An Avoidable Manufacturing Failure?

Google announced in May that it has decided to close its Motorola MotoX smartphone plant. The Texas plant has been in operation for one year. Its smartphones will be manufactured in China and Brazil.  

One goal for this plant was to “challenge conventional wisdom that manufacturing in the U.S. is too expensive.” But unit quarterly sales were so low that economies of scale could not be realized.

Keeping manufacturing operations in this country depends on several criteria:

• Quality management down through the 3rd organization tier;
• Disciplined strategic focus – with an honest and periodically updated Situation Analysis;
• Superior culture with the absence of hubris and politics;
• Best Cost Producer – utilizing Lean, Kanban and Kaizen protocols;
• Productive, lean salaried employee organization – not just lean for hourly manufacturing employees;
• Regular Competitive Benchmarking and Value Analysis of the product lines;
• Effective application of capital spending – which is essential.

The photographs of Motorola’s Texas plant show an unusually large number of hourly direct labor employees assembling product. This seems excessive.

This raises questions of how effectively “Best Cost Producer” and capital spending protocols were applied to create a low cost, high thru-put operation normally found in this type of technical product. Did Google Motorola have an engineering and manufacturing team capable of putting together an equipment plan to reduce direct labor headcount and increase thru-put resulting in a profitable USA plant? Was the equipment plan supported by the correct level of capital expenditures? Advanced manufacturing technology such as robotics is fairly easy to do.

Is the Moto X smartphone competitive in features, performance and price point? CNET’s review concludes that it is a good quality and relatively competitive smartphone. Not perfect. But if the price points were set correctly and its manufacturing costs yielded positive profit margins, profitable unit sales should have been realized.

While Motorola has struggled, Google appears to be well-run. It is hard to believe that Google did not put top people and resources behind making its Texas smartphone facility successful. But did they?

Google’s failure does not bode poorly for manufacturing operations being successful in this country. It is certainly possible that the USA’s manufacturing base can be increased if the criteria for successful operations are in-place – particularly for technical products.

Fixing General Motors

 
Even well-run manufacturing companies periodically have product quality problems. The lifeblood of a manufacturing company is controlling its costs. Quality problems increase costs and ultimately reduce sales. As such, successful chief executive officers pay attention to product quality costs and causes which are readily available in monthly financial and operating reports.

Reports that the General Motors’ CEO and senior officers did not have knowledge of this critical and tragic ignition switch defect points up a serious flaw in its management process and culture.

The cause of GM’s ineffective management process

As reported in a recent Bloomberg article, GM’s senior management may not have learned of the ignition switch problem because: “… people didn’t want to push bad news upward.”.

Depending on the culture, lower ranking employees may not come to a chief executive officer’s office to reveal a problem. Some may not speak up in a meeting with higher ranking officers. Even senior officers may remain silent so as to not violate an unspoken pecking order, keeping vital information from being considered.

If we are to believe that management was unaware of this extremely serious defect for a decade, it raises the question of what other hidden operating problems is GM’s CEO not aware of today that can affect its performance and reputation.

General Motors has a correctable management process problem. It apparently has a hidebound culture that isolates senior management from an accurate and timely understanding of what goes on in its operations.

Correcting GM’s flawed management process

CEOs and senior officers of successful companies accomplish being fully aware of problems by using “random walk” which results in “bottom to top” communication – commonly referred to as “bubble up”.

I was given excellent advice on my first day running an Emerson Electric division:

“Remember you are at the top of your division’s organization pyramid. You will only know 10% of what is actually going on. You must “submerge” yourself into the lower levels of the organization to learn about problems. You cannot be office bound. “Randomly” walk your office hallways and the floors of your manufacturing plants. Be visible. Ask questions. Listen. Relax. Smile. Do not make friends or make decisions lower management should handle. If you don’t have time to do this, you are working on the wrong priorities.”

Emerson Electric is considered an exceptionally well-run manufacturing company. Management is never surprised. The management process relies on hands-on, face-to-face cross-functional communication. No videoconferences or telephone meetings.

When Chuck Knight was Emerson’s chief executive officer, there were about 130 manufacturing plants. Knight carried a matrix with him that listed every plant with the dates of his visits. His advice: “…make sure you are in your plants frequently…go alone.” He was known for visiting plants unannounced and alone. An example of a successful CEO seeking an accurate understanding of what goes on in the company’s operations.

For GM to fix its process requires a change in its culture with the development of “bottom to top” communication. To make it work its CEO and senior officers must use “random walk”.

General Motors has about 10 final assembly plants in this country. Its other 34 USA plants produce the components used in final assembly.

A brief 4 hour visit twice a year to each of its 10 USA final assembly plants would require no more than 20 half days from a GM chief executive officer’s 250 day annual schedule.

This is all that would be needed to learn what is going on in GM’s operations.

GM’s CEO should go alone, without an entourage. Do not notify the plant that the CEO is coming – make it a surprise visit. This will avoid having the plant spending costly hours fixing and cleaning it. Walk through the offices and manufacturing floor alone, without the plant management.

After a few visits people will relax and talk to a CEO – particularly if they see a rational, approachable person that can be trusted. People will tell of problems, make suggestions, disagree with decisions or just vent their concerns. The CEO should ask questions: “How are we doing? Do we have any problems? How is our quality?”.

Once every three months randomly drop in unannounced and alone to various GM committees particularly the ones cited in the Bloomberg article: "At the heart of General Motors…slow response to fatally flawed ignition switches is a committee culture that impeded the flow of information…to the corner office.". Ask: “Do we have any quality issues? Any production problems?”.

A General Motors CEO’s periodic random walks will breakdown a dysfunctional management process and an inept culture. It will eventually result in communication flowing from the very bottom of the organization to the top.

If chief executive officers do not have time to do this, they are working on the wrong priorities. Thus, failure will be guaranteed.
 
Follow-up:

NY Times’ recent article: “G.M. Recalls Another 2.7 Million Vehicles”

Just two months after GM announced the recall of 1.6 million cars with the ignition switch defect it announced an additional recall of 2.7 million vehicles. This raises the question of what other hidden operating problems is GM not aware of today that can affect its performance and reputation.

Bloomberg’s recent article, “Don’t Bail GM Out Again” is a helpful read noting that GM continues to make poor quality cars which was one cause for its decline into bankruptcy. Its earnings are currently slumping.

Another worthwhile article by the Wall Street Journal in 2012 “General Motors Is Headed ForBankruptcy – Again”

Can GM fix its hidebound culture and ineffective management process?  

Avoiding a Common Manufacturing Problem

Otis Elevator’s costly move of its Mexican plant to its South Carolina plant is a common problem in manufacturing. Sadly it is an elementary, “Manufacturing 101”, process that seasoned manufacturing managers know how to avoid.

Contrary to Otis’ reasoning that “…it was trying to do too much”. The principal cause was most likely that the “manufacturing fundamentals” were not accurate.

This would include inaccurate bills of material and routings in its cost system:

Bills of Material not accurate:

When the daily production plan is published and individual product (SKU) orders are released to the plant floor component parts are taken from inventory and sent to the production floor. If the bills of material for the SKUs are not accurate, some of the parts necessary to produce the product will be missing resulting in production delays. As a result, hourly production employees are idled incurring costly labor variances.

Inaccurate bills of material complicate an operation further because supply chain does not know what component parts to purchase to support sales and production. Supply chain uses the bills of material and sales forecast to decide what raw materials to purchase.

When moving production to a different plant, if the bills of material are not accurate, the necessary component parts to produce a product will not be transferred or on-hand at the new plant.

Not everything may have been captured in the older, long-used manufacturing plant’s bills of material. There may be an informal system in-place which long-term employees know from experience what parts are needed to produce a product – although these parts are not included in a cost system’s bill of material.

Routings incomplete:

Routings are simply the timed steps a product (SKU) takes from start to finish in the production cycle. It is possible that the older plant’s routings were not accurate. But experienced employees may know how to successfully route product through production.

However, if routings are not completely accurate when a plant is moved, it will be virtually impossible for the new plant’s management and engineers to establish the correct order of steps and tasks to produce product.

It would be the same as when we assemble a new bicycle for one of our children. We open the box and find only a completely disassembled bicycle – only parts. But there are no instructions included on how to assemble the bicycle. We may eventually figure out how to put the bike together, but it will take a longer time with hits and misses.

It is not much different asking production managers and engineers to produce product with inaccurate routings.

Once a cost system is in-place it is fairly easy to maintain it daily by manufacturing and industrial engineering and cost accounting allowing supply chain to maintain the requisite inventory supported by a bar coding system.

Wall Street Journal’s Market Watch article: “Otis finds 'reshoring' manufacturing isn't easy”

Warren Buffett and Corporate Governance

Coca-Cola’s $13 billion management equity compensation plan was recently assessed as excessive by Warren Buffett and investment advisors, according to a NY Times article, “Buffett Punts on Pay”. Buffett is Coca-Cola's largest shareholder, owning 400 million shares.

Apparently Mr. Buffett disagreed with the equity compensation plan, believing it to be excessive, counter to the best interests of the shareholders. Yet, he did not vote against. Oddly, he abstained.

Mr. Buffett provided his reasoning via CNBC: “…I love the management. I love the directors. So I didn’t want to vote no…But we did disapprove of the plan.”

Ironically, in 2009, on the subject of excessive executive compensation, he said, “The way to get big shots to change their behavior is to embarrass them.” Investors should,  “speak out…”.

The NY Times concluded regarding the Coke vote: “The need for collegiality trumped good corporate governance.”

The National Association of Corporate Directors and the Corporate Governance Center at the University of Delaware once provided me with guidance on how to participate as a member of a Board of Directors.

--> Their advice seems applicable to a major shareholder.

They advised: Board members should be assertive, pleasant and straightforward. When they disagree with a subject before the Board they must 'push' to make sure everyone understands the pro and con prior to a Board vote. If Board members do not do this, they are not acting responsibly, may even be considered 'legally out of whack'. A member of a Board of Directors has a fiduciary obligation to operate in a manner that assures shareholders that they are providing the best representation possible.  Boards can lose liability lawsuits if it’s discovered that they do not function in this manner.

Warren Buffett did not need to go to the extreme of embarrassing or offending anyone. Would a presentation of the facts by one of this country's most respected businessmen have resulted in Coke's Board rejecting or modifying the equity compensation plan? Would Mr. Buffett's 'no' vote have sent an important leadership and corporate governance message to the Board and this country's business community?

Warren Buffett’s follow-up interview on CNBC: “Buffett: Coke will listen to shareholders on equity plan”

Mr. Buffett responds again - he seems embarrassed: “Buffett Bites Back” 

Is China Facing a Growth and Debt Crisis?

"Will China Shake the World Again?” is a recent article written by Robert Preston. Preston is the Business Editor for the BBC. The piece discusses China’s ability to sustain its growth, manage its heavy debt positions and avoid a disaster equal to or greater than the 2007-2008 financial crisis

Preston believes China has an "unbalanced economy whose recent sources of growth are not sustainable.”

In 2007-2008 “…the Chinese government unleashed a stimulus programme of mammoth scale: £400bn…growth accelerated... But the sources of growth…have a limited life.” “…China's growth rate…really looking at 4%."

 “But what makes much of the spending and investment toxic is the way it was financed: there has been an explosion of lending. China's debts…have increased since 2008 from 125% of GDP to 200%.”

“…investing at that pace…it is a…certainty that much of it will never generate an economic return…debtors unable to meet their obligations…large losses for creditors; the question is not whether this will happen but when, and on what scale.”

Based on my experience working with operating companies in Shanghai and Guangdong, I have to agree. My expectation for China’s future is negative, as their potential for serious growth and continued competitiveness will prove to be very difficult.

Having inspected a number of Chinese owned manufacturing companies in mainland China, it becomes apparent manufacturing knowledge, processes, and systems are woefully behind the times. Contemporary manufacturing in China corresponds to the USA’s 1970 manufacturing capabilities.

Therefore, cost increases from higher wages and inefficient operations are to be expected. Also, unfavorable changes in currency valuation will be a factor. This will result in lower growth, employment and capital availability. This will make it far more difficult to service its debts and fund necessary initiatives.

Judging from my visits, the young and educated Chinese appear much more independent, aggressive and spontaneous. It may make its citizens more difficult to control. Social unrest could be a major issue affecting China's economic development as well.

Click on this link to read Mr. Preston’s article.

Here are some other posts on China:

Is China’s decline permanent?

China to surpass USA as World Leader in manufacturing?

Can Manufacturing Return to the USA?