I was disappointed to see comments from the U.S. Department of Commerce official Al Frink at the August 8 Management Briefing Seminars held in Traverse City, Mich., suggesting that the American automotive industry may be too focused on cutting costs through Lean and Six Sigma initiatives and not giving enough attention to innovation as a vehicle for remaining competitive on the global landscape.
Mr. Frink fails to note that lean manufacturing creates not only improved cost performance, but even more important, it creates agility. And agility enables a business to be fast and flexible, with profitable performance. He also shows a lack of understanding of the depth of the challenge that many manufacturers -- particularly in the automotive sector -- face right now.
A recent study by the corporate advisory firm AlixPartners really puts things in perspective. In its review of automotive OEMs and suppliers across a wide range of operational and financial metrics, the AlixPartners study found that no less than 38% of all auto suppliers in North America are in "fiscal danger," meaning that they could face insolvency within 24 months or less unless they take urgent counteractive measures. That would be in addition to the $60 billion in major supplier bankruptcies in the U.S. alone since 2001.
Among other findings, the study revealed that a pronounced divergence is taking place between top-performing OEMs and suppliers and those in the lowest performing quartile and that auto suppliers, in particular, need to do much more than what they have done to date to strengthen their financial positions, from maximizing cash flow to improving working capital to enhancing revenue strategies and beyond.
The fact is that while many manufacturers have been on the lean journey for some time, there is much work to be done to transform those disjointed projects into programmatic initiatives that produce meaningful bottom-line impact that is sustainable over the long haul. As someone who was part of the leaning of 85 plants for the American Standard Companies, I can tell you from experience that there is a major business performance gap between merely practicing lean and operating a lean enterprise.
The Aberdeen Group Lean Benchmark Report published earlier this year drove home that point in vivid color. The report showed that approximately 80 % of best-in-class, 60% of industry average, and 40% of laggard companies are meeting, if not exceeding, expectations in key areas such as reduction in inventory and assets, manufacturing and cost and improved customer service. Yet, when questioned quantitatively on order-fill rate, yield and on-time delivery, even best-in-class companies reported less than three sigma performance.
Like the folks at AlixPartners, I believe that the auto industry remains a very good industry to be in, but success moving forward requires greater, coordinated attention toward various lean and Six Sigma initiatives in motion, not less as Mr. Frink has suggested. Similar to the fiscal danger that many automotive companies face today, lean implementation efforts at American Standard were linked with a compelling business problem -- an emergency need to service a substantial leveraged-buyout debt and avoid breaking up the plumbing products, air conditioning and vehicle control divisions.
Driven by CEO Mano Kampouris, ongoing reviews of program expectations and key performance metrics ensured that resources deployed were working on the right projects to drive improvements. Cultural change occurred by ensuring that everyone -- from laborers to executive management -- had the right tools, leadership support and incentives to fully achieve and sustain lean capability.
The end result was one of the more remarkable Wall Street success stories of the past few decades, with lean and flow transformations facilitating major gains in inventory turnover levels which led to more flexible and predictable on-time shipments which led to increased margins and customer satisfaction and a dramatic increase in market share leadership and valuation.
The irony is that on the way to becoming one of the outstanding lean companies in America, American Standard created the Champion toilet that can flush a dozen golf balls, the oil less compressor at Trane Air Conditioning and sway control at Westinghouse Air Brake company for truck safety. Lean thinking drives discipline, and frequent innovation and the delivery of innovative products and services requires discipline.
With all due respect to Mr. Frink, now is the time for manufacturers to lean forward, not backward.