For years, Detroit automakers have been playing catch-up when it comes to manufacturing in North America. Honda, Nissan, and Toyota regularly set the pace with lean manufacturing practices, an obsession with quality, lower wages, just-in-time parts delivery, and unmatched teamwork. Now with a new, competitive labor agreement with the United Auto Workers in hand, Detroit automakers are as confident as ever that they can narrow the productivity gap with Asian rivals.
Long stymied by bloated structural and labor costs, GM, Ford, and Chrysler can hire new workers at a fraction of the pay and benefits longtime UAW workers earn — $25.65 an hour vs. $78 an hour. They also have greater flexibility in deploying factory manpower where needed, including wider use of temporary workers, and new plant-level work agreements give them more leeway to assign tasks, manage production levels, oversee maintenance schedules, and control quality.
And the new labor pacts wipe billions of dollars in future health-care obligations — some $90 billion to $95 billion — off their collective books. That’s a liability that added as much as $1,900 to the price of a new GM car or truck, for example, in recent years. Yet even before the historic new contracts were signed last fall, Detroit was making progress on the quality and productivity front. Based on the latest closely watched survey by Harbour Consulting, GM has, after a 20-year chase, essentially matched Toyota Motor Corp. in vehicle assembly productivity across North America.
And the difference between the best (Nissan) and the worst (Chrysler) is now three hours per vehicle, a significant drop from the 12-hour gap just four years ago. And when stamping, engine, and other manufacturing operations are included, the gap between the top and bottom performers is about five hours per vehicle, half of what the gulf was four years ago.
What’s more, Toyota, Honda, and Nissan have plateaued — and in some cases, slipped — in the Harbour survey. A tide of early retirements and buyouts will shave more Big Three workers in 2008, allowing even more productivity gains on the plant floor. The only hurdle standing in the way of more progress is slower economic growth, which is expected to weaken auto sales further in 2008, forcing additional production cuts.
Detroit automakers are still dogged by big challenges, too — higher absenteeism, pockets of restrictive labor agreements, higher pension obligations — that add to manufacturing costs. And North America remains awash in a glut of plants, with more on the line as Honda, Toyota, Kia, and VW open or launch new factories over the next few years.
And there are other intangibles to overcome and keep workers and suppliers rallied. After decades of market share losses and staggering red ink in recent years — they lost a combined $15 billion in 2006 — the survival of all three Detroit automakers is at risk. That prospect has many workers unsettled, and it encouraged many of them to accept generous buyout packages.
As a result of the latest contract, the industry’s period of largesse and generous benefits that began to take root in the 1950s is coming to an end, and in many cases, is being reversed. As The Wall Street Journal recently described it, the golden age of dominance is over for the UAW and the Detroit automakers.
Pockets of bad blood between UAW workers and management still exist, and could be exacerbated as benefits are reduced and new hires making less money start working alongside veteran workers making more.
Some suppliers grumble that Detroit’s automakers require more robust tools and equipment to counter employee abuse — even sabotage in some cases, that add to their manufacturing costs. But it’s clear that after years of false starts, Detroit thinks it has some real traction. Quality is improving across the board. Productivity and lower warranty outlays are permitting GM, Ford, and Chrysler to spend more money making new models more appealing.
Going forward, GM plans to use the new labor agreement to lower costs even further by taking full advantage of less expensive wages for new hires and non-production work, enhance vertical integration with improved and simpler parts sequencing, and shorten main production lines in assembly plants to lower capital costs, logistics expenses, and structural needs.
“The competitive labor agreement will provide enablers for GM to continue to drive productivity improvement strategies across assembly, stamping, and powertrain operations,” says Mary Barra, executive vice president for manufacturing engineering at GM. “We have seen significant improvements in all our plants globally as we institutionalize our global manufacturing system.”
GM has been studying Toyota’s vaunted manufacturing production system for years — even enjoying a rare, front-row seat at a joint-venture factory with the Japanese automaker in California. In the latest Harbour report, the New United Motor Manufacturing Inc. (NUMMI) factory needed just 19 man-hours to build the Pontiac Vibe and Toyota Corolla. That was just 4 percent more man-hours than the industry’s best small-car plant, another GM factory in Spring Hill, Tenn.
GM has tried to replicate the success of the Fremont, Calif., plant at other locales. The automaker now runs around 20 simulated workplace centers around the world modeled after NUMMI and launched it at its two newest plants — in Lansing. The training covers the best global manufacturing practices — how to hold a torque gun, whether to automate windshield installation, etc. — discovered internally, from Toyota and other automakers.
The goal: standardize processes worldwide, build in quality at each manufacturing step, and teach problem-solving and teamwork to drive waste out of the manufacturing system. To date, workers at the new GM plant in Delta Township have logged more than 100 hours of training.
But there’s a new plant emerging as the North American benchmark — a $1.28 billion highly automated manufacturing complex on 2,000 acres in San Antonio. It’s billed as Toyota’s most innovative plant to date and elevates the automaker’s vaunted production system to a new level of quality, efficiency, and technological advancement.
And it’s producing full-size pickups — one of the most profitable segments in the business. In a radical new approach for the often insular automaker, Toyota has brought 21 separate parts suppliers on-site and, in many cases, inside the final assembly plant to build and deliver key components. The arrangement means fewer final parts for workers to handle, less inventory to manage, and lower shipping costs. The result is one of the shortest production lines in the world inside a Toyota plant.
New proprietary stamping equipment, which is both smaller and quieter, churns out hoods and other body panels in record time. The paint shop is much shorter (thus less expensive to operate and maintain) than those found in older plants. Seats are assembled mere feet from the production line where they’re installed, saving freight and packaging costs. When the Tundra’s hulking steel body exits the paint shop, an instrument panel is ordered and, 26 vehicles later, it’s installed down the line in a process that takes less than 30 minutes.
But it’s in the workforce where Toyota has invested the most time, resources, and energy. To screen some 100,000 applicants for 2,000 posts at the plant, Toyota put job hopefuls through a rigorous four-step assessment similar to those used in Toyota’s existing U.S. sites. The screening included a virtual day in the life of Toyota, where prospects installed wire harnesses and performed other production tasks and underwent team-building and problem-solving evaluations.
Early on, Toyota wants to weed out workers more willing to bury a problem than tackle it before it mushrooms. “The No. 1 priority at Toyota is developing people,” says Jeffrey Liker, a professor of industrial operations at the University of Michigan and author of a new book, Toyota Culture. “When it works, everything else — quality, steady improvement — follows.”
The result has been a low attrition rate — 6 to 8 percent — and similar to other manufacturers in San Antonio. In many ways, the plant posed more challenges for Toyota. It’s located far from the automaker’s existing U.S. supply base, requiring parts makers to set up shop close to the plant. Several of them are minority-owned, with little experience working with an automaker of Toyota’s exacting standards. And the workforce is largely inexperienced in automotive manufacturing.
While Toyota dispatched team leaders from other plants to train workers, the opening of the San Antonio plant has come with Toyota’s worldwide resources stretched, thanks to record sales growth and a global manufacturing push. Liker says the automaker will nourish the Texas plant for several years to guarantee quality and success. “Other Toyota plants will suffer for the child, absorb the shocks, until it can walk, talk, and ride a bike,” he says. “As it matures, it will become more flexible — adding new models — and complex.”
Plant management says safety and quality still have room to improve, but the plant is meeting internal operating targets just one year after launch. “This is the first truly self-reliant Toyota plant launched in North America,” says Don Jackson, senior vice president and head of production at the Texas plant. “In the past, we would’ve looked to Japan more often for help.”
GM’s newest North American plant, outside Lansing in Delta Township, was designed to build on the automaker’s cooperative workforce and union leaders in the area. It’s no coincidence that GM has invested some $2.6 billion — including two new assembly plants — in the Lansing area over the last five years. The $1.5 billion plant in Delta Township is now one of GM’s most modern manufacturing complexes, churning out the popular GMC Acadia, Buick Enclave, and Saturn Outlook crossovers. But after a successful ramp-up, it suffered an early shock when GM recently announced that it would eliminate a third production shift at the end of December, in part to keep inventory levels lean.
GM has other stellar plants — most notably in Oshawa, Ontario — where workers require just 15.68 hours to build the Pontiac Grand Prix, and two Buick sedans, on one line; and just 16.34 hours to build the Chevrolet Impala and Monte Carlo on a nearby line. Ron Harbour, head of Harbour Consulting, thinks the Oshawa plant’s workforce is among the best throughout GM. “That site builds 20 percent of GM’s North American sales volume and consistently does it well,” he says. “The employees are a key driver.”
But Toyota, eager to keep a competitive edge as rivals close in, isn’t standing still. Senior management wants to cut nearly $8.7 billion from the cost of developing and building vehicles within four years. Eventually, Toyota hopes to create new low-cost plants that crank out as many as 12 different models on the same production line, at a rate of one every 50 seconds or less.
Today, the best flexible plants are limited to building four different models. Much like Toyota, GM, Ford, and Chrysler are making a big push into flexible manufacturing. The automakers want fewer plants building more models to streamline operations and boost utilization — a key to sustained profitability. By contrast, idled plants — or factories operating at less than optimal rates — put a major dent in investment returns and profits.
The manufacturing efficiency and high plant utilization rates of Japanese automakers also helps explain the vast difference in profitability between Asian and U.S. automakers. In addition to plant efficiency, health care and pension outlays, discounts, and low-rate finance offers all factor into profit levels.
Toyota and Honda, which run their plants at 95 to 108 percent of capacity (including overtime), are better able to leverage design, engineering, and manufacturing operations to increase flexibility, and they use more common parts and processes. In 2006, Toyota and Honda each earned a pre-tax profit of more than $1,200 on each vehicle sold in North America. According to Harbour, Chrysler lost $1,072, GM some $1,436, and Ford $5,234 on each model sold in 2006. Detroit automakers are expected to narrow the losses per vehicle sold but remain in the red in 2007 and 2008.
The latest drop in industry sales and subsequent production cuts have lowered plant utilization rates at Ford, GM, and Chrysler — estimated as low as 75 percent for some plants and as high as 90 percent for others. To make improvements, each automaker is rushing to be more flexible, while better adjusting output based on market demands. In return for concessions, GM, for example, has agreed to invest in UAW-represented plants while enhancing flexibility through 2011. By then, all of Ford’s nine U.S. assembly plants will be so-called “flexible.”
Ford has poured more than $750 million into an Oakville, Ontario, plant to transform it into a state-of-the-art flexible-manufacturing site capable of building four different vehicles — the Ford Edge, Lincoln MKX, Ford Flex, and a planned Lincoln version of the Flex — based on two unique product platforms. Under the new contract with the UAW, another five U.S. plants will receive flexible body shops to enable them to build multiple models.
GM’s next step toward manufacturing flexibility is designed to help the automaker build, ship, and sell vehicles across borders based on market demands, while leveraging parts procurement around the globe. “We are designing a global assembly plant footprint that works like a power-grid,” says Barra. “Over the next few years, more than 80 percent of our products will be built in plants that are connected in a network that will enable cross-regional shipping, if required by the market.”
In addition to flexibility, Toyota is radically rethinking other processes including the size of its stamping presses, tooling, and machinery. The automaker also is striving to eliminate all factory waste that ends up in landfills while radically streamlining the way parts are delivered and installed during the assembly process. New Toyota assembly plants under construction in Mississippi and in Woodstock, Ontario, will adopt many of the new advances designed to slash costs. Under a new initiative, employees are undergoing another round of training to establish new centers of excellence outside of Japan, the automaker’s longtime manufacturing stronghold.
For three years now, the automaker’s best team leaders have been retraining themselves and teaching best practices throughout the automaker’s plants. The intense schooling is designed to create a new generation of experts, a bigger talent pool, and a deeper bench, mostly outside of Japan, as the automaker’s old guard retires.
Retired manufacturing engineers are even being recalled to mentor younger workers. “Every best practice — new or old — gets shared,” Jackson says. “There’s always room for improvement.”
Toyota also wants to inject a fresh spirit of thriftiness, discipline, and desire for continual improvement that has long defined its success. “Toyota realizes that the old pace of innovation is no longer enough,” Liker says. “The world is changing faster, and they have to move faster. It’s scary what they hope to do.”