World Class Manufacturing: The Next Decade

Building Power, Strength, and Value

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About The Book

Since the invention of double-entry bookkeeping, managers have judged a company's worth by sales and profits. Now, Richard J. Schonberger, the architect of the worldwide Just-In-Time revolution, reaches beyond "financials" to redefine excellence -- and reveals, with new benchmark data, how pioneers become dynasties.
Schonberger's pathbreaking new research reveals that, from 1950 to 1995, while "financials" dipped and soared repeatedly, industrial decline and ascendancy correlated perfectly with inventory turnover -- one of two key nonfinancial indicators and a bedrock measure, along with customer satisfaction, of a company's power, strength, and value. In this immensely readable book, he captures these new metrics -- the true predictions of future success -- in 16 customer-focused principles created from self-scored reports supplied by over 100 pioneering manufacturers in nine countries. Armed with new world-class benchmark data, Schonberger redefines excellence in terms of competence, capability, and customer-focused, employee-driven, data-based performance.
For front-tine associates to senior executives, Schonberger has written manufacturing's action agenda for the next decade. This book will be indispensable reading for manufacturing and general managers in all industries, as well as for pension fund managers, institutional investors, stock analysts, and stockbrokers.

Excerpt

Chapter 1: Industrial Decline and Ascendancy

We've learned more about running a manufacturing enterprise in the eighties and nineties than in all the rest of the century. And the manufacturing renaissance has not yet run its course. In fact, it has spread to less developed countries and out of manufacturing into the service sector. The many new lessons have transformed consultants into educators, invigorated sleepy community and technical colleges, and made employee training a significant budget item.

Training wasn't important in the sixties and seventies. The existing subject matter was stale and simply did not lead clearly to success. Today's is fresh and does drive success. Widely applied new concepts have transformed industry.

MANUFACTURING PERFORMANCE: DOWN, THEN UP

Consider manufacturing performance in just the last half of this century. It takes the shape of a wide V. It declined for twenty-five years and has been rising ever since:

This twenty-five-down, twenty-five-up phenomenon is a global composite, shifting somewhat by region. For Japan the bottom of the V occurred in the mid-1960s. Then total quality control and the Toyota system kicked in, raising Japan to industrial prominence. Prestigious North American manufacturers -- Japan's natural target in view of the massive U.S. market -- knew they were in trouble by 1975. European manufacturers did not know they had a serious problem until the mid-1980s.

The wide V pattern does not show up clearly in plots of profitability, return on investment, sales, or market share. These "financials" rise and fall with the economic cycle, are influenced by state fiscal and monetary policies, and are easily skewed by protectionist trade practices and internal company manipulations. What, then, might support the wide-V contention?

Anecdotal evidence, for one thing. The research method used by Naisbitt, resulting in his book Megatrends, is to pile up stories from the press to indicate trends. In the late 1970s and early 1980s, the U.S. business press was abubble with stories about a "productivity crisis" and the "hollowing of industry." H. Thomas Johnson provides a concrete case-study example: the once-redoubtable machine-tool maker Burgmaster. It's history, Johnson notes, "falls into two phases: twenty years of excellent growth and profitability in the hands of a brilliant, customer-focused engineer who founded the company, followed by twenty years of decline into bankruptcy in the hands of finance-driven, numbers-oriented professional managers." (The company had been a leveraged buy-out victim of Kohlberg, Kravis, Roberts in the mid-1960s.)

We need not rely on case studies or news clippings. One statistic extractable from corporate annual reports tells the story with surprising accuracy: inventory turnover (cost of sales divided by on-hand inventory). It happens that when a company manages its processes poorly, wastes in the form of inventory pile up.

Exhibit 1-1 shows the pattern of declining inventory removers for several venerable manufacturers. Ford's, Emerson Electric's, Motorola's, Whirlpool's, and Eaton's descents were precipitous. Du Pont's, Eastman Kodak's, Cummins Engine's, Johnson & Johnson's, and Outboard Marine's declines were a bit less sharp but were steady. GE defied the trend somewhat, enjoying rising inventory turnover from 1951 through 1961; but then, reverting to pattern, its turns fell steeply.

IBM, however, gets the prize for longest, steepest decline. Its inventory turnover up to 1961 (the inaugural year for IBM's 360-series computer) was spectacular: in the twenties in 1958 through 1961, then down to twelve and eleven in 1962 and 1963. Exhibit 1-1 picks up IBM in 1964 when its turnover was 6.3; from there it plunges, finally bottoming out twenty-one years later at a miserable 2.1 turns.

SUSTAINED IMPROVEMENT

The long period of decline would be depressing were it not for what happened next. By the early 1980s, the Toyota system had reached Western shores. U.S. manufacturers, first to try it, may have had their share of false starts. On the whole, however, the system proved to be eminently transportable. Exhibit 1-2 and the following discussion provides some of the evidence: sustained high rates of improvement, noted in the form of inventory turnovers, for numerous companies.

U.S. Manufacturers

The star performers are Ford, Deem and Company, TRW, Eaton, PepsiCo, and Hon Industries. All have double-digit rates of improvement in inventory turns -- from 4 percent per year for TRW to 3.6 percent for Ford and 3.3 percent for Eaton. All have been improving turns nearly as long as many of the top Japanese waste cutters -- since 1975 for Ford; 1978 for Deem; 1974 for TRW, Eaton, and PepsiCo; and 1980 for Hon.

Honorable mention -- for annual turn improvements in the 2.5 to 4 percent range for at least ten years -- goes to Cummins Engine, Outboard Marine, Caterpillar, Black & Decker, General Motors, Motorola, Dover, Honeywell, Emerson Electric, and Timken. General Electric has been improving its turns at a roaring rate but only for about five years, which corresponds well with the ascendancy of GE's common stock price and overall esteem.

French Manufacturers

The U.S. is not alone in showing remarkable rates of improvement in inventory turns. The Paris-based consulting firm Proconseil has provided data from seven of its client companies plus one nonclient. The data, dating back to 1979, use sales rather than cost of sales in the numerator of the inventory turnover equation. This upwardly biases the computed turnovers, but the trends are fully valid.

Graphic results in Exhibit 1-3 are for the top four French performers among the eight. Valeo, the automotive parts manufacturer, is the superstar, which is no surprise. In a five-year period starting in about 1984, Valeo completely converted its LaSuze radiator, heater, and air-conditioning plant to cells, called zones autonome de production (ZAP). Each ZAP has its own mix of metal-forming and plastic-molding equipment, tools, product specifications, problem displays, team of ten to twelve associates (per shift), and technical support staff. Valeo's rate of improvement was good from 1979 to 1989 -- and then sharply accelerated. For the whole fifteen-year period its improvement averaged 4.6 percent per year (from 4.2 to 13.6), slightly above that of TRW. Valeo, TRW, and Dana (U.S.) and Lucas (U.K.) are in about the same kind of business -- large, multiplant auto parts manufacturers. They are the West's answer to Japan's Nippon Denso. Like Nippon Denso, their implementation of world-class manufacturing has generally been more impressive than that of the major automakers they supply.

The other three companies represented in Exhibit 1-3 have the following rates of improvement in inventory turnover: Renault (cars), an erratic 4.4 percent for thirteen years; Plastic Omnium (auto pans), 3.9 percent for fourteen years; and Legrand (electrical appliances), 4.9 percent for nine years. In the honorable mention category are Carnaud Metalbox (packaging, affiliated with Crown Cork & Seal), 3.5 percent for thirteen years; Pechiney (aluminum and packaging), 3.1 percent for ten years; Le Carbone-Lorraine (carbon applications), 2.6 percent for eleven years; and Peugeot (cars), 2.2 percent for thirteen years. While both Renault's and Peugeot's improvements extend over the same number of years, Renault's rate far exceeds Peugeot's. Of all the companies whose inventory trend data I've looked at, Peugeot is the only one that experienced a recent several-year decline. Its turns rose steadily from 4.1 in 1979 to a peak of 7.9 in 1988 and then fell for the next five years to 5.8 in 1992 and 5.9 in 1993. Over the last ten years Renault has become a respected, lean, financially sound automaker; Peugeot has survived but not thrived.

Obstacles and Openings

Some companies are doing well despite unimpressive inventory turnover trends -- Coca Cola, for example. (Coke is a beverage company. Stellar inventory performer PepsiCo is in a different business, since two-thirds of its sales come from snack food and restaurants.) Companies that are in the midst of global expansion may have to deal with uncertain markets, perverse laws and tax codes, corrupt officials, and lack of infrastructure (good highways, point-of-sale data capture, electronic data interchange, and the like). These factors add up to marketing mistakes, logistics difficulties -- and heaps of inventory here and there. In such consumer-goods companies' own developed markets, no excuse.

Other highly successful firms with poor inventory trends have a double difficulty: highly volatile businesses serving those same uncertain world markets. Motorola, Texas Instruments, Intel, and Hewlett-Packard fit the description. This does not necessarily mean that volatile, multinational manufacturers are stuck with static inventory performance. H-P mounted an inventory reduction crusade in 1994 that is off to a good start.

What made the ten star and fourteen honorable-mention companies (U.S. and French) so smart? Westerners were unaware of the Toyota system until about 1980, and it takes a while for knowledge to translate into action. Perhaps a more pertinent question is, why did it take so long for so many companies to see the wastes in front of their eyes? The top ten evidently did see the wastes -- some of them well before they learned about the Japanese success story. Notably, however, each considerably accelerated its rate of improvement after about 1985 or 1986 in the United States and about 1988 or 1989 in France. By then, it was no longer the Toyota system. It was manufacturing excellence, or world-class manufacturing, or lean production.

These data are only for top-performing publicly held companies. Their annual reports, and therefore inventory turnover data -- are open to scrutiny. Privately held companies, however, seem to be at least as adept as public ones in implementing a world-class agenda. This conclusion is based on data from just a few private companies that were willing to assist in this research. For example, Charles Machine Company, maker of the Ditch Witch line of digging equipment, improved its turns by over 3 percent yearly in a recent decade. Haworth, a maker of office-equipment, improved even more. And Steelcase, the largest office equipment maker, improved its inventory turns by about 5.9 percent per year. Haworth and Steelcase were not under pressure to compete with a foreign juggernaut. Rather, these improvements took place in a golden decade for the office-equipment industry; each of the majors increased sales at spectacular rates through the 1980s.

CUSTOMER SERVICE

We have seen some eye-opening data on inventory trends and noted the apparent connection between inventory turns and long-range competitiveness. Perhaps, therefore, trend in inventory turnover is a fairly reliable predictor of future success for a company or business unit. Whatever merit that conclusion has, still other indicators beg our attention.

One of the most important, if only it could be measured reliably, is customer satisfaction. During its dominating years, IBM was renowned for its dogged pursuit of customer-satisfaction information. Its excellence in customer service was largely reactive, but in the 1950s and 1960s a well-oiled reactive approach to customer service was world class.

Today's standards are higher. We recognize the need to give equal or greater weight to customers' present and future needs. Since those needs can change quickly and with little notice, speed and flexibility have become mainstream criteria of customer satisfaction. Furthermore, total quality calls for placing more weight on prevention of difficulties and less on recovery when things go wrong. In other words, by today's standards IBM's hand-holding approach was overly narrow.

Broad-Based Customer Data

Today's broadened approach may be found in criteria for prominent quality awards. The Malcolm Baldrige Quality Award in the United States designates 250 of 1,000 possible points for "customer focus and satisfaction." (IBM's business unit in Rochester, Minnesota, was a Baldrige winner in 1990). The European Quality Award puts 20 percent weight on customer satisfaction.

Of all the Baldrige honorees the company with the most comprehensive customer intelligence gathering system may be 1991 winner Solectron, Inc. Solectron specializes in assembly of printed circuit boards and subsystems for makers of computers and other electronic products. Many of its customers are well-known, for example, Hewlett-Packard, AT&T, and IBM. Solectron's customer satisfaction index (CSI) aims at grading the company's performance on five service criteria for every customer every week. According to Les Nishimura, general manager of Solectron Washington (one of the company's newer business units), "It isn't easy to get that information every week. Sometimes we have to almost pry the information out of the customer." Xerox collects customer satisfaction monthly. A few of the participants in a research project discussed in the next chapter were proud of surveying their customers yearly. Most companies don't do it at all.

Solectron's CSI Feedback Form is shown in Exhibit 1-4. Salespeople administer the CSI and are measured on their rates of completed forms; an 85 percent completion rate is typical. Most CSI responses are conveyed in written form -- by fax or E-mail -- although Solectron will accept oral responses.

The CSI does not fully reveal the extent to which the system gets at customers' real and changing needs. Both Solectron and most of its customers intend their commitments to extend from product development partnerships all the way through to funds transfer and after-delivery postmortems. Thus, any low CSI scores can trigger formation of improvement teams, often with customer representatives. Solectron's target satisfaction score is 95 percent. Thus, if a customer grades any of the five criteria (quality, delivery, communication, service, and overall) as low as C (zero), an overall score of 95 percent is impossible. This triggers corrective action and a response to the customer.

At the same time, Solectron gets its people into two kinds of teams, both customer-focused. Project-planning teams work with customers to plan, schedule, and set forth specifications and response times. Total-quality-control teams meet weekly to monitor and evaluate production. Walt Wilson, Solectron's president, says, "The teams here are...fiercely loyal to [customers]....Ask anyone what team they're on, and they'll tell you. They'll say they work for Intel or IBM or H-P and that Solectron just signs the checks. That's customer focus at its best."

Nishimura has a mental model. It is a four-by-four matrix with customer needs on the x-axis and Solectron's capabilities on the y-axis. He observed that his company's challenge, not always achieved, is to be in the fourth cell (see Exhibit 1-5): all customer needs covered fully by Solectron capabilities. However, Nishimura continued, there is an all-important z-axis: time. Customer needs change, and the changes must be captured and employed to alter Solectron's processes, products, and systems. No matter how good we are, he noted, we need to be quick to change.

Few manufacturers plumb consumer satisfaction as deeply as Solectron does. However, help is on the way. Claes Fornell and his colleagues at the National Quality Research Center at the University of Michigan's School of Business Administration have devised a national customer satisfaction index. Fornell first created the index for Sweden in 1989. Germany set up its own similar index in 1992, and several other countries are at work establishing theirs.

Pooled Customer Data

The U.S. version, the American Customer Satisfaction Index (ACSI), began in 1994 using telephone interviews from a sample of about fifty thousand U.S. households. Respondents report on their usage of a company's product, and satisfaction is registered on a scale of 0 (lowest) to 100 (highest). The initial ACSI measured seven sectors and forty industries and included over two hundred organizations. Manufacturers comprise two of the sectors, nondurables and durables, and eighteen industries. (The rest are service-sector organizations.) For example, Procter & Gamble, Unilever, Colgate Palmolive, Dial, and Clorox comprise the personal-care-products industry group.

The index provides a way for a company to compare itself over time, compare with industry averages, predict long-term performance, and answer specific questions. In addition, Fornell believes the index can gauge an industry's and a nation's performance better than such indices as consumer prices can. Consumer prices are subject to currency, trade, and other influences. Marketers may sometimes be able to manipulate customer satisfaction, but not much and not for long.

Not long ago, indices of customer satisfaction would have been less meaningful. Consumers in much of the world might have been fairly satisfied with their own countries' poor workmanship, high defect rates, long delays, and inflexible labor and equipment. Political and trade barriers have that effect. Now, with the globalization of trade, Toyota cars, Benneton sweaters, Mercedes diesel engines, and Compac PCs are everywhere. And global communications networks bring visual portrayal of how others live and work to TV sets in parlors all over the world. Consumers are no longer in the dark. They can judge their local goods against high world standards. Thus, the introduction of customer satisfaction indices is timely.

We have now examined a pair of underappreciated indicators: customer satisfaction and inventory turnover. The two provide overlapping metrics for valuing a manufacturing business unit or company or an industrial sector for an entire country: Customer satisfaction measures quality and value; low inventory turnover reflects costly wastes, delays, scrap, rework, and other negative values.

We must understand, however, that these are aggregated metrics. As such, they can only be watched, not managed. The proper targets of management are root causes: how products and processes are designed, how the work force is trained, how data are used to isolate mishaps, how suppliers and customers are treated, and so on. In Chapter 5 we revisit customer satisfaction, inventory remover, and other aggregated metrics and put them in their proper places. The real manufacturing renaissance has much more to do with innovations in managing the root causes.

SUMMING UP

We've seen evidence of a general decline in manufacturing performance over a twenty-five-year period beginning in about 1950. The causes were a combination of poor strategies and practices in all of the following functional areas: manufacturing, marketing, performance measurement (accounting), product design and development, supplier relations, and human resource management. In each area the bad strategies and practices led to wastes, which appear on the books as enlarged inventories. The same weaknesses should also show up in the form of lower customer-satisfaction indices. They often do not show up in popular financial metrics. For example, Eaton Corporation, one of the manufacturers featured in Exhibit 1-1 for its long decline and long ascent in inventory turns, had an erratic pattern of earnings per share of common stock. Its EPS was $7 in 1950, fell to $5 in 1954, rose to $9 in 1955, fell to $2 in 1963, rose to $6 in 1979, fell to $2 in 1982, rose to $5.50 in 1984, fell to $3 in 1986, rose to $6 in 1988, and fell to $4 in 1992. (Ford's, GM's, and Outboard Marine's EPS patterns were not much different.) Stock prices and other common financial measures show similar hippety-hop patterns -- for Eaton and most other firms.

Savvy company executives have learned how to manipulate most of the closely watched financials in ways that mask underlying weaknesses. Even return on stockholder equity, often thought to be a purer measure of company value, has been assailed. Byron Wien of Morgan Stanley has shown how executives inflate their ROEs by writing off equity through plant shutdowns, employee buyouts, and other well-timed size-downs. Juiced and jumpy financial numbers are not reliable measures of manufacturing strength and value. Over the long run, inventory turnover may be better.

Eras

In my 1982 book Japanese Manufacturing Techniques, I traced the decline in manufacturing in another way. I noted how the productivity emphasis during World War II gave way to a marketing emphasis. The reason was that war-related scarcities disappeared, pipelines became filled with goods, and industry ended up with overcapacity problems. (The United States and Canada began to experience overcapacity in about 1950. It occurred several years later in bombed-out Europe and Japan.) What does any company with overcapacity do? It sells, sells, sells. A productivity emphasis no longer made sense. The marketing era produced losers in danger of going under and winners with vast accumulations of cash to invest. Naturally, this ushered in the finance era, during which richer manufacturers could make more money by doing mergers and acquisitions than by manufacturing and selling.

We may now update the story. Exhibit 1-6 shows the three old eras plus an update for the past decade and another for the next. By the 1980s Japanese consumer and industrial products were everywhere in the United States. Through superior quality Japanese companies were picking off famous Western brand names one by one. Their names (e.g., International Harvester tractors and Westinghouse home appliances) fade in memory, and it's a shame (see box, "Brand Name -- Public Asset). A few Western companies (e.g., Texas Instruments, Motorola, Xerox, Ford, Hewlett-Packard, and IBM) reacted in the only effective way. They adopted their own total-quality commitments.

BRAND NAME -- PUBLIC ASSET

To its owners, a well-known brand name ranks in value with the finn's buildings, equipment, and labor resources. A brand name is also a public asset. The company that invests millions to build brand recognition gains sales volume, which cuts unit costs and generates revenue to improve quality and delivery. Consumers depend on the brand, which makes their shopping quicker, easier, and more likely to yield good results. The buying public is the beneficiary -- and the loser when a famous brand name bites the dust.

For leading manufacturers the quality era was about a decade long. By 1990 nonconformity and rework rates for Western makers of cars, earth-moving equipment, farm machinery, TVs, computers, appliances, telephone equipment, electric motors, and many more products had plunged to world-class levels. Defectives fell from percentages to double- and single-digit parts per million. Competitive advantage shifted from quality to value: high quality for a low price.

So now value supersedes plain quality. But value is complicated. It requires high quality, timely availability, and removal of non-value adding wastes of many kinds. All this in the face of excess capacity. But this time (unlike the 1950s) it is a global phenomenon. For complex sociopolitical reasons the world is awash in products and capacity to extract, construct, and produce them. A dominant strategy for surviving and thriving is to find external partners who can perform a valued function for you. Internal partnerships across departmental lines are equally important, mainly for ensuring that internal capacity matches market, supply, and financial realities.

Since geographical distance sometimes separates the partners, advanced communications and logistics are supporting elements of the partnership strategy. Technologies such as point-of-sale data capture and electronic data interchange propel real demand data back through supply echelons. The forging of quick-response partnerships among those echelons -- including multimodal freight carriers -- ranks among the most important management developments of the century. More on this in Chapter 7.

Japan Decade, American Decade, Global Decade

In terms of management innovations the 1970s were Japan's Decade and 1985-1995 America's Decade (the early 1980s were transitional). Japan's innovations include total quality control, just in time, kanban, total preventive maintenance, supplier partnerships, quality function deployment, target costing, employee involvement, cross-careering, and visual management. America's (with some non-U.S, participation) include design for manufacture and assembly, benchmarking, reengineering, quick-response linkages to retailers, point-of-sale technology coupled with electronic data interchange, rapid prototyping, digital design, activity-based costing, cost of quality, peer performance appraisal, broad-band pay systems, reformulated gain-sharing/profit-sharing/bonuses/employee stock ownership, and assorted lesser innovations (e.g., cross-docking and metrics such as the linearity index and the response ratio).

Regional dominance, however, is of the past. The end of the Cold War and the globalization of trade and communications ensures that. Now we are in the Global Decade. Innovations in managing manufacturing companies -- and many that are equally applicable in services -- will continue to pour forth but from all parts of the world, including the less developed countries.

Amid all the commotion, what companies need is a guide path that will move them forward confidently, step by step. What fits the need is principles-based management, the subject of Chapter 2.

dCopyright © 1996 by Richard J. Schonberger

Reading Group Guide

Discussion Group Questions
1. Why should industry evolve toward customer-focused, employee-driven, data-based principles? What are the requisites of sound world-class manufacturing company principles meaningful to any manufacturer?
2. What is the significance of inventory turnover as an indicator of long-term power, strength, and value? (Note: Richard Schonberger's inventory research included over 200 manufacturers of every stripe in four countries as of summer 1997; over 80% show the pattern of decline throughout the third quartile of this century and rise ever since)
3. What performance measures are most relevant for motivating continuous improvement?
4. Roughly score your organizational unit on the 16 principles (for this assessment to be meaningful, think in terms of a whole product family or business unit as the organization -- not a functional department). Where are your organization's strengths? Where are its weaknesses and what must be done (or is being done) to address them?
5. Are your organization's dominant measures of performance consistent with principles-based management? If not, what needs to be done?
6. What is your organization's recent year-to-year performance in becoming lean and agile, as measured by reduced inventories and cycle times? (Relates to Principle 6)
7. Is synchronized, rate based scheduling well-suited for your organization's product line and customer requisites? Why or why not? (Relates to Principle 7)
8. How successful has your organization been in "commonizing" component parts? In reducing t "a few good suppliers?" (Relates to Principle 5)

About The Author

Richard J. Schonberger, PhD, is president of Schonberger & Associates of Seattle. He is the author of more than 170 articles and papers, a twelve-volume video set, and several books.

Product Details

  • Publisher: Free Press (May 2013)
  • Length: 288 pages
  • ISBN13: 9781476747347

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