Chapter 1 Management Perspective: The Profit Motive
Productivity and international competition have become increasingly important issues for manufacturing firms here and abroad. With this in mind, the primary goal of this book is to demonstrate that any company, anyplace in the world, can achieve superior productivity technology. With even modest investment, the factory output of high-quality products per employee hour can be substantially increased. In fact, major advances can be achieved by the simple reorganization of people and equipment. For several years in the late 1970s, Andersen Consulting studied productivity problems when it served as a consultant to Yamaha Motor Co. in Iwata, Japan, and worked with Yamaha's customer, the Toyota Motor Co. One of the most important lessons Andersen learned from this relationship was how to set targets for improving productivity. Some of the more startling revelations of this endeavor were:
1. When management set unbelievably high targets, it expected improvements of 50 to 90 percent and more. Surprisingly, these high targets were almost always matched and surpassed.
2. Since management had no specific basis for establishing targets, entirely new manufacturing methods needed to be invented to achieve these objectives.
3. Little or no time was spent justifying the cost of the project. The full-time project teams responsible for designing and implementing changes were charged with the responsibility of inventing low-cost solutions that were expected to generate savings in 6 to 12 months or less. Infrequent exceptions were handled through normal capital investment procedures.
In countries other than Japan, executives have recently started to adopt the same ambitious targets, and they have had the satisfaction of knowing firsthand that potential for productivity gains is not restricted to any single global area. Equally important, they have learned that these gains do not require a complete change in either national character or company culture. These executives also know that the most important secrets to success are setting high goals, discarding old ways of working, and inventing new, simpler, and lower-cost methods. The setting of seemingly impossible goals thus becomes self-fulfilling prophecy, but not by any magical formula, as radical goals demand radical departures from accepted ways of operating. When enlisting and insisting on the committed and enthusiastic participation of every manager, supervisor, and employee in the drive to achieve performance beyond the levels of competitors, executive management performs its most important role.
MANAGEMENT GOAL SETTING
Today, manufacturers in every country are comparing themselves to the most productive companies in the world, and most conclude that they may be second- or third-rate at best. Usually, however, the measure of productivity used to reach that conclusion has little to do with how successfully the company can compete in the international arena. Several indicators of productivity are measurable; others, such as degree of factory automation, are not. None of the conventional measures -- (1) man-hours of direct labor per unit produced, (2) man-hours (or employees) on the entire payroll per unit produced, (3) product cost per unit produced, (4) degree of factory automation -- are valid for meaningfully evaluating the competitiveness of a company vis-à-vis a company in another part of the world. For example, in some countries, employee compensation and benefits are only a small fraction of what they are in other areas. As a result, the productivity of the factory, office, and executive work force can be lower and yet still place the company in a competitive position internationally. Even when labor costs are comparable, material and component purchases usually make up 60 percent or more of product cost. Thus, purchase prices usually have a greater impact on competitiveness than do payroll costs. Since different manufacturers have different degrees of vertical integration, the one that merely assembles a product has considerably lower payroll costs than the vertically integrated manufacturer that manufactures components and, as well, assembles the finished product. Therefore, total product cost, although less than a perfect gauge, is a more meaningful measure of international productivity. The customer deciding between competing products of equal value should select the product with the lowest delivered price rather than be concerned with the manufacturer's cost. In the same vein, degree of automation is a subjective, and frequently erroneous, criterion for evaluating competitiveness. Glamorous, high-technology automation is often viewed as modern and productive -- even if the automation should be eliminated, as in the case of material transportation and storage, or if the automation itself costs more than simpler, manual techniques, or low-technology alternatives.
As long as world trade remains unregulated and stiff international competition prevails, market price is the only practical measure of productivity for manufacturers of products with identical value. Even delivered price has only short-term transient value, since a price can increase or decrease as a result of changes in the value of currency. For example, rapid and sharp appreciation of the German mark and Japanese yen from 1985 to 1987 caused the prices of products produced in those nations to rise sharply in most other countries. In some parts of the world, and especially in the United States, it has been fashionable to chastise manufacturers for losing their competitive position or, in developing nations, for never having achieved one. It is time to realize that large numbers of companies, worldwide, are working diligently to surpass the world-class manufacturers of today, their goal being to become the superior manufacturers of tomorrow.
To get started in this race, some companies have viewed a competitive benchmark project as the first phase of a productivity improvement program. But while completing extensive and arduous competitive comparisons, they have delayed work on factory improvements. While it is important to understand as much as practical about the competition, it is a mistake to put off improvements, awaiting study results in order to set targets. For one reason, meaningful comparisons range from extremely difficult to impossible to make, and are based on factors such as the degree of vertical integration, degree of automation, and value of the local currency. And, above all, the main issue is not the competition's stance today or what it will be in the coming year, but how to determine how much a company can expect to improve.
As quickly as possible, executive management must set new style factory improvements in motion. It is management's responsibility to specify aggressive targets that will demand quantum leaps forward in the international race for manufacturing superiority. It is not difficult for management to determine what its goals should be, throughout the company, or in individual departments. Experienced managers can suggest improvement targets based on a fast factory tour, Japanese style, albeit with a more logical basis. However, it is less important how the goal is set, than how high it is set. To explain this concept further, the remainder of this chapter deals with achievements of Western companies that now stand as reasonable goals for most manufacturers.
CHANGEOVER AND SETUP REDUCTION
One example of a management target is the reduction of the cost of machine changeover from producing one part (or product) to producing another. Based on studies of thousands of different types of machines around the world, experience on changeover reduction shows that the average cost reduction should be expected to be somewhere between 75 to 80 percent. Inter