Toyota Gains Lead in Overproduction?

Toyota beats GM in global production; GM No. 1 in global sales

So it turns out that GM *sold* more cars than Toyota in 2007, but it's basically rounding error and a virtual tie (as pointed out well by the Lean Thinker blog). He's right, who cares who sold more? It's profit (and long-term profitability) that matters.

I wasn't going to comment until I saw the headline that Toyota *produced* more than GM. How odd -- Toyota produced 213,000 more vehicles than GM.... so they produced more cars than they sold.

In the latest neck-and-neck numbers race between the world's top two automakers, Toyota Motor Corp. said Monday it had made a record 9,497,754 vehicles worldwide in 2007, up 5.3 percent from the previous year.

That's about 213,000 more automobiles than the 9.284 million that GM made last year.

Now, I'm somewhat "tongue in cheek" saying that it's the "waste of overproduction." If Toyota's "heijunka" (or level loading of production) says it was more cost effective to slightly overproduce (to be made up for in a period where sales will be higher than production), then it's not necessarily the worst thing ever. Keeping production level brings many benefits to the stability of the supply chain and the supplier base. Constantly changing production to meet demand isn't necessarily the best business decision, nor is it "not Lean" to have a little bit of planned out inventory... am I explaining that well?

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The Danger of Overproduction?

PEPCON disaster - Wikipedia, the free encyclopedia

In some Saturday afternoon background TV watching, my ears perked up when I heard about this story on the History Channel, from 1988. A factory, in Nevada (just outside of Las Vegas) had produced a chemical that was used for the space shuttle program as a rocket fuel accelerant.

The show claimed that, after the Challenger disaster that grounded the program (killing demand for the chemical), the company "kept producing it anyway, stockpiling it, and hoping to eventually sell it."

According to Wikipedia:

With the space shuttle program frozen, no government instruction dictating where to ship the product, and no mandated storage procedure or proper storage facilities for such large quantities of product, PEPCON stored almost all manufactured ammonium perchlorate on-site, in plastic drums on campus parking lots. An estimated 4000 tons of the finished product were stored at the facility at the time of the disaster.

Well, wouldn't you know, an employee was careless with a cigarette -- who allows smoking in a facility with explosive chemicals!?!?!?!? -- and one barrel exploded, flying through the air, landing in the middle of the main storage stockpile.

According to fire responders, the plan at the factory had apparently been "in case of fire, run like hell," but they arrived to find employees trying to put out the initial fire with regular hoses. A huge explosion ensued with the force of 250 tons of dynamite equiv (3.5 on richter scale) that was felt at the Strip, 10 miles away.

Two people were killed in what should probably be considered an utterly preventable disaster. It makes me wonder why it was cheaper or somehow better to keep producing the product, just to pile up dangerous inventory. Is there some chemical engineering reason that someone knows about?

It seems like an interesting case study in failure mode planning, basic safety, and error proofing, not to mention the "waste of overproduction." I don't think I've ever heard of a case where overproduction had been deadly.

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Automotive Overproduction Comparison

How GM Handles a Hit: Build Fewer - WSJ.com

Welcome to new readers from the MoneyCentral MSN blog. To explore more about "Lean," visit the main page of my blog or click on "What is Lean?" in the left column.

The WSJ had an article today about how GM is trying to avoid overproduction of hot new vehicles (like the Buick Enclave) so that they don't have to dump inventory to rental fleets or resort to using incentives and discounts to move metal. Both of those practices harm resale value, which is one buying point for many customers.

I read recently how Toyota's goal is to build one car less than customer demand, always keeping that in balance.

So how does Toyota compare to the "Detroit Three" in terms of inventory levels and avoiding overproduction? This graphic from the article tells quite a story.

Toyota has half the inventory of GM, Ford, and Chrysler, not just in total numbers, but in adjusted "inventory per market share point." Toyota carries fewer days of inventory than their competitors, clearly.

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The "Waist" of Overproduction?

Restaurants Take Leadership Role with Portion Control

Pardon the horrible joke there. One of the types of Waste, defined by lean manufacturing, is "overproduction," the idea of providing more than the customer wants (or providing it earlier).

Portion sizes at restaurants have grown to the point of outrageous, huge plates, huge portions. Restaurants claim this is what the customers want. I've always suspected that it's driven more by the restaurant driving more revenue and profit from the "fixed cost" of your visit and your use of that table for 45-90 minutes.

I would assume that a huge portion requires just about the same labor (kitchen and wait staff) to produce as compared to a normal portion and the raw material cost is marginally higher. So, the restaurant makes more money and forces you to spend more for a huge $11.99 entree (at a Chili's/Friday's/Applebee's type restaurant) that provides "value", either in terms of providing a lunch the next day, or in terms of tightening your waistband if you eat it all.

The TGI Friday's chain is taking a positive step in offering "Right Portion, Right Price" meals that are smaller and proportionally cheaper. It will be interesting to see if they use this "prove" that customers want the larger portions, as these smaller meals will be on the regular menu alongside the regular portions.

It's an interesting experiment toward reducing the waste of overproduction, a waste that leads either to wasted food or the wasted human potential that results from poor health.

In your own business, are there cases where you force larger batches/amounts on customers because it's more economic for you?

"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?

The Gift of Overproduction

Honey, You Shouldn't Have - WSJ.com

Update: I was probably wrong on this one (see here).

You see the ads for Lexus with the cars with red bows on top, the ultimate Christmas gift, right? It's really the result of overproduction and the need to dump product at the end of the year. The WSJ article said:

Once upon a time, auto makers accepted that the Christmas season wasn't a great time to sell new cars. But that is ancient history. Now, the 12th month of the year is one of the most promotional on the auto-industry calendar. One reason is that car companies, especially the luxury makers, realized that it was better to hold sales than end the year stuck with too many out-of-date models.

Surprising that the company that talks about the "waste of overproduction" (Toyota) has end of year clearances (Lexus). It goes to show they aren't perfect.

The graph with the article (click for larger view) shows how Toyota is offering far lower incentives ($800 per vehicle) than Chrysler ($4000!!) is with their overproduction.

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.

GM to back off on Incentives

Via Google News Archive

Auto incentives... bribing people to buy the car they didn't exactly want, but you built anyway.

"As part of General Motors' new brand strategy, the company will avoid rebates and other one-time discounts..."

The punchline -- this article is from 1996. It was Chairman Jack Smith in the quote, not 2006 CEO Rick Wagoner.

The more things change, the more things stay the same. Overproduction is still overproduction. GM still can't wean themselves off of incentives.

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?