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Focus: Manufacturing

Feature Article from Our Supply Chain Trends and Issues Subject Area - See All

From SCDigest's On-Target E-Magazine

Jan. 31, 2011

Supply Chain News: After Years of Lean 1.0, US Automakers Finally Get Healthy with Lean 2.0 after Restructuring


Bankruptcy Leads to Dramatic Changes that Take out Unsustainable Costs; Hourly Labor Now Just 6% of Revenue at GM


SCDigest Editorial Staff

What a difference a couple of years make.

Two years ago, the US' Big Three automakers - Ford, GM and Chrysler - were all to different degrees on the verge of collapse, victims of bad decisions, unsupportable cost structures, and a economy flat on its back.

GM and Ford took the path of a government led bankruptcy. Ford, under relatively new CEO Alan Mulally, who was recruited to the company from Boeing a few years earlier, managed to avoid that road, but just barely, its stock price dropping at one point to about a dollar per share. It is now at about $16 - a retirement-inducing return for anyone so brave as to take the plunge near the bottom.

SCDigest Says:

GM now makes 28 vehicles per year for each employee, according to Goldman Sachs auto analyst Patrick Archambault. That is more than double the company's productivity during the 1990s and 400% higher than the 1950s.
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While there are opinions all over the map as to whether the government should have bailed out GM and Chrysler, and the approach taken in the bankruptcy itself, there seems little question that the process enabled all three automakers to finally shed many of the cost elements that were a killing them compared to many of their global competitors and non-union foreign firms making cars in the US.

The reality is that while all the Big Three used "Lean Manuacturing" techniques to drive much of their plant operations, from a larger perspective they were still quite flabby.

GM and Chrysler were able to make dramatic changes using the muscle of the bankruptcy process. Ford, not in bankruptcy court, was simply able to jump into the current being forged by the other two OEMs to enact similar changes.

Just consider:

  • Numerous brands sold or shuttered: Pontiac, Mercury, Saturn Hummer, Saab, Jaguar and Range Rover all now gone from the Big Three.
  • Dramatic changes in health care costs: A new union-based trust has replaced the so-called "legacy costs" of health-care obligations the OEMs had to retired workers, to which they will still contribute a substantial but fixed amount each year, versus the never end rise in such costs seen over the past decade or more. Active workers now pay about 5% of their health-care costs, up from an unbelievable nothing just a few years ago. That's not much compared to most US workers, but it's better than the previous scenario, and expect higher contributions to be required in coming years.
  • Productivity gains: GM now makes 28 vehicles per year for each employee, according to Goldman Sachs auto analyst Patrick Archambault. That is more than double the company's productivity during the 1990s and 400% higher than the 1950s.
  • Lower labor costs: The combination of greater productivity and flexibility in the plant, lower health care costs, more outsourcing and other changes means that GM's hourly labor costs now represent only 6% of revenue in North America, down from almost 30% a few years ago when work rules hammered productivity, health care costs were brutal, and GM and the others were paying tens of thousands of workers to sit idle in the infamous "jobs bank."

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  • Capacity rationalization: At last, many plants that should have been shuttered years ago but weren't because of union contracts or hubris have at last been closed, dramatically lowering the Big Three's fixed cost structure.

More recently, GM executives have launched some trial balloons that suggest in upcoming contract talks, GM would try to move more hourly pay to incentives based on quality and productivity. The company has already made changes to white collar compensation that ties pay more directly to company profitability.

All this was only possible of course because GM and Chrysler were able to make changes to union contracts as part of the bankruptcy process, and because the US government and new boards were able to force GM and Chrysler into some tough decisions that for a variety of reasons management had not been willing to make before, such as shutting down poor performing brands. Mulally and his team at Ford have been on a similar path.

The market for autos in the US is still well below the peak of 17 million vehicles sern in the mid-2000s. In the past, this would have meant crushing losses. Now, the companies appear able to make money in a market of just 12 million or so vehicles - a dramatic change.

Ford just announced full year 2010 earnings of $6.6 billion, 10-year high and a phenomenal turnaround from the more than $30 billion lost between 2006 and 2008. GM, which has yet to announce for the full year, made $4.8 billion through the third quarter. Chrysler is more troubled, but is operating at about break even and has been cash flow positive.

More good news for the US auto industry: The average vehicle on American roads today is 10.2 years old, according to research firm R.L. Polk Co. That compares to an average age of 9.4 years five years ago and 8.8 years a decade ago. At some point, these aging vehicles will have to be replaced.

What is your take on the financial recovery of the US auto industry? Could much of this have been done before, or did it take financial disaster and bankruptcy to make it happen? Let us know your thoughts at the Feedback button below.

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