Continuous Improvement -- Auto Companies Must Change From Within

Jan. 22, 2006
Bowing to capital markets has made GM and Ford weak, while an internal focus on process improvement and customer satisfaction has made Toyota stronger.

Five years ago the editors of IndustryWeek invited a stock analyst to come in and tell us how his company identifies value when evaluating manufacturing companies. He was a very nice man, and we sent him away with some nice token gifts. But we editors all had an uneasy feeling as we said good-bye to our guest.

His message made no sense to us, process improvement junkies that we are. Essentially, he said, "We don't care what companies are doing internally to make themselves stronger and more productive -- we just care if they make their earnings projections and grow revenues and profits."

Sadly, the danger of this opinion quickly became apparent when non-manufacturing technology companies fed the Internet-stock craze in the subsequent years, followed by a bubble-bursting that the U.S. economy still is stinging from. The things market analysts valued in the late-'90s turned out to have no value. (I recall that during this time, many manufacturing companies with outstanding financial performance saw their stocks devalued simply because they were "old economy.")

I resurrect this question of value again as two domestic manufacturing stalwarts, General Motors Corp. and Ford Motor Co., face uncertain futures despite their venerable roles in the establishment of the world's largest economy. Somehow, these companies -- filled with smart, productive people -- have imploded. It seems they have too much of everything that is costly and not enough of everything that sells cars. How did they get that way?

I posit that they began to concentrate on the external value system of capital markets instead of sticking to an internal value system that focused on continuous improvement and customers, which is what their competitors did. This resulted in misdirected and wasteful growth (overcapacity, complex and inflexible production practices), a disconnect from employees (costly union strikes, negotiations and contracts; top-heavy management) and customers who found better options (Honda, Toyota, Nissan). And because these OEMs dictate, more or less, how suppliers run their businesses, these damaging practices permeated the auto supplier industry, which is going through its own struggles.

Let me set one thing straight: I'm talking about corporate philosophy here, not individual plant or employee performance. Certainly, GM, Ford, Delphi, Collins & Aikman, Visteon, Dana and many of the other auto-industry companies with financial problems also have individual examples of outstanding process improvement, impressive levels of quality, and innovative and popular products. Indeed, many plants from these companies have won Best Plants awards from IndustryWeek, and the employees of these plants deserve kudos for teamwork, cost cutting and quality improvement.

But unlike Toyota, which is dominating the North American auto industry in terms of financial performance and market growth right now, these examples are sporadic and at the plant level. While U.S. companies are just now talking about "lean" moving from the plant floor to other areas of the business such as accounting, Toyota executives are scratching their heads and wondering what exactly has to be moved. The Toyota Production System (TPS) never was meant to be a plant-level cost-cutting tool in the way U.S. companies have used it. It is an internal value system that unfortunately got no respect from the U.S. capital markets because analysts could not make a direct connection to it and the top or bottom lines each quarter. Companies, in turn, devalued TPS, using it successfully to boost productivity but ignoring its real worth. To me this -- more than anything -- explains the mess that the U.S. auto industry is in.

On a granular level, it plays out like this: Laurie Harbour-Felax, who has 18 years of experience as an auto industry analyst and is honing her expertise with research these days, told me recently that Toyota has five types of catalytic converters across all of its product offerings. One U.S. OEM (she wouldn't say which), has 140 catalytic converters across all of its product offerings. Now, this wasn't something anyone would have blinked an eye about in 1970, when the authority of the Big Three was unquestioned, and Toyota was a minor pest. But three decades later, it explains a lot. This example illustrates a huge cost differential when all things related to catalytic converters are considered: purchasing, transportation, product design, inventory costs, plant equipment and configuration, etc. And that's just one component!

Why weren't analysts or corporate executives asking questions in the '70s, '80s and '90s that would have led them to the conclusion that having common components was a good thing, and domestic auto companies should start doing it and be rewarded for it? Because, I say again, all that really mattered was financial performance, and back then, U.S. consumers did not have the choices they have today, so the numbers looked good. The auto companies kept selling cars, kept building plants and kept focusing on external values. They built a house of cards while Toyota invested in bricks.

There is some good news here. First off, Harbour-Felax says that not all analysts ignore process improvement and that at companies that invest heavily in autos, such as her former employer, they are training analysts to ask the right questions. So perhaps the globalizing forces that have turned manufacturing on its head in recent years also will force a correction within the value systems of our capital markets.

Secondly, the aforementioned U.S. companies have done more than just dip their toes in the healing waters of TPS. As Harbour-Felax points out, productivity and quality are actually not what differentiates these companies from their foreign-owned competitors. GM and Ford have smart people who know how to cut costs, design great autos and properly configure operations. They have made investments in process improvements that have made them stronger, even in this weakened state. What they need more than anything, though, is a solid establishment of internal values that refocuses every single area of the companies on continuous improvement and taking dictation from customers.

Thirdly, the auto industry has a turnaround model: the steel industry. While Big Steel was dealing with trade violation issues at its lowest point and received tariff help to bounce back, it also understood that it had to change from within. Executives, managers, union officials and employees worked together to consolidate capacity, reduce job categories to increase flexibility, establish reward systems tied to overall corporate performance and establish a reasonable method of compensating retirees who lost benefits through bankruptcies and mergers. What it painful? You bet. Did it work? Yes.

The final point that I consider a positive is that Toyota has never hoarded its gems. Indeed, its first foray into U.S. manufacturing occurred as a partnership with GM. The amount of knowledge, guidance and case studies on TPS is astonishing. But what the U.S. auto industry has to understand this time around is that TPS is a corporate philosophy that (a) was never meant to be a grassroots plant-floor trend; it requires buy-in and daily practice from everyone, everywhere, always (b) should not be viewed as a way to directly grow revenues and profits or cut costs, and (c) is still not completely understood by the capital markets.

I think Toyota is a remarkable company. But I also think Ford, GM and many, many U.S.-based auto suppliers are as well. They've just been told too many times that all that matters are the numbers, and their leaders have bought into it. Obviously, this focus on external values does not work in today's global marketplace. It's time to take a second look at TPS and stop basing corporate strategy decisions on short-term values. If nothing else, this downward spiral of the U.S. auto industry should teach investors that real value is created on a daily basis, with small decisions that follow a strong internal value system.

Tonya Vinas is managing editor of IndustryWeek. She is based in Cleveland.

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