October 28, 2005    Volume 12, No. 19

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Legacy Costs Overwhelm Excellence In Manufacturing Delphi's Shingo Prizes Can't Save It From Oblivion

BY RICHARD McCORMACK richard@manufacturingnews.com

No other company has won more Shingo Prizes for Excellence in Manufacturing than Delphi Corp. Over the past four years, Delphi has won 19 Shingo Prizes for individual factories, accounting for 42 percent of the 45 total awards. But excellence in manufacturing was not enough to stave off bankruptcy for the world's largest maker of auto parts.

How is it possible for a company that has won so many Shingo Prizes - described by Business Week as the "Nobel Prize of manufacturing" - to experience such failure? "I've been asked that question for a month now," says Shingo Prize executive director Ross Robson.

The answer, in two words, is "legacy costs," Robson responds. "The senior executives and [recently retired CEO] J.T. Battenberg were overly optimistic about the legacy problems they carried with them from General Motors and were not realistic in understanding the yoke around their neck of pensions, the UAW contract and carrying health care for both current workers and their retired workforce."

Delphi is said to have retirees who worked for the company for 34 years and have been receiving retirement benefits for 35 years. The legacy costs were just too great a burden to overcome, no matter how efficient the company's plants had become.

It's a burden borne by virtually the entire American-owned automotive industry and does not bode well in its competition against international rivals that have no such costs strangling them. "The U.S. has to compete with a cost structure that's now global, and there are vast differences," Delphi vice chairman David Wohleen told Manufacturing & Technology News shortly before the company filed for bankruptcy protection on October 8. "What's happened to us is we became an independent company with a cost structure of an auto maker. The strategy was that over time we could grow away from that cost structure by growing our non-GM business and growing more internationally. That strategy was working. But then several things came about, one of which is a loss of volume at a rapid rate from our North American customers, which impacted most of our cost base; and then commodity pricing fluctuations, like steel, other metals and now petroleum-based products. Those things overwhelmed the effectiveness of that strategy."

Does Delphi's bankruptcy mean that even the best companies with the best plants in North America can no longer compete in the global economy? "Your point is well taken and that is why lean is so absolutely critical and important," Robson responds. "Without lean they would have been in a big hurt much earlier than this." Wohleen says that it will be impossible for Delphi or any other U.S. manufacturing company "to compete product to product [on cost] with the rest of the world."

Many of Delphi's plants winning the Shingo Prize were profitable and had achieved some of the highest Shingo ratings of any plants evaluated. One Delphi plant had a customer parts-per-million (ppm) return rate of zero for one year. Delphi has seven or eight plants with ppm customer return rates of one. Its average customer ppm return rate for its approximately 150 plants around the world is 25.

"I just read a report yesterday about a company in North Carolina whose ppm rate from their customers was running at 90,000," says Robson. "There are still a ton of companies out there performing at that level." They are able to survive because they are in niche markets and continue to make money.

The Delphi plants that applied for the Shingo Prize were so good that Robson had difficulty getting Shingo Prize examiners to assess them. "If they've been to one or two they say, 'They're all alike. They're all doing outstanding work and I don't learn anything.' Their manufacturing facilities are boring kind of like Toyota is boring to Wall Street."

Shingo Prize criteria include profitability of a plant. Almost all of the Delphi facilities that have won the award were ranked by examiners as being profitable. But like a majority of plants run by large corporations, they are also considered to be cost centers, not profit centers, so they operate on a budget. "If you look at the price that they receive for their products and their costs, every [Delphi] plant [winning the Shingo award] save for perhaps one has been profitable," says Robson. "I have not found anyone who has been into Delphi and seen their manufacturing system in place that has not acknowledged that they are one of the best in class in the world today."

For now, the Shingo Prize directors do not expect to change the criteria to weigh a company's financial position more heavily in their evaluation. The Baldrige National Quality Award changed its criteria after one of its winners (Wallace & Co.) went bankrupt. "I think Baldrige reacted wrong," says Robson. "They've taken their criteria now and made it so heavy on financial results that they have lost sight of what is being evaluated. You may as well fill out your results and the [manufacturing] process doesn't make any difference."

Robson concludes: "I've said for years that at the point in time when somebody writes a negative article about the Shingo Prize, I guess I know that I have arrived."

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