From Also-Ran To Front-Runner

Dec. 21, 2004
A strategy system called 5 Axes has helped a French automotive supplier make a dramatic turnaround.

When Nol Goutard took the wheel at Valeo SA in 1987, the French company was an also-ran in the exacting and cutthroat business of supplying subassemblies to the world's big automakers. Losing money under a management adrift, Valeo was too small, too regional, and not focused sharply enough on its automotive business to be a viable competitor in a rapidly globalizing industry. Goutard has driven the company hard, maneuvering it through a pack of competitors to make it a front-runner on a par with Delphi Automotive Systems, Ford Motor Co.'s Visteon Automotive Systems Corp., Robert Bosch GmbH, and Denso Co. Ltd. Today Valeo has 50,000 employees on four continents. Having shed all its nonautomotive operations, last year it sold nearly $7 billion worth of electric motors, windshield-wiper systems, lighting and security systems, climate-control assemblies, and other components to major automakers including General Motors Corp., DaimlerChrysler AG, and Renault SA. (Aftermarket sales of windshield wipers and other parts accounted for 8% of sales.) And unlike some of its competitors -- notably industry leader Delphi, which was forced to take a huge restructuring charge last year -- Valeo is solidly profitable, with net income of about US$294 million last year on a pretax operating margin of 7.1%. To work the turnaround, Goutard sold off noncore operations and bought his way into new geographic markets and automotive product lines. The most spectacular example of the latter strategy was last year's $1.7 billion purchase of ITT Electrical Systems to bolster Valeo's North American presence. Such strategies weren't necessarily standard when Goutard launched them, however. "They were smart in becoming a global company before others became global," says Marc Santucci, president of ELM International Inc., an automotive-industry consulting firm in East Lansing, Mich. "That allowed them to get business from the Big Three that they might not have gotten otherwise." But beyond that, the company has spurred growth and profitability through its far-reaching 5 Axes program for cost-cutting, new-product development, and quality improvement. The 5 Axes is a management mantra so familiar as to be almost tired: involvement of personnel, supplier integration, constant innovation, total quality, and a lean production system. Many companies mouth such slogans, but Valeo is one of the few that have been able to make them work. The secret of its success is the effectiveness with which the company translates principles into action. Each of the 5 Axes principles is underpinned by a series of systematic prescriptions governing procedures for everything from keeping machinery clean to evaluating ideas produced in brainstorming sessions. The principles are implemented by a discipline almost military in its thoroughness. "Over the last five years, our sales and margins have grown 95% and 142%, respectively, despite very strong price pressure. And we succeeded because of the impact of our 5 Axes," says Goutard. "That is the engine of our cost control, and it allows us to constantly improve our technical performance." Valeo has won GM's supplier-of-the-year award seven times in a row. Of the 184 other companies that earned the honor for 1998 performance, only 10 others could match Valeo's seven-year winning streak. The award is more than a pat on the back. "It means that we will prefer to give business to them, and they will be involved in all our future business developments," says Otto Jetter, executive director for worldwide purchasing of electrical commodities at GM, Valeo's biggest customer. For a company that gets 50% of its growth through acquisitions, as Valeo does, an equal virtue of the 5 Axes is that acquired companies can be integrated without fumbling, says Bruno de Tarl, group vice president for 5 Axes deployment in North America. The common language and nuts-and-bolts operating procedures laid out in the 5 Axes play book are proving their worth now at the former ITT Electrical Systems, he says. There, 13,000 workers, 15 plants, and five research centers are being folded into Valeo with a minimum of glitches. Within hours of the legal change in ownership, Valeo signs had gone up outside all the former Electrical Systems buildings. Within days, 1,400 headquarters staff had been reassigned to operating units as Valeo dismantled ITT's centralized structure and put in place its own product-line structure. Within weeks, a program to clear plants of unused tools, machinery, and furniture was underway, in line with Valeo's dedication to keeping workplaces simple and functional. "If you can't walk a plant and understand the product flow and operations immediately, then the plant can't be run properly," says Goutard. Within months, Valeo-style production teams had been formed, and Valeo auditors had visited every Electrical Systems plant to explain the 5 Axes. Management training in the how-tos of applying the 5 Axes began immediately. "It's a long process to integrate a company, and you can't change a corporate culture overnight," says de Tarl. "But with the 5 Axes, we avoid mistakes and errors," because it's clear exactly what needs to be done, how it needs to be done, and what the final processes and organizational structures should look like. The 5 Axes program was implemented in 1991, after Goutard had healed Valeo's wounds and faced a choice: sell or grow. Valeo had stuck a toe outside Europe -- one of Goutard's moves had been to buy a U.S. maker of engine cooling systems. However, it still was essentially a European regional player, ripe for acquisition in a consolidating industry. The prospect of auctioning off the company held no thrill for Goutard, whose upbringing in Morocco's wide open spaces imbued him with a frontiersman's love of challenge and conquest. "I wanted to be the hunter, not the hunted," he says. That meant Valeo would have to meet customers' demands for technical innovation and lower prices even while digesting a string of acquisitions. Goutard, who learned management at U.S. companies after earning a law degree at the Sorbonne in Paris, provided the vision that supports the system: Valeo should build on its technical strengths in development and manufacturing, and it should do that by instilling a firm management discipline. "I had been with excellent companies and less good companies, and I had seen what could be accomplished with strong management systems and excellent reporting," says Goutard, whose career has included posts with Warner-Lambert Co., Pfizer Inc., and Schlumberger Ltd. The reporting he had in mind went far beyond financial statements. "Physical indicators like quality, absenteeism, machine utilization, and development delays have to be monitored, because they are what give you the financial results," he says. What grew from this approach was a two-tiered statement of principles, with the 5 Axes as the supporting tier under what Valeo calls its 4 Directions, or strategy for growth. The 4 Directions commit the company to excellence and customer satisfaction in four areas: total quality, advanced technology, competitive costs, and global presence. But stating the principles was just the beginning. "When you set a strategic direction, you also have to provide a toolbox to the organization" for meeting your objectives, insists Goutard, whose spare and steely office at Valeo's Paris headquarters is an apt expression of his faith in methodology and technology. "The 5 Axes are easy to understand intellectually, but that's not the point," says de Tarl. "The point is, do you know how to apply them fully, do you know what you're doing? On a long-term basis, a manager can't achieve good results if we don't give him or her the tools." The 5 Axes tool kit includes training, setting precise targets for individuals and teams, monitoring by roving audit teams, and liberal use of pay and promotions to reward good performers. The system encompasses all 50,000 employees. Even Goutard's performance is periodically reviewed by an audit team, and performance-based bonuses and merit raises are extended to hourly workers. But the 11 branch managers, 100 division managers, and the managers of Valeo's 115 plants are the key. "We take every manager as accountable for implementation of the 5 Axes, and they are measured, not just by the audit teams, but also by profit-and-loss and balance sheet," says de Tarl. Targets for improvements are set throughout the company. Goals might be to increase sales per employee or to reduce accident rates, quality returns, product-development time, or costs. Numeric or percentage targets are set, so that progress can be quantified. Ideas are sought throughout the company, and employees are encouraged to speak up when they see a better way to do something: The goal is to solicit an average of 15 suggestions per employee each year. To assure that the ideas don't languish -- which could discourage the flow of comments -- each suggestion must be reviewed within five days, and any feasible change must be implemented within a month. Numerical targets -- 15 suggestions a year, five days for review -- are just one example of the kinds of policies found in every working area. Another: An engineer who comes up with a new idea must describe it on a standard form "to make sure it's relevant to the problem you're trying to solve, among other reasons," says de Tarl. Although the method might seem stultifying to some, Valeo points to the 547-plus patents it won last year -- more than any other French company in France -- as proof that its systems foster creativity rather than squelch it. GM's Jetter gives Valeo high marks for its technological advances. "In the automotive industry you don't get revolutionary changes, but combinations of a lot of small ideas, and they have come forward with a number of modules" that provide improvements in such areas as heating and cooling systems and windshield wipers, says Jetter. One development that's now an option for Cadillac buyers is wipers with sensors that turn them on automatically when rain hits the windshield. And the rules and forms aren't cast in stone. Employees can suggest modifying them as conditions change, and the company's goal is to review all of the procedures annually "to see if they are still relevant," says de Tarl. Feedback comes from roving audit teams that visit about 10 company facilities each month to judge how well the principles and methods of the 5 Axes are being implemented and to decide in tandem with management the best ways to progress and how much higher to raise the bar. "Because the 5 Axes is based on continuous improvement, by definition we are never satisfied," says de Tarl. Each of the company's divisions and every plant is audited every 13 to 14 months, and the audit teams' reports are circulated to all managers, "so a kind of competition occurs," says de Tarl. The reports also land on Goutard's desk, and he makes it a point to study them. "They show where each plant or division stands, how it has evolved since the previous audit, and the road map to achieve better results, so it's a strong and methodical discipline," he says. But he takes nothing for granted. "I still walk the plants to see for myself," he says. On a recent trip to Munich, with a free half-hour before a meeting with a customer, he dropped in unannounced on a sales office "to see if the 5 Axes were being applied." His judgment: good but not perfect. One Valeo rule is that papers shouldn't be left lying around, because that's a sign of disorganization that can interfere with efficiency. The Munich office had a case of old papers waiting to be taken away -- which Goutard couldn't approve of although he admitted that it might have been unavoidable. (Valeo aims for perfection but both Goutard and de Tarl admit it's not really possible: Goutard himself was cited for leaving papers on his desk the last time he was audited.) Such attention to detail might seem a fussbudget's concern, but Goutard and de Tarl are adamant that it serves a larger purpose. Cleanliness and order are vital for work to be done properly, says de Tarl. Filing papers, rather than leaving them on a desk, makes it easier to organize and complete tasks. Besides, says Goutard, clean and attractive plants contribute to productivity by attracting better workers. Another company mandate in the realm of cleanliness is that all machines must be white and production workers must wear white coats. "That's so they can see right away if there is dust or an oil leak," says de Tarl. "You can't develop quality unless you can see when something is wrong." The thoroughness of the 5 Axes system extends even to the design of plants. The company has developed a standardized architecture, decor, and work organization that it uses for new plants around the world and imposes on older plants to the extent possible. "If we were to take a customer and put him down in one of our plants, he couldn't tell if he was in South America or Central Europe, but he would know he was in a Valeo plant," says Goutard. GM's Jetter hails that as one of "a lot of clever ideas" that Valeo has developed. "It means they don't have to design each plant from scratch, and that gives them cost advantages." The thoroughness of the Valeo system produces results appreciated by suppliers as well as customers. "What differentiates Valeo [from most other companies is that] they are very professional and very systematic. They put their acts behind their speech," says Henri Gagnaire, president and CEO of Textron Industries-France. To illustrate, Gagnaire cites the January housewarming for Textron's new Paris headquarters, at which Michel Peglia, director of purchasing for Valeo Electrical Systems, was scheduled to make a few remarks. Before the other guests arrived, Peglia showed up with a member of the Valeo training staff in tow. The trainer took 20 of Gagnaire's direct reports into a side room and set them to work on a Valeo exercise to determine how quickly they could change toolings. "It was terrific," says Gagnaire, and showed why "they are one of the customers that stimulates us and helps us work better for all our customers."

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