How Does Detroits Past Affect Your Future?

Dec. 11, 2008
Can you survive the spread of the automotive industrys business model?

Over the years, U.S. original equipment manufacturers (OEMs) have gradually adopted Detroit’s business model to mass produce standardized products at decreasing costs. Now, the likelihood of a deep recession means lower revenues and slimmer margins for most of them — and tougher terms for their suppliers, including foundries and diecasters. With most casting buyers cutting production volumes and reducing operations, their purchasing managers are continuing to follow Detroit’s price-cutting tactics and intensifying their pressure to extract even lower prices from their suppliers.

Only the most effectively managed foundries and diecasters with the highest employee productivity will survive. Larger ones have professionals who can coach managers to be more efficient and develop methods to boost employee productivity. Smaller ones rely on knowledgeable consultants for affordable short-term help to achieve the same goals.

Will you survive your customers’ demands for lower prices? Compare your key financials with those of the rest of the metalcasting industry (see Tables 1a-e.)

Survival practices for casting suppliers
OEMs of all types – automakers, producers of other durable goods, construction and agricultural equipment manufacturers, aircraft and industrial machinery builders – are aggressively passing these competitive pressures to their suppliers, including metalcasters. The most successful ones have adopted seven strategies to survive. They are:

• Improving managerial effectiveness by more rigorous selection, development, and compensation systems to develop more efficient managers who can define and focus on strategic objectives, rather pursue work better delegated to subordinates;

• Training firstline supervisors to do better organizing and managing of their employees’ work, not just their employees’ behavior;
• Improving worker productivity through pay-for-performance programs, like “gainsharing.” The federal General Accounting Office has cited gainsharing as “the wave of the future,” because it unites an organization’s workforce in boosting productivity. GAO research found productivity rose on the average from 17% to 29% in companies pursuing gainsharing.
• Focusing on core competencies, dropping marginal products and customers, and outsourcing some production – coremaking, for example – to cheaper suppliers that specialize in that activity.
• Saving working capital by more rigorous collections and developing tighter internal controls to reduce accounts receivable and inventory.
• Using computer technology and management information systems more effectively to coordinate all aspects of their business;
• Adopting lean manufacturing practices to eliminate waste, save costs, and again, save working capital.

The best-managed foundries and diecasters combine these practices to cut per-unit costs to a level that enables them to survive their customers’ cost-cutting methods.

Mass production, … and management, financing
Mass production requires sophisticated management and highly productive workers paid well enough to be mass consumers, whose purchases can be paid through mass financing. Over the decades, Ford, Chrysler, and General Motors have developed this formula from a font of innovative business practices that changed American industry, the American economy, and indeed, the American way of life:

Automotive industry cost-cutting began with Ford’s moving assembly line (1913), establishing high productivity and true mass production. Ford’s $5/day minimum pay (1914) started to give real purchasing power to workers, moving them toward middleclass incomes and consumption habits.

General Motors’ rationalization of diverse businesses (1920-22) enabled it to transform a hodgepodge of independent automakers and parts manufacturers into a successful, vertically integrated, centrally controlled organization coordinating supplier subsidiaries (self-starters, axles, etc) with autonomous, multi-functional assembly divisions, and selling cars for every type of consumer.

And, Walter E. Heller & Co.’s financing programs (1923) expanded consumers’ purchasing power by extending installment sales from the traditional productive equipment (tractors, etc.) to automobiles and other bigticket items, like furniture and appliances.

Simplified mass production of standardized parts drove down the cost of Americanmade goods, starting with Ford’s Model T. Rationalized management enabled GM to build the world’s largest car company, selling so many cars (over 60% of the U.S. market) that by the 1960s it feared that the Dept. of Justice trustbusters would break it up. Mass consumption, fueled by mass unionization and higher pay, gave purchasing power to blue-collar America; and mass financing allowed everyone to “buy now, pay later.”

Still, the foundation of this economic pyramid remains domestic mass production, driven by low-cost products made from locally sourced, standardized parts made at ever lower costs by highly productive workers.

Price-cutting tactics
Now, Ford, Chrysler, and GM merely assemble parts and components supplied by lower-cost manufacturers; for the most part, they no longer produce those parts and components themselves and then assemble them into finished cars and trucks at their own high-wage plants.

Thus, today fewer metalcasters are producing the finished products that consumers buy. Rather, they make the castings used by the OEMs of big-ticket consumer durables and industrial products, who have adopted Detroit’s cost-cutting practices. These include: insisting on lean manufacturing and just-in-time delivery practices to save their own inventory expenses and working capital; demanding expensive initiatives from foundries so the castings they supply meet rigid quality standards; out-sourcing of parts and component production to reduce their own labor costs; boosting employee productivity, and exacting price concessions from suppliers as the price of continued business.

The domestic automakers buy more parts and components from more suppliers than any other industry, in any other country. Ford, Chrysler and GM purchased $171 billion worth of domestically produced parts in 2005, supporting about 480,000 supplier jobs. Foreign automakers, ie., the transplants, bought another $50 billion in parts, sustaining another 140,000 such jobs in US plants. (see Table 2.)

Price-cutting specifics
The specific ways that Detroit pressures suppliers to cut their prices have rarely been reported. The concessions that the Big Three and their Tier 1 suppliers have demanded from Tiers 2 and 3 suppliers over the past decade have been painful, driving some into bankruptcy, or very close to it. (Among metalcasters, Intermet Corp. apparently is an example of this.) Tables 3a and 3b detail Detroit’s demands, and portray how it has transferred the expense of its own uncompetitive labor costs and unwieldy bureaucracies to its suppliers. Detroit is purchasing an increasing volume of castings from independent, lower labor-cost foundries, and it has spun-off its own captive parts divisions into separate companies in the vain hope that they could persuade the United Auto Workers union to lower their labor costs.

Detroit now focuses on assembly, not partmaking
The strategy of buying cheap parts from independent suppliers with (hopefully) lower labor costs is due to four critical changes in Detroit’s business model:

• Focusing on core competencies, i.e., “doing what they do best,” and subcontracting all non-core work from their own highcost, unionized workforces to non-union suppliers, or those with union contracts at lower pay rates. The old business model of vertical integration is pass.
• Recognizing that employment costs are about 65% of their operating expenses. OEMs in all industries are trying desperately to lower their employment costs by outsourcing work to lower-cost suppliers, and by re-negotiating their union contracts. • Adopting a global view of the supply chain. Because each of the three automakers sells products worldwide, they now source from the low
• Saving inventory costs and working capital by insisting suppliers use lean manufacturing techniques and make just-in-time (sometimes hourly) deliveries.

Having been established by Detroit, these practices have been adopted by the transplant automakers, and subsequently by virtually all other OEMs of big-ticket consumer and industrial products and their Tier 1 suppliers.

Although these changes have lowered their costs – and the prices they will pay for castings and other component parts – the automakers and other OEMs still need confident customers who will risk buying high-value items that include those castings. Ultimately, consumer confidence pays for the castings you sell to the OEMs.

Subprime loans, credit crisis and low productivity
Now, the credit collapse, the global market declines, and rising per-unit labor costs are reinforcing the pressures inflicted by OEMs on their suppliers for better productivity.

Since global credit markets seized up in Summer 2007, consumer confidence has fallen, along with housing prices, the stock market, and 401(k) retirement funds. New home construction, existing home prices, and sales of consumer durables, furniture, and automobiles have nose-dived.

Bell-weather sales of cars and light trucks have tanked. Annual sales hit 17.4 million in 2000, and remained near that for about five years. Then, new vehicle sales fell by 2.5% to 16.1 million in 2007, largely due to higher fuel prices. GM CEO Rick Wagoner told analysts at a meeting last January, “As we look out, we’ve got to be realistic (that) we are facing some tough headwinds, particularly here in the U.S. with a relatively weak industry.”

He was being candid about conditions at the time, but that was before the market collapse in September. U.S. sales of new cars are estimated to fall below 14 million units this year, and may be down another 500,000 units in 2009, according to J.D. Power & Assoc., as buyers hold back or fail to secure financing.

Chrysler and GM may yet be forced into Chapter 11 unless they can gain a federal rescue package, which is now uncertain. Moreover, these automakers may merge even if they gain government subsidies. Between them they have about 10,000 dealers, and U.S. sales totaling $110-$130 billion. They directly employee about 145,000 workers at more than 100 assembly, stamping, and parts plants, and indirectly support another 400,000 or so at independent suppliers. The dire economic implications of bankruptcy are hard to exaggerate.

Somber predictions conclude that the effects of the sub-prime mortgage crisis will be felt for years to come, with stricter terms on commercial and industrial loans, disappointing automotive and consumer durable sales, and slim prospects for quick improvement. All of these would adversely affect the consumer confidence and the consumer spending that drive the American economy.

In self-defense, domestic automakers and OEMs have become even more cost-conscious. Lower consumer confidence means less consumer spending, which means fewer finished goods purchased, fewer parts needed for the fewer finished goods, lower production, fewer jobs, and excess industrial capacity. Thus, while these manufacturers outsource more production they are simultaneously making even more onerous demands upon suppliers for parts and components (see Table 4).

Many smaller metalcasters supplying automakers and Tier 1 suppliers cannot afford fulltime experts to develop their managers to peak effectiveness, train firstline supervisors how to organize their work, develop effective payfor- performance programs, or design overall compensation programs to reinforce these efforts. Help is available on a short-term basis from consultants skilled in these specialties.

Wherever they obtain the help they need, metalcasters must follow Detroit’s traditions: strive even harder to improve their managerial effectiveness, rationalize their business practices, boost their employees’ productivity, and lower per-unit production costs, all in order to survive – and even to prosper.

Will you be one of them?

Woodruff Imberman is an economic historian and president of Imberman and DeForest, Inc., management consultants specializing in improving managerial effectiveness, supervisory training, increasing employee productivity, and implementing Gainsharing Plans. Contact him at [email protected].

About the Author

Woodruff Imberman | Ph.D.

Dr. Imberman is the president of Imberman and DeForest Inc., management consultants specializing in improving managerial effectiveness, supervisory efficiency, and employee productivity through management and supervisory training, workforce audits, Gainsharing Plans, and other pay-for-performance programs. He has written numerous articles on these subjects.