December 22, 2000    Volume 7, No. 23

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Lean Manufacturing Will Be The Only Way To Ride Out Coming Storm

The U.S. automotive sector is going to be in for a rough ride in the near future, with sales projected to fall from 17.5 million units this year to potentially 15.8 million next year, says Joseph Day, president of automobile parts giant Freudenberg NOK. The situation will be even more difficult for U.S. automakers because their share of the market continues to decline. Pressures on suppliers to reduce costs are becoming much more intense, with Chrysler demanding suppliers to cut prices by 5 percent starting in January.

"During the banner sales years of 1998 - 2000, significant amounts of soft cost crept into the supply community as suppliers scrambled to service those unprecedented vehicle production rates," says Day. "Extracting those costs now will be complex. It will generate added pressure and instability within the majority of component suppliers...Lower vehicle volumes will create huge turmoil for financially insecure suppliers."

Lean manufacturing concepts and systems will become one of the driving forces of the automotive industry, Day predicts. But most companies are not prepared. For every manufacturer that has adopted the lean culture, "there are literally thousands that still don't get it," he says. "The sub-tier suppliers need to understand that the practice of lean systems is so critically important that I believe automakers will soon make it a requirement of their vendors, much like QS-9000 is today. It's not that far away! In fact, two automakers are rumored to be considering the use of the new SAE J4000 lean standard in the evaluation of suppliers."

Companies that don't adopt lean manufacturing practices "won't make the automakers' purchasing cut," Day notes. "It won't take very long for that requirement to cascade down the tiers of the supply chain because each company's leanness ultimately depends on the leanness of its own suppliers."

Suppliers are going to be squeezed by a myriad of new requirements being made of them. They are being asked to follow their customers around the globe; they are shouldering higher labor, health care and energy costs; they have to certify their plants to ISO 9000 quality and ISO 14000 environmental standards; they are having to adopt the new e-commerce technologies; and they are absorbing more warranty costs.

"At some point, something has to give," says Day. "It seems everyone wants the other guy to foot the bill."

The big OEMs need to start treating suppliers as partners and begin addressing issues in a cooperative manner, he notes. The Big Three auto makers are spending $6 billion a year on warranty costs for the 12 million vehicles they sold last year, or about $500 per car. The warranty cost for Japanese autos is less than $75 per car, says Day. "Perhaps the industry should move its focus away from confrontational negotiations for tenth of a penny price reduction per component and move onto partnership solutions that attack this $6 billion problem."

Because his company has roots in both Germany and Japan, Day feels he can provide insight into how the U.S. industry needs to be restructured, especially since both German and Japanese carmakers continue to capture greater portions of the U.S. market.

"A big difference between the U.S. and Japan is the sharing of technology and the Japanese partnerships that meet target prices, normally 8 percent to 15 percent down, at the launch of a new vehicle instead of during the vehicle life," he says. "In the Japanese case, the costs really come out up front and therefore the price pressure during the vehicle life is very different. However, the biggest difference is not generally understood in the U.S. market. The Japanese vehicle manufacturers demand that their suppliers practice lean business principles. It's not an option. Either you learn and practice lean or you're kicked out of the supply base."

The U.S. Big Three need to realize this soon because they continue to lose market share. This year alone, they are expected to lose 2.6 percent of the U.S. market, bringing their share to the lowest level in history. "Many of us in the U.S. supply base have been preaching this to the U.S. vehicle and supply community but to no avail," says Day. "Until these companies mandate lean processes from their suppliers, the costs won't come out, the quality and customer satisfaction ratings won't go up and the overall competitiveness of the U.S. community will suffer."

Moreover, the goal of producing a three-day car is unattainable unless lean principles totally permeate the supply chain.

Even when companies do adopt the techniques, they are only at the beginning of a long, difficult journey. "Lean isn't something a company becomes overnight," says Day.

"The lean culture will be just as critical in achieving [the three-day car] as any e-commerce technology is," he says. "Only the lean culture can remove the bottlenecks, unleash the creativity of our employees and ensure that everyone is looking for new and better ways day after day."

Freudenberg itself has run 15,000 kaizen events, yet it still has as much as $100-million worth of waste in its system, says Day. "And about half of that waste is out of our control, It's totally driven by our suppliers."

To help its own suppliers learn the system, Freudenberg is working with the Michigan Manufacturing Technology Center in its efforts to educate suppliers on lean systems.

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