Tag: auto industry

OM in the News: Ford’s Secret Battle to Save Its Supply Chain

Late in 2008, Ford was just months away from running out of cash. With the auto industry careening toward ruin, Congress offered the Big 3 a bailout. GM and Chrysler grabbed the taxpayer lifeline, but Ford decided to save itself. Under CEO Alan Mulally, Ford had already put together a bold plan to unify its global operations, transform its product lineup, and overcome a dys­functional culture. It was an extraordinary risk, but Mulally applied the principles he developed at Boeing to streamline Ford’s operations, force its executives to work together, and convince the UAW to join his fight for the soul of American manufacturing.

It wasn’t just the Big 3 struggling to stay in business though. In a very interesting article in The Wall Street Journal (March 9, 2012), we learn of the secret “Project Quark”, a move to save Ford’s suppliers, most of whom were also on the brink of bankruptcy. Without parts, nothing else Ford did would matter. In a high-tech room that looked like it belonged in a NASA facility, Ford created a risk profile for each supplier. It might be easy to find another company to make plastic trim, but finding one for exhaust systems might be impossible, as such firms are highly engineered and have proprietary technology.

Ford pared the list down to 850 suppliers it had to keep in business. It also recognized that the world’s automakers had become mutually dependent on a complex web of suppliers. Although GM and Chrysler bowed out of cooperating, Toyota, Honda, and Nissan did not. With the web in danger of collapsing in late 2008,  Ford started dealing with suppliers that were vital to Toyota, in exchange for Toyota buying from American parts companies, like Delphi, which were vital to Ford.

This is a wonderful article that you might ask your students to read when you teach Ch.11, Supply Chain Management.

Discussion questions:

1. Why did GM refuse to participate?

2. Why did the Japanese auto makers join Ford?

OM in the News: Europe’s Turn to Face Auto Plant Overcapacity

While Europe has been preoccupied with the euro crisis, another storm has been gathering that could also take a huge toll on jobs. Just as it has too much debt, Europe has more auto factories than the economy can support. With new car sales down 21% in France and 17% in Italy, “the overcapacity is not exactly a secret,” writes The New York Times (March 7, 2012). 

“All of the car manufacturers have capacity problems–all of them,” says Carlos Ghosn, head of Nissan-Renault. Government scrap programs, which promoted the replacement of older cars with new ones through the 2009-2010 downturn, are not likely to be repeated. Nations are simply not in a financial position to subsidize unproductive plants as they may have in the past. But in Europe, any attempt to cut costs will deteriorate into a political struggle among the countries that stand to lose jobs.

Sergio Marchionne, the CEO of Chrysler-Fiat, estimates the industry needs to cut capacity by 20% in Europe, a huge number when considering the 2.3 million employees making cars and parts. Unused capacity, as we saw in the US, is ruinous for automakers because idle factories cost money to maintain and unproductive workers to pay. Production capacity in Europe fell only a little after the 2009 downturn. Fiat closed a plant in Italy, Saab went bankrupt in Sweden, and Opel shut a plant in Belgium. Some companies have become better at managing fluctuations in demand. BMW, for example, makes use of temporary labor. Porsche outsources production of some models. Still, a large production overhang remains.

Discussion questions:

1. How is the US auto industry different from that in the EU?

2. In what ways can European car makers cut capacity?

OM in the News: Honda Revs Up Plants in the US

When discussing global OM issues in Ch.2, the news that Honda is shifting a major chunk of its manufacturing to the US over the next 2 years is noteworthy. The Wall Street Journal (Dec. 21, 2011) reports that the 63-year-old company is accelerating its move away from Japan after two huge challenges: natural disasters and the yen’s gain of 40% to the dollar since 2007.  (The yen was 78 to the dollar this week, compared to 120 a few years ago). Honda plans to  grow to 2 million cars  in N. America, up from 1.29 million last year. This is to be done by building a new factory in Celaya, Mexico and expanding all 7 existing US plants.

With the expansion, Honda will export 200,000 to 300,000 vehicles a year from N. America, a tenfold increase, while reducing exports from its Japanese plants by 50%.  Because of the strong yen, “It is virtually impossible to make money on exporting vehicles from Japan in the short and medium term”, says the president of American Honda. For the US, the move means good news: thousands of new auto-related jobs and a boost for US suppliers that make components for Honda. The Greensburg, Indiana, plant alone will go from 100,000 to 200,000 Civics per year and add 1,000 jobs.

“It’s almost an economic necessity that they co-locate exports outside of Japan”, adds an industry consultant. “You can expect others to follow”. Today,  37% of Honda’s global production is in N. America: this will grow to 50% after expansion.

Toyota, likewise, has begun making its Corolla in Mississippi and is looking to expand its Baja, Mexico factory. Both firms saw earnings drop 50% this quarter.

Discussion questions:

1. Why are many foreign auto makers now expanding in the US?

2. What is the risk to Honda of transferring a large part of capacity offshore?

Good OM Reading : Once Upon a Car

If you are looking for a fast-paced, riveting story of the near demise of the US auto industry, read Once Upon a Car: The Fall and Resurrection of  America’s Big Three Auto Makers. Author Bill Vlasic started following GM, Ford, and Chrysler in 2008, about a year before GM and Chrysler filed for bankruptcy.

 We attend a secret meeting between Rick Wagoner (GM’s CEO) and Bill Ford (the great grandson of Henry Ford), in which the GM team proposed a merger with Ford. Desperate to stave off bankruptcy and burning through more than $1 billion per month, GM needed Ford’s $30 billion bank account. Savings would be huge and synergy phenomenal. As GM’s vice-chairman Bob Lutz had argued, “It could be one  large, enormously powerful global auto company.You could shut one proving ground, one finance department, one tax department, a bunch of plants, get rid of a lot of engineering”.  But  Ford was angry with GM’s arrogance in wanting to be the senior partner and  would have none of it.

The overture, though, was also disturbing. If GM went bankrupt, a big part of the auto supply chain would go with it. And that would definitely hurt Ford.  (You may recall that some 15 years earlier, GM won a major lawsuit  against VW, only to realize that if destroyed VW, its own supply chain would be severely damaged. It settled for $100 million in cash and VW’s promise to buy a $1 billion in parts from GM per year).

To protect his flank, Ford courted the future president, Barack Obama, who was excited about Ford’s plans to create smaller, fuel-efficient cars. On the other hand, Wagoner’s outsized control of his board and his political maneuvering killed a potential partnership with Renault-Nissan. In the end, he was forced out by Obama as part of the $50 billion bailout. And as to Chrysler, we learn that it didn’t have a chance in the game. Daimler-Benz, its German owner, wanted to dump Chrysler for years and had long starved its R&D budget. UAW union head Ron Gettelfinger does not escape blame either. Outsized demands and the infamous union job bank did little to help his autoworkers.

Good OM Reading: Car Guys vs. Bean Counters

If you are looking for a good  read at the beach this summer, pick up Bob Lutz’s new book , Car Guys vs. Bean Counters (Penguin Group, 2011). After holding top exec positions at BMW, Chrysler, and Ford (but never reaching the CEO spot) , Lutz joined GM at its depths, in 2001, convinced he knew exactly what a car company should look like. Despite Lutz’s strongly inflated view of himself (he compares his style to Jobs, Gates, and Branson), he has written the best book about the auto industry since Iacocca, in 1984.

Car Guys vs. Bean Counters contains some fascinating views of GM during the past decade that you might want to use in your OM class. For example, Lutz writes: “The operations portion of the automobile industry has been thoroughly optimized over many decades, doesn’t vary much from one automobile company to another, and can be manged with a focus on repetitive process. It is the ‘hard’ part of the business and requires little in the way of creativity, vision, or imagination. There is little or no competitive advantage to be gained by ‘trying harder’  in procurement, manufacturing, or wholesale”. I have to wonder if Toyota  and others would agree with this assessment.

What does separate the winners from the losers, according to Lusk, is the long-cycle product development process, which still takes GM about 3-1/2 years from initial idea to 1st off-the-line.  In the book, he notes how GM cut corners in some ways and wasted effort in others. He makes public for the 1st time the “hider” technique GM used on interiors, where plastic corners were rounded so customers would not notice misalignments.

My favorite story is about the Outside Speaker Effectiveness Analysis Group, which rated guest lecturers who came to speak at HQ. One well-known speaker received this letter after giving a talk at a GM conference: “The five ‘outside speakers’ average scores  ranged from 5.25 to 8.25. Your average was 7.35. Your standard deviation was 1.719 and ranked 2nd among the variances”.  Maybe more time on OM  could have saved GM from near-destruction.

OM in the News: BMW Loves Making Cars in the U.S.

As the Big 3 auto makers still struggle to reclaim markets and manufacturing leadership, BMW announces that employment will hit 7,600 workers in its South Carolina plant next year. Its $750 million expansion means the plant will be the largest car factory in the U.S., dwarfing any Detroit operation.

Of course, with the economy so bad, this is good news, even if some profits end up in the company’s German headquarters. And because of high-tech firms like BMW, South Carolina is the 4th largest net importer of college-educated adults.

Why did BMW decide to make its luxury SUVs here, when it exports 70% of these vehicles to the rest of the world? The Wall Street Journal (Oct.14,2010) reports that US production helps BMW hedge against currency fluctuations around the globe. Another reason…according to U.S.-BMW President Josef Kerscher (in Fortune, Oct.15,2010): This U.S. group has absenteeism of “less than 3%, better than in Germany”.

 Similar good news is that Mercedes plans to shift some production of its best-seller, the C-class sedan, from Germany to the US in 2014. Its not only a currency issue for Mercedes, but the strategy reduces labor and other costs. As we note in Ch.8 (Location), Mercedes already makes SUVs in it Vance , Alabama plant.

Discussion questions:

1. What others reasons are there for foreign car makers to be attracted to the US?

2.Why is South Carolina  a primary destination for auto manufacturers?

3. What brought Mercedes to Alabama (see Ch.8’s OM in Action box)?