Sunday, June 28, 2009

Reinventing the Automakers

It’s refreshing to hear President Obama talk about the need for the American automakers to reinvent themselves to become more competitive. Politicians, business leaders, writers and newscasters continue to talk about the need for General Motors and Chrysler to fundamentally change in order to survive. My concern from what I have seen so far, however, is the idea that “getting smaller” is considered fundamental change.

If we look at the dictionary, the term fundamental is defined as, “serving as, or being an essential part of, a foundation or basis.” Following this definition, selling off divisions, laying off workers, closing plants, and shedding dealers does not constitute fundamental change. They are ways to cut costs, and may be necessary because of decisions made and actions taken in the past, but it has nothing to do with changing the philosophy and basic approach to business.

In my opinion, fundamental change for American automakers begins with getting back to the basics by clarifying and communicating the purpose of these companies. At one time, the Big 3 had very clear missions that involved offering safe transportation that provided value for their customers. Somewhere along the way they forgot about this and got the idea that their purpose was financial – e.g., related to profit or earnings for shareholders. When this happens in any business, decisions become much more focused on the short-term and the company’s overall health begins to break down.

Valuing Employees

Another area requiring fundamental change is the relationship between management and workers. There have been problems for years between the union and management, and it appears that the problems are still not being addressed. Unions don’t trust the intentions of management and the situation needs to be addressed immediately. And recent conversations with the union have been completely focused on concessions, with little or no discussion about improving the relationship.

If the relationship is to improve, the union needs to be involved in planning at the highest level and management needs to improve its communication with the workers throughout the company. This may work itself out because of the large stake unions are taking in the companies, but it can’t be assumed – it must be acted upon quickly.

Supplier Relationships

Another relationship that has been severely strained over the years is the one between the automakers and their suppliers. Surveys of tier 1 suppliers have shown a very small percentage of them feel they have a “good” or “very good” relationship with the Detroit 3. These surveys also show that suppliers feel that the automakers have little or no concern in the success of their supply chain. Lengthened payment terms and continual pressure to reduce prices has left many suppliers on the verge of bankruptcy and forced others into other industries because they just could not afford to continue to do business with the U.S. automobile manufacturers.

From a business perspective, it is crazy for any company to disrespect its suppliers. Unfortunately, large organizations in the U.S. and Europe have somehow come to believe that pressuring suppliers and shifting business around to keep prices down is good practice. Suppliers are a part of a company’s overall system – they just happen to be external to the organization. The effect they have on the quality, cost and delivery of the company’s products are just as important as employees inside the company. In this way, it would seem crazy to pressure employees to reduce their pay, increase the time between paychecks, and continually look for new workers in order to reduce pay by getting people to compete with each other for existing jobs. This is exactly how suppliers are treated.

Any supplier relationship must be based on mutual success. Analyzing suppliers must be done on the total cost of doing business with them; not just price and payment terms. In this way, all costs must be included – including inspection costs, inventory costs (due to defects, late deliveries and leadtimes), defects, design support, and extra labor due to variation in incoming products, in addition to price and payment terms. Unfortunately, price and payment terms seem to be the only components measured.

Better Cars

Whatever the change looks like for the U.S. automakers, it absolutely has to include offering better cars. The latest J.D. Power survey results regarding initial quality have been released and American cars are the noticeable minorities on the list. With all the publicity surrounding the improved quality of American cars, the survey results show that, unfortunately, they still lag behind those from Japan, South Korea, and Germany. This has got to change.

The processes for designing and building cars requires overhaul to give U.S. producers a better chance against foreign competitors. Anyone who has read, The Toyota Way by Jeffrey Liker has to wonder what it must be like to compete against a company like Toyota. Their methods are so different from traditional Western manufacturers, that it’s difficult to know where to start. What is important, though, is that the Detroit 3 actually “start.” They have got to start doing things differently and not believe that survival will come from cutting back.

Will it Work?

I know that something had to be done to keep the Detroit automakers afloat during the recession. Letting GM or Chrysler close down at this time would be devastating to the unemployment rate, the economy, the automotive supply chain, and the auto industry, in general. What I can’t help but wonder, though, is that giving GM and Chrysler billions is just delaying the inevitable and they are going to disappear anyway. The fundamental change that is needed to stave off closure just doesn’t seem to be happening . . . or happening quickly enough.

I hope I am wrong.

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