numbers” company as opposed to a “fix the company” company, says Jim. But now GE is saying they have to be like Toyota… “is there anything beyond Six Sigma or even to Six Sigma?”
• 18:25 Lots of other little guys out there, privately held. “Wish I could point to other examples of large companies…”
• 19:00 LEI is doing some research for how to take a traditional mass production mentality company and transition them to a lean management approach, what methods do you have to implement?
• 20:00 “The world is pretty Dilbert-like.”
• 20:30 “I wish I could rattle off the 14 companies who have actually done it…. No stock tips.”
• 20:50 From Joe Wilson, what about “Lean and Mean? Do you wish you had picked a different word than Lean?
• 21:15 “It also rhymes with green…. A word is a word, you have to pick something.” Jim meant it to describe “how to do more with less” but many have spun it into “how to do less with a whole lot less, including people.”
• 22:00 “If lean is taken on by managers who are clueless to the real meaning, well then over time, the meaning becomes the meaning that people deduce from the behavior of those managers. I can’t do anything about that.”
• 23:00 “Lean got us out of the nationalism and ethnic focus,” that it had something to do with Japan. “Lean” was designed to focus on an objective measure of performance. (the term coined by Jon Krafcik)
• 24:40 “Sorry that so many clueless people [made lean “mean”]… it’s a lot of stupid meanness, where you try to hurt others and end up hurting yourself.” Toyota was about growth, not trying to get rid of people. “Where you get into the problem with Lean is when you have these big behemoths that are fading fast…”
• 26:10 Jim spent a week in Australia looking at healthcare organizations… “How would Toyota run healthcare?” “Toyota treats car parts better than a hospital treats its patients, and treat people better than hospitals treat their staffs.”
• 26:45 “We’re going to bankrupt every company with our healthcare practices.”
• 27:45 Far more than half of the visitors to the LEI website and those signing up for workshops have nothing to do with manufacturing… “How would Toyota run Starbucks?”

If you have feedback on the podcast, or any questions for me or my guests, you can email me at leanpodcast@gmail.com or you can call and leave a voicemail by calling the "Lean Line" at (817) 776-LEAN (817-776-5326) or contact me via Skype id "mgraban". Please give your location and your first name. Any comments (email or voicemail) might be used in follow ups to the podcast.

Click here for the main LeanBlog Podcast page with all previous episodes.

How About Partnership Instead?

New Detroit Woe: Makers of Parts Won't Cut Prices - WSJ.com

Wah, the latest complaint from the "Detroit Three" (formerly known as the "Big Three") is that they are having trouble squeezing and stomping on their suppliers for lower prices. Because so many suppliers were beaten up over time, they have consolidated, have had plants closed, and/or were bought by private equity firms. Seems like a natural response for a part of the industry that has been abused by many OEM's for a long time.

The WSJ article talks about the trend toward shorter and shorter contracts with suppliers, as opposed to long-term partnership and collaboration.

Principle #11 of The Toyota Way says:

Respect your extended network of partners and suppliers by challenging them and helping them improve.

Toyota treats suppliers much like they treat their employees, challenging them to do better and helping them to achieve it. Toyota provides cross functional teams to help suppliers discover and fix problems so that they can become a stronger, better supplier.

Does this type of interaction sound like respect? From the WSJ article, describing the negotiating practices of the Detroit Three:

...says auto makers and large "tier one" parts makers continue to ask Bluewater to accept business under terms that cover just labor and materials, with nothing left over for overhead or profit. "We are constantly getting calls asking, 'Can you take on this or that business from another supplier?'" says Mr. Lord. "We tell them, 'Here is our price,' and many times they get offended and say, 'We won't be doing business with you.' That threat hasn't proven valid."

The Curious Cat blog has a nice summary of the Detroit Three's supposed attempts at "partnering" with suppliers, including a recapping of Deming's attempts to push Ford toward partnering with suppliers, not just demand price reductions.

What Deming tried to re-introduce to Ford [in the 1980s] was a more modern and refined version of what had made Ford great.

Here’s what I mean - During the early days, Ford and his associates were dissatisfied with the price that an auto body manufacturer was demanding.

They wanted him to get his price down, just as today’s Big Three want their suppliers to reduce prices.

The difference was that Ford and his co-workers didn’t just tell the supplier to cut his price.

They looked at the supplier’s product and taught the supplier how to make it more efficiently.

The supplier’s production costs dropped so far that the supplier could not only give Ford the price he wanted, but also make more money for himself.

When will the Detroit Three ever learn? Instead of whining about "legacy costs," why not change the way you are doing business??

Chrysler supposedly made the most progress in this areas, in the 1990's, under the leadership of Thomas Stallkamp. After Stallkamp left with the Daimler merger/acquisition, those partnership practices went away. I saw Stallkamp give a talk once in an academic setting where he seemed near tears that all of his work had been done away with. Sad. Stallkamp is now, ironically enough, working with private equity firms and the supplier base, including one possible attempt by a supplier (Magna) to purchase an OEM (Chrysler).

I wonder if Magna will use Detroit Three tactics to beat the Chrysler price down??

China or Mexico? Is Lean an Alternative?

Winding Road » Archive » Japan Report: Toyota To Build 8th Plant In MS, But We Hear No. 9 Is Already In The Works…

Rumors are already going around about the NEXT factory that Toyota will build in North America. The rumor is a small car factory in Mexico.

In the wake of Toyota’s announcement that it would build its eighth U.S. manufacturing plant in Mississippi to build the next generation Highlander by 2009, a Japanese newspaper is reporting that Toyota is already planning its ninth plant, this time in Mexico.

The Japanese media says Toyota will build a new 1.0-liter compact car in this plant, which could get going as soon as 2010.

There was more whining in the USA Today yesterday that Chrysler can't profitably build small cars in the U.S. because of high labor costs. So, they're looking to China.

As Jim Womack said in my podcast interview with him, "What's wrong with Mexico?" Mexico offers cheap labor AND it's closer to the U.S. than China, which would reduce supply inventory and transportation costs. Plus, there's got to be less political risk in Mexico compared to China.

Chinese carmaker, Chrysler near deal

Chrysler Group moved a step closer Tuesday to becoming first to bring Chinese-made cars to the USA.

Chrysler can't afford to build a small car in the USA, where labor and other costs are too high to make a profit.

But in China, labor rates can be as low as $1 or $2 an hour, and Cosmai says he suspects that building a modern auto plant can cost half as much as in the USA.

The adjacent USA Today article about Toyota's Mississippi plant announcement showed a box with all of the Toyota North America plants, including the plants that build the small Corolla and Matrix vehicles. Of course, maybe Toyota isn't profitable with small cars either, but they can afford to keep the production here for political reasons?

Assuming that there are about 25 labor hours in a small car (including stamping, etc.) you can do the math. Should labor costs, even on a $10,000 vehicle, be too much of a hurdle that you can't overcome with Lean?

Reminded of Tom Peters

GM in early talks to buy Chrysler: source - Yahoo! News

I'm reminded of hearing Tom Peters ask once:

"What do you expect when one big, slow, dopey company merges with another big, slow, dopey, company??"

That's pretty much the exact quote. Peters loves the phrase "big, slow, dopey."

Seriously, both companies have a lot of excess capacity. Would GM really do this just to gain market share to remain #1? Is this profitable marketshare?

"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?

WSJ Interviews LaSorda

Tom LaSorda Plebeian Prince (WSJ)

Here is a new interview with Chrysler's Tom LaSorda, a lean leader who has been featured often here on the Lean Blog (some earlier posts here).

LaSorda is spending a lot of his time at the Auto Show talking with dealers after the inventory problems they've gotten themselves into (waste of overproduction).

Last year Chrysler built far more cars and trucks than it could sell. Unsold inventories piled up. The company pushed dealers to buy more cars -- even shipping cars to dealers who didn't order them.

The article continues:

Sales of the high-horsepower cars that had fueled Chrysler's turnaround plunged. And then Mr. LaSorda, the manufacturing whiz, lost basic manufacturing discipline. "We built too much inventory last year," Mr. LaSorda concedes. As he tells it, the problem crept up on the company. Mr. LaSorda cut production in July and August. But he didn't cut it enough, partly because Chrysler overestimated how many cars and trucks it could sell last summer and fall.

One other topic of interest that's covered is the future role for Chinese production in the auto industries (and Chrysler's talks of partnering to import cheap cars):

As for concerns, expressed by GM and Toyota executives, that Chinese-made cars aren't good enough for the U.S. market, Mr. LaSorda disagrees. "I walked through their plants," says the manufacturing expert. "I walked through their [engineering] labs. I walked through their suppliers' plants and their design studios." He saw lots of Western-made high-tech equipment, he explains, and "I was quite convinced."

It's a shame, though, that LaSorda falls back on the "we can't compete" mantra that's so common in the broader manufacturing world:

Meanwhile, in the quest to add fuel-efficient small cars to Chrysler's lineup, Mr. LaSorda is turning to China. His deal to import cars from Chery Automobile Co. likely will make Chrysler the first Detroit company to import Chinese cars to the U.S. It's yet another irony for a man with deep union roots, but Mr. LaSorda says he has no choice.

"We can't compete in this segment with our cost structure in Canada and the U.S.," he says. "So what do we do, just sit and wait?"

Lean advocates and practitioners like to talk about using Lean methods as an alternative to chasing cheap labor. Chrysler can't get their costs down low enough and quality high enough to compete with China? I guess they can afford to build cars that customers and dealers don't want, but they can't afford to build inexpensive cars here in North America. Is LaSorda moving away from lean or is he just being realistic? What do you think?

By comparison, Jim Womack said in our recent podcast that China is nowhere near ready to build cars for American consumption. We'll see.

Lean Blog Homework - CNBC CEO Videos

I can't get the videos to play on my PC. CNBC did interviews today with the Big 3 big wigs, a big mullet, and a Toyota leader. I heard the Mulally interview on XM Radio, but didn't hear the others.

Can someone post a book report version of what you see/hear? Do any of them talk about lean?

• GM's Rick Wagoner
• Ford's Alan Mulally
• Chrysler's Tom LaSorda
• Ford's Mark Fields
• Also, Toyota's Jim Press

Thanks. Sorry to outsource the blog, but I have some smart readers.

OT, then Plant Shutdowns = Waste

Chrysler Extending Plant Closures Over Christmas in Bid to Shrink Inventory: Financial News - Yahoo! Finance

We read this morning in the WSJ about how Chrysler had the largest per-vehicle incentives ($4000) in the industry. It really seems like the inventory problem was terribly out of control, their overproduction, as I blogged about before. They were running OT (while inventory piled up), now they're doing extra shutdowns (as referenced in the article linked to above and here). That just adds cost, cost, and more cost. Such waste.

Here's another take from the Truth About Cars blog, getting more into the "sales bank" and other questionable practices.

Chrysler's Overproduction

Chrysler's OT shifts baffle analysts

It's "waste of overproduction" day on the Lean Blog. Here is an article about Chrysler, where analysts are baffled because they are cranking out vehicles on OVERTIME shifts while sales are falling and inventories are rising.

Hourly workers who make the company's core models -- pickups, SUVs and minivans -- say they regularly have been working overtime even when nearby storage lots are full. This weekend, for example, Chrysler planned to pay UAW members overtime to make Grand Cherokees in Detroit, Dodge Durangos in Delaware and Rams in St. Louis.

Typical comment:

"I don't understand what they've been doing," said Joe Langley, an auto industry analyst at CSM Worldwide in Northville. "They've been doing this for months. The inventory is up. The incentives are up. And they're running overtime. It's an absolute mystery to me."

Now the only reason that I could see for building cars that people don't want is for level loading or "heijunka" purposes. You might overbuild today with the idea that seasonal sales are increasing and they'll sell later. That's quite a bet to make, you better be sure of your forecast.

Chrysler says:

Determining production schedules is complicated, involves long lead times and is affected both by dealer orders and business fleet customer demand, said Chrysler spokesman Mike Aberlich.

"You have to look ahead," he said. "What you decide to do on a plant level is based on a long-term look. ... When a dealer puts an order in it can be six weeks before it leaves the system."

Is that long lead time part of the problem?

Maybe not:

Part of the problem, [analysts] say, is that the last time they couldn't get reasonable answers -- earlier this year -- it was about why storage lots near Chrysler assembly plants seemed to be overflowing with inventory.

Chrysler eventually told dealers in September that it had built more than 100,000 vehicles that dealers hadn't ordered.

So what is going on here? Level loading or overproduction? The person who emailed me this article asked, "What is Tom LaSorda smoking?" I think that's a bit harsh, LaSorda is as good of a lean guy as we have on top of the formerly-Big 3, and that's including Ford's new CEO.

Chrysler's Waste of Overproduction

My dad alerted me to this article from Automotive News. It's not available free online, I have a pdf copy that I could post or email if you really want to see it (trying to avoid a cease-and-desist from them). I'll do some cut and paste. The whole article is really a pretty shocking example of the waste of overproduction and just some silly non-lean practices. The "sales bank" sounds as bad as the "jobs bank."

Dealer Thomas Vann has been sitting on 13 Chrysler Town & Country and Dodge Grand Caravan long-wheelbase minivans since June, when he bought them from Chrysler's sales bank.

Vann, owner of Team Hillsdale Chrysler-Dodge-Jeep in Hillsdale, Mich., says he can't get rid of the vehicles. As with other sales bank vehicles, Chrysler built the base-level minivans with no dealer orders, then shipped them to holding lots and sought dealers to buy them.

Vann describes the vehicles as "weirdly packaged minivans." "There are no (lease deals), no keyless entry, no key fob, no power front chair," he says. "People say, 'I don't want that. I'd rather get the megapackage.'

So Chrysler built vehicles with no end customer in mind and without dealer orders. They built vehicles with weird specifications that customers don't want. This is the year 2006 and Chrysler is led by a lean guy, Tom LaSorda? I would expect better from Chrysler, really.

This is why the great Tom Peters, I believe it was, said the auto industry is the only industry that has to bribe customers (through incentives, rebates, and financing) to take a product that wasn't exactly what they wanted.

Some examples of the bad configurations that are rotting on dealer lots:

• Loaded Chrysler Aspen Limited SUV with no navigation system
• Base-level Grand Cherokee with V-8 engine (V-6 sells better)
• Base-level 2006 Grand Caravan SE that costs more to lease than loaded 2007 SXT

I can see where people with the loaded SUV would also want the nav system. Why would you want a cheaper minivan at a higher price? It's not just an overproduction issue, but having prices that are out of line with how the market values products.

You might ask, does Toyota build everything with a dealer order? Nope; they level production which means sometimes producing without an order. but they understand the customer better and in those circumstances only produce stuff that will easily sell (essentially).

So Chrysler things they can move these?

Chrysler spokesman Kevin McCormick said: "While there may be vehicles out there with less than perfect configuration, our dealers are great people, and we do believe they can find the right customers for those vehicles."

Good luck dealers! Time to visit PT Barnum Chrysler Dodge for some screaming deals on leftover '06's!! So why would Chrysler build these vehicles other than not knowing their market or having too much confidence in their dealers (along with not enough fear of making the dealers mad)? An analyst says:

One reason oddly equipped vehicles are built is that automakers make commitments to suppliers to purchase certain quantities of components they think they need to use, he adds.

Now, even the build-to-order king Dell has to make commitments to suppliers well in advance (partly due to the long lead times from Asia, but that's a different story). When Dell has excess components, they use pricing and incentives to push the excess on customers, but they still only build product AFTER the customer has ordered it.

Why would Chrysler feel the need to use the excess parts? Wouldn't it be better to eat some relatively cheap components instead of building a whole unwanted vehicle around those excess parts?

Chrysler Gains Edge by Giving New Flexibility to Its Factories

WSJ.com - $$ Subscription Required

Front page article today about Chrysler and flexible manufacturing, focused on the retooled plant in Belvidere IL. Here is an earlier posting on their retooled team concept.

The main point of the article is about how the plant previously could only build one model, the Dodge Neon.

Chrysler engineers discovered that the PT Cruiser was an inch too tall to fit through the plant's paint shop. Chrysler, which was losing money at the time, ended up spending $300 million to expand the assembly line at the PT Cruiser plant in Toluca, Mexico.

Meanwhile, Chrysler took another hit at Belvidere: Because Neon sales were slow, it had to cut production there, leaving the Illinois plant's assembly line operating just eight hours a day. The rest of the time, hundreds of millions of dollars in equipment sat idle.

Ouch! Comparing the automakers and their use of flexible plants, Ford and GM are at roughly 50% of volume on flexible lines, Chrysler is higher, Honda is the lowest of the Japanese, then Toyota and then Nissan is the highest.

GM has four plants making small cars for its Chevrolet, Saturn and Pontiac brands, about 410,000 vehicles a year in all. It could conceivably produce that many with a single flexible plant.

Yup, labor cost, that's GM's only problem (the WSJ called GM and Ford "slow" to respond to an industry trend that the Japanese started). Anyway, the "new" Chrysler plant does three different models, which allows them to spread out costs and it's less risky, since if sales of one model are lower, chances are another model will have higher sales to compensate.

The flexibility comes from automation that can change tooling with zero changeover, the equivalent of a person picking up a different hammer.

The robots can quickly exchange one of these devices, or "end effectors," for another, the way a human being would put down a wrench and pick up a hammer. By switching end effectors, the robots can produce a different car.

The robots are a third less expensive than old-style tooling. And since they aren't designed to build a single vehicle, and discarded when it's dropped, the robots can be expected to stay in use about twice as long, perhaps 10 to 12 years.

Not only are they more flexible, they're cheaper now and in the long run!

With the flexibility, though, came the need to standardize the assembly process across multiple vehicles.

In the past, each plant had its own method, each with inefficiencies. For Belvidere, engineers hammered out a process that will become the template for almost all Chrysler plants. "If you put the doors on at the third step with one model, you have to put the doors on at the same place with the other, too," Mr. Faga said.

But it's not just automation. I don't think Chrysler is going down the GM "lights out factory" path of Roger Smith in the 1980's. CEO Tom LaSorda is a great lean advocate and the earlier article on the team concept tells me that they are also focused on people.

The engineers found that it's cheaper to have windshields installed by workers than with automated equipment.

So while the reporters (and Wall Street, in general, I guess) are wowed by automation, it sounds like Chrysler is taking a smart, lean approach, of not pushing automation for the sake of automation. I understand that Toyota has more the vehicle welded by hand than other automakers, because people are ultimately more flexible than robots (robots are used for major welding or in areas where it would be unsafe for people).

Last thing that jumped out at me from this article was the discussion of cost and price.

Remember the Toyota/lean model is "Profit = Price - Cost" where the price is set by the market and you increase profits by lowering costs. The old model was Price = Cost + Profit where you felt entitled to tack on the "necessary" profit on top of your costs.

People still have this association of "if we can make it cheaper, we can sell it cheaper" mindset. There's no association between cost and price. Companies charge what the market will bear. Why does a certain designer handbag cost $1200? Because somebody is willing to pay it!

So, anyway, in this article:

Chrysler can use the cost edge it thus gains to be more competitive on price. The base price of its new Jeep Compass, a small sport-utility vehicle, will be $15,985, about $3,000 less than the competing Toyota RAV4. For the Dodge Caliber, a small hatchback that uses some of the same parts as the Compass, the starting price is $13,985. That's about $200 less than the Neon was even though the Caliber is more advanced, offering features such as side airbags and a beverage cooler in the glove compartment.

I wouldn't necessarily brag about the lower prices. That means the market is valuing the newer Caliber lower than the old Neon, probably partly because it's a new unproven model. You could argue that the Toyota RAV4 earns a $3,000 price premium over Jeep Compass because of Toyota's reputation and reliability. If Chrysler had lower costs AND a market price premium, think of how profitable they would be!

It seems like, for now, Chrysler is buying access to the market through cheap prices. Didn't we call that "dumping" when the Japanese were doing that decades ago?

Either way, good luck to the Belvidere plant and to Chrysler.

For "Lean", Chrysler Cuts Tradespeople

01/22/06 - The Detroit News

Don't worry, these skilled tradesmen will go into the famous JOBS Bank and receive almost full pay for doing nothing (something I've written about a lot on this blog).

It *IS* necessary for Chrysler to reduce the number of skilled trades categorie. The old UAW classifications forced factories to keep an artificially high number of tradesmen employed and created much waste that companies can't afford when they're competing against Toyota. One of the first things Toyota did when they took over NUMMI from GM was to reduce the number of trades classifications.

Let me give an example the waste rom when I worked at GM. Let's say we were doing a Saturday maintenance project that was mainly electrical in nature. If the project required someone to turn a wrench at the start of the project and at the end of the project, the electrician was not allowed to do that work. We had to bring in a Pipefitter, who would get the minimum four hours of overtime for doing maybe one minute of "value added" work. The rest of time was spent smoking, eating, and/or sleeping. Nice gig if you can get it.

Now, I'm on the record as being opposed to layoffs as a result of lean. What if Chrysler took these folks and had them work on continuous improvement projects? Why the hell not, you're paying them almost 100% pay anyway. You might as well potentially get some value out of them and let them feel like they are accomplishing something. Ah, I'm a bit far removed from the auto industry. I almost forgot most of these guys have a long-standing grudge against management and the company and wouldn't want to help the company improve anyway. Sad.

Another trip down memory lane for me.... go to the article and click on the picture of the memo from the UAW. I can't believe, in the year 2006, they STILL TYPE THEIR MEMOS IN ALL CAPS! :-) I should create a website with all of the funny memos I have from my GM/UAW days.