In a sense, the recession might have come just in time for the domestic auto industry.
That is the born-again wisdom of auto officials here, who say hard times have forced them to take hard looks at previous practices, particularly their dealings with parts suppliers.
The self-examination has turned up billions of dollars of waste, much of it traceable to poor parts quality and sloppy inventory management, the automakers say.
The waste may have been tolerable in the days when unwarranted production costs could be shifted to sticker prices without consumer protest. But foreign competition changed all of that--leaving U.S. automakers more vulnerable than they should have been to the ill winds of recession, the auto officials say.
"We need new approaches if we're going to be competitive," says Robert B. Stone, vice president in charge of materials management at General Motors Corp. "We can't just keep passing along increased costs every year. There may be a limit to what the market can bear."
GM, Ford Motor Co. and Chrysler Corp., thus, have chosen to change radically their relationships with parts and materials suppliers. The car companies are entering longer contracts, two to five years versus the traditional one-year pacts, and are inviting suppliers of critical parts, such as transmissions, to help design and develop cars from scratch.
"It has become clear to us that the historical one-year supplier contract was a detriment to product quality," says Lionel M. Chicoine, Ford's vice president of purchasing and supply. The one-year contracts encouraged suppliers to go for volume, instead of quality, because there was no guarantee that the contracts would be renewed, Chicoine said.
The deterioration of quality increased costs. Labor and materials were wasted in producing bad parts. Labor and fuel were used to ship the mistakes. Manufacturers carried additional inventory costs by overstocking in an attempt to make up for the presence of bad parts, which accounted for as much as 10 percent of any given shipment, according to industry analysts. Other costs came from weeding out the bad parts and shipping them back to the supplier, who had to spend money to repair the parts or dispose of them.
"If we, for some reason, didn't catch the bad part, and it was put into a car on the assembly line, then it ultimately got all the way to the customer," notes David R. Platt, Chrysler's vice president of procurement and supply. That circumstance carried the biggest cost of all--"loss of customer confidence"--Platt said.
U.S. automakers now concede that their performance, at least, helped open the door for imports, which now occupy about 30 percent of the domestic auto market. The U.S. automakers' failure to eliminate waste in the supply system also contributed to the estimated $1,500 per car production cost advantage enjoyed by their Japanese competitors, domestic auto officials say.
"There's no question that quality wasn't what it should have been. We had to change," says Platt.
Some major suppliers agree. "It's clear to me that we must go the way the auto companies are saying" in order to help eliminate "the significant cost disadvantage" U.S. automakers have in competing with foreign manufacturers, observes William M. Agee, chairman and chief executive officer of the Bendix Corp. Bendix, a subsidiary of Allied Corp., supplies brakes and other parts to domestic automakers.
"The answer is not business as usual, because we know what business-as-usual has done to us," Agee adds.
In their efforts to reform, domestic automakers are embracing a prophet whom they once rejected and are practicing an industrial religion they spurned in their giddy days of production-at-any-cost.
The prophet is W. Edwards Deming, an industrial consultant and statistician who once tried and failed to get the U.S. auto industry and its suppliers to follow his doctrine of "statistical quality control."
Simply put, that means routine monitoring of production processes and plotting the points at which those processes began to produce defective parts. That approach helps suppliers and automakers avoid production problems, or, at least, to correct them quickly.
The religion is called "just-in-time" materials handling, a supply system designed to provide the right parts at the right time in the right quantity, reducing inventory and other costs in the production process.
The just-in-time system was started in the United States by Ford in the early days of the U.S. auto industry. But it was abandoned in favor of a system involving widely dispersed assembly plants that were supposed to do a better job of quickly moving products to regional markets.
Both Deming and the just-in-time supply system went to the Japanese, who used the approaches to establish their beachheads in the U.S. market.
Today, all of the Big Three automakers are requiring their suppliers to adopt statistical quality control procedures and to participate in just-in-time supply programs.
GM, the largest, has the most ambitious project. The company over the next two years will invest $200 million in its Buick and Fisher Body plants in nearby Flint, Mich. The goal is to establish a just-in-time assembly complex in which all major suppliers would be located within a maximum 300-mile radius, an eight-hour journey from point-of-supply to point-of-delivery.
GM's Stone said other just-in-time experiments have saved the company $2 billion in worldwide inventory costs since 1980.
In order for the Buick just-in-time system to work, some suppliers will have to move their operations closer to Flint, GM officials say. But the key will be quality of production because the redesigned and consolidated Buick and Fisher plants, now used to produce medium and full-size rear-wheel-drive cars, won't have the space to hold defect-bloated inventories, GM officials say.
Chrysler officials are planning a similar experiment in Windsor, Ontario, where the company intends to produce its 1985-model T115 vans.
"The total plant and supply system will be set up to accommodate limited inventory," says Chrysler's Platt. "A plant manager is not going to be able to have a three-day supply or something just to cover himself. He's going to have to have a minimum amount, and the supplier community is going to have to be able to react and ship to his schedules."
But what happens if a hitch develops, one that interrupts the flow of just-in-time parts?
"The only way you can have just-in-time is if the manufacturer sticks to production schedules," Platt said. "We're going to shut the plant down, rather than try to jerk the production schedules around."
That kind of talk makes smaller suppliers nervous.
"The car companies have basically dictated to the supplier exactly what they were going to do and where," a representative of one suppliers' group said, requesting anonymity.
"The manufacturers have a habit of setting production schedules and then breaking them, leaving [their] suppliers hanging. Now, the manufacturers are asking suppliers to take on additional expenses by moving their plants closer to become a part of these just-in-time operations," he said. "But a lot of suppliers are asking themselves: 'Are we getting screwed again?' "
The suppliers' representative said some companies are choosing to quit rather than switch. Those that remain "will do whatever the manufacturers want them to do because they have no choice," the representative said.
Platt and other Big Three executives disagree. All claim that they have seen minimal attrition in the ranks of suppliers, whose numbers are legion, but not accurately known. (GM, for example, says it has 30,000 suppliers of production and nonproduction materials, but can't give a breakdown. Ford says it has about 25,000 suppliers, an estimated 6,000 of which ship production parts. Chrysler says it has about 20,000 suppliers, including 6,500 that are involved in production.)
The automakers say the purpose isn't to dicate to suppliers. The objective, they say, is togetherness for survival.
"We've learned a lot of things in these last years," says Stone. "We've found out that a lot of our suppliers have a lot of research and development expertise, and that we should be using them more."
The domestic industry could have saved itself a lot of trouble by taking that tack in the past, concedes Ford's Chicoine. "We used to go for the lowest bidder. But, sometimes, the lowest bidder did not really have the capacity to produce the parts. Sometimes, the lowest bidder was just hungry for a contract," he said.
He says getting closer to suppliers "means working and talking with them at the earliest stages of production, whenever possible and practicable."
That method also helps to avoid "surprises" after a car is designed and engineered and the prints are released for parts.
"Yes," says Chicoine. "Like finding out that it's absolutely impossible to produce the kinds of parts for the car you've designed."