Q: When you were considering moving production of the water heater from China to Louisville, were labor costs a major consideration?
Rick Calvaruso: The cost of wages is only one factor. What you have to look at is total cost of the whole product. When you make a product far away from where consumers buy it, you have costs of shipping, duties, customs and you have to carry more inventory.
Keith Burkhardt: You can respond quicker if your factory is domestic. You have time on the water when you manufacture a product abroad. It takes time to respond to fluctuations in demand. We had a very successful promotion last fall where we sold more units than we expected to and as a result we were out of stock for a lot longer than we would have been had we had a domestic factory.
Q: What was the time lag?
Keith Burkhardt: Our promotion ended October 5, but we didn't start receiving products back into the United States until early December, and we didn't get back healthy with inventory until the end of December. You're talking two good solid months that we were capacity strained.
Steven Downer: At the end of the day, you're going to have a couple of weeks on the water any way you look at it. If you look at just the pure physical size of these products, they're big. If you need to air ship product, it's very, very expensive.
Tom Zimmer: The product coming in from Asia is coming in to the West Coast and from there you are shipping across the country. That is very different from being centrally located in Louisville. There is a reason UPS has a hub here and that so many businesses centralize in this Midwest region. It gives you a nice reach all the way across the country within a really reasonable timeframe. It helps you manage your inventory and your responsiveness to customers.
Q: You have people in GE wearing green eyeshades who are using an SAP or Oracle system that provides them with exactly to the penny the costs involved for production. When you look at those cost analyses, is it cheaper to manufacture it here than in China?
Tom Zimmer: From a total product cost perspective, yes.
Steve Downer: There are a lot of factors involved. If you think about what enabled us to get here, we had a significant shift in our agreement working collaboratively with our union. We have a competitive wage structure in Louisville, Ky., that allows some of the new hires and employees to come in at a different wage rate. That allows us to be more competitive.
We did a complete product redesign from the ground up in the lean methodology. Labor is cheaper in China, no question about it, but our total package with this product is significantly lower cost than the one that was made in China.
Q: Why can't you save even more money by adopting the same lean approach at the current manufacturing plant in China instead of building a new plant in the United States?
Steve Downer: Sure you could do a lean manufacturing plant there, but we chose to do it here. Looking at the total program, the total investment and total execution of the package, we made a more efficient product. I'll wave the flag just like anyone else, but it was American ingenuity with the co-location of the production facility, the design team, the industrial design service team, and people working collaboratively versus trying to do that overseas. We're starting to get better at this.
Q: What percentage of the wholesale price of the GE water heater is labor?
Steve Downer: I'm sorry I can't go into more detail, but it is a significant component. One of the things we are trying to drive for the whole team that started with the initial inception and evaluation of this product is the total product cost structure. I can tell you without question that this business historically not been as good as we should have been at total product cost and that is because historically we have worked in our functional buckets.
Rick Calvaruso: If you only look at labor, then the decisions that you make are going to be based on labor costs. With our team, we said that you have to solve for total cost. That is pretty powerful thing because this team was like its own CEO or board of directors. They made decisions as a team that would have been made by traditionally functions like manufacturing or technology.
Tom Zimmer: The decisions made weren't always popular even with our business leadership internally because as lean teams operate, it's all about right sizing and correct automation as opposed to labor application. It's finding the balance for making sense for what you are trying to accomplish at that moment in time for the flexibility you desire to have. Those tradeoffs became very interesting discussions. You still have people who review product that are still much more siloed than what we are moving toward today because of their history of how they evaluated performance. They would challenge us: "Why would you apply labor in a particular area when you could have automated this with just investment?"
Steve Downer: When you are designing and building for a market, there is the local market knowledge -- the local understanding -- of what needs to happen. Sitting in Asia trying to design a 50-gallon water heater that would not be a typical installation in most places in Asia is not easy to understand. The work of design and user interfaces with local market knowledge -- they just don't have that overseas. It is a difficult for the folks in the field to properly communicate remotely with the folks in the manufacturing plant what really needs to happen, and we have been ignoring that.
Q: Why are you so late to the lean game?
Steve Downer: It has become clear with appliances that we have been on an outsourcing path for a number of years and there are downsides to outsourcing. You lose certain capabilities. You lose manufacturing capabilities. We simply didn't invest at a level that we probably historically should have.
We said if we're going to put $1 billion back into this business it's not just about updating systems and developing new products. We have to transform the culture, operate more efficiently and do more lean. We're going to go out and beat the Whirlpools, the LGs, Samsungs and Eletroluxes and we're going to be the best possible appliance company in the world.
Rich Calvaruso: From a lean perspective, I would say it's not important when we started it's what we do now and how we finish. Only about 7 percent of the companies that start lean actually do it. What we have been doing is trying to figure out the secret sauce that makes that 7 percent successful. We believe it is about people and the process and how they work in conjunction. So, even though when we started may not have been that long ago, the amount of progress we've made is really commendable. The development of people will be the thing that makes us strong for a long time.
Q: How many people applied for the 400 new jobs on the water heater line?
Kim Freeman: We received 6,000 applications and we closed it off in 50 minutes.
Q: How was the quality of applicants?
Tom Zimmer: I'm working with them in the plant. They come in very positive with energy and enthusiasm. For the more skilled jobs on the line that require specific skill sets -- braising is one -- we take them through a training program and qualify them against those jobs. So there is a fair amount of in-house training, not because they are unskilled, but because they have not practiced that skill in a manufacturing environment. We were able to go through a selection process and land some very, very good people that really enhanced our team. Although they may not have come to us carrying all of the skills we want, they are eager to learn and have been trained and they have come into that environment trained.
Q: We hear constantly in the media that CNC machinists, lathe operators and other skilled people are hard to find.
Tom Zimmer: In some trades it is harder to land skilled people. But for the particular manufacturing operations that we are engaged in, we have not had a problem coming up with operators who are either skilled in it already or are easily trained into those roles.
Q: When you get inundated with 6,000 applicants in 50 minutes, what is your response when you hear that the United States doesn't have enough skilled manufacturing workers?
Tom Zimmer: This is a gut reaction: We don't have difficulty finding trainable, interested or engaged and enthused people, but we can't easily go to the street and find a machinist or someone with braising skills. Those are specific skill sets that have to be developed. There is not a deep pool of those skills in the general workforce today. It's hard to hire somebody from day one who can step in and perform in some of those jobs. Many of the jobs we have are very base manufacturing and they are fairly straightforward roles.
Rich Calvaruso: I'm on the shop floor -- it's pretty much where I spend all of my time -- and I went up to one of the operators and she was drawing a sketch of an idea that she had. It's awesome. To me, that is pretty cool. She says, "What do you think of this idea? I think it's something that can really help." You would be surprised at the capability of people when you get them involved. People might not have an engineering degree or a higher degree but they have a lot of capability for solving problems. You have to engage them in order to get it out of them.
Lou Lenzi: Our design team went from seven people to 23 people in the past 18 months and one of the reasons we were able to attract top-talent designers to Louisville is because of the mission, the opportunity to work on a project from start to finish and to see the product that you designed come down the line and to be part of it. It's not just the ability to attract the top-rated designers from around the country because we need people to build stuff; it's because of the environment that we're creating. My user interface design manager is a young single woman out of Manhattan. She moved to Louisville because of the exciting work that we're doing.
Q: As a means to enhance sales, will you put an American flag on the box?
Tom Zimmer: I would love to, but there are certain guidelines from the FTC that present challenges of being able to do that.
Q: Is it because you are importing too many parts?
Tom Zimmer: The short answer is yes. There are no domestic suppliers available for some of the key components in our product that achieve the efficiencies that we are after. We've adapted [components] that we had to source from outside the U.S. As a result, we can't meet the guidelines.
Q: Will the box say "Made in America"?
Tom Zimmer: The box will say, "Proudly Produced in Louisville, Kentucky" -- and it is.
Steve Downer: I would encourage you to all go read the FTC guidelines for Made in America. They are extremely, extremely tight. But we'll take a very conservative approach because we want to make sure everything we say is accurate.
Q: What percentage of the product is made from parts imported from foreign suppliers?
Steve Downer: There are some components that are made overseas. The compressor is made overseas and the electronics are made overseas and those are two key components that are not U.S.-made.
Q: When you are selling the product, do you think that it being "proudly produced in Louisville" will make a difference in sales?
Steve Downer: We had three commercials in the Super Bowl. One was for GE Appliances, GE Works. We have it all over the unit, so we think it's a big deal. I'll give you an opinion as opposed to treating this as a fact, but I think Made in America at a very minimum is a tiebreaker. If we have two products that are relatively comparable in price and performance, I think Made in America is going to win every single day. In the environment that we have right now, it's particularly important because people are starting to get it, because I know we got it.
Q: Has the supply chain been a problem for you locating production here?
Tom Zimmer: In the environment that we have, the sourcing team that has traditionally managed the supply chain activity sits right in the room with us. With the lean approach, we are managing the supply chain in a way that gets us responsiveness. We are looking for reasonable cost for a high quality product, obviously, as we always would in a sourcing environment, but we're also looking for responsiveness -- their ability to respond to changes in volume requirements and their speed of delivery. We have mapped out responsiveness as one of the key deliverables for the sourcing team as we have gone through this activity. But identifying sources for some of the components is a challenge. The compressor is one in which there are a limited number of available suppliers in the world. Some of them have volume restrictions and some can't meet the requirements for the design we were trying to deliver. We do have some supply chain limits that became a little imposing, but for the most part, we were able to develop or find supply chain solutions very efficiently for the environment we've got.
Q: Does the compressor have to get on a ship and spend six weeks in transit?
Tom Zimmer: It has a long ride. That is one of the areas where we can't be as unconstrained for work-in-process inventory as we'd like to be.
Q: Would the producer of your compressor open a production line here so that if you start building volume they can supply it from nearby? Would this start a virtuous cycle of economic development in this region?
Steve Downer: I think we have a tremendous cycle in the millions of refrigerators we put out every single year and we still don't see a lot of compressor manufacturing in the U.S.
Tom Zimmer: I worked in the compressor manufacturing operation that was part of GE years ago and is no longer in existence. We touched earlier on skilled trades and some of the things that go along with precision machining. Producing those types of products requires precision machining. It is a high cost, highly automated, high-precision environment and you have to have good skilled trades available for that.
Q: We hear frequently that there are too many regulations, too many high costs and too many taxes in the United States and that you can't manufacture here due to OSHA and EPA and all of the other government-imposed obstacles. Yet, you have overcome all of those barriers. Why?
Tom Zimmer: The regulations and concern around the environment are real. They are hurdles. If you are in an existing infrastructure and you have no interest in reinvesting, they can be really difficult to get past. We had to look very carefully at how much effluent we were going to put in the waste stream, what kind of VOCs we are dealing with. All of those regulations become true factors, not necessarily limiters but factors in what we elected to do around processes we were interested in bringing into the manufacturing operation. One of the key examples is the painting operation. Our painting operation is as environmentally friendly as is technically available in the world today. There is no effluent. There are no drains. You are not putting any VOCs out of the stack because you are spraying dry powder. It is a very, very difficult approach because we had the opportunity given the investment that we were given to look at the latest technology. When you can invest in the latest technology and are not hindered by being locked into something that is existing, that really changes the dynamic of whether those become limiting factors for you or not. It was one of the key factors on our mind when we looked at whether we should source or bring in house the painting operation. If we had not found the system we were able to bring in house, I don't think we would have done that painting in house.
Q: So some other company would have done it overseas or in a place where there aren't those EPA regulations?
Tom Zimmer: Overseas or a third-party supplier who had already built that technology into their infrastructure.
Keith Burkhardt: Some regulations can actually be an enabler. The Department of Energy has mandated that any water heater built after March 2015 that is larger than 56 gallons has to be a heat-pump water heater. They are enabling the technology by effectively raising the energy efficiency requirement for water heaters and only heat pump water heaters will apply.
Q: Why is GE refocusing on products that are considered low tech?
Steve Downer: There is a drive for more energy efficient products. The water heating business has been relatively stagnant for many, many years in terms of technology. When we looked at areas that utilize the core technology skill sets that we understand, the manufacturing skill sets that we have in other parts of our business and a market that could be fundamentally transformed through innovation and through energy-efficient application, water heaters was one of those growth opportunities. Water heaters fit in there with the technology and energy efficiency transformation.
Q: Why for 50 years has there not been a new product like this introduced by GE? What happened to GE? Did you lose the innovative spirit?
Lee Freeman: I'm going to be real blunt. We were not competitive in Appliance Park. We have historically lost money here. We had to do some pretty major things in order to get to the point to bring jobs back to Appliance Park. The first thing was in 2005 we worked with our union and they voted in a competitive wage for new hires. That was re-approved and voted in in 2009. Competitive wage is not a silver bullet. We could not do what we are doing now without lean. So it's really the two of them working together. It was a small piece, but we also got some government support.
But it required changing the culture. The culture wasn't really right for us investing in Louisville. But as we started working with the union and making the cultural changes with competitive wage, with lean, with the whole new collaboration, we really just turned the place around to the point where GE said this is the place we want to invest. It has taken a lot of hard work, a lot of creativity by a lot of people, but we've gotten to the point where we can be competitive in manufacturing in the U.S. We couldn't have said that 10 years ago.
Lou Lenzi: It's more than just the manufacturing. [One of the reasons to bring manufacturing back to the U.S.] is that when you go offshore you are potentially training a future competitor. If you continue to outsource, you are putting the bullets in the gun. Now that we have the technology here, the development team here, the lean process here, it's a different ball game.
Q: Do you think what you are doing can be replicated by other large OEMs that have outsourced so much of their production?
Rich Calvaruso: We hired [lean export] John Shook [chairman and CEO of the Lean Enterprise Institute] to coach us and I'll just tell you what John said. He said that he normally doesn't care whether or not a company does lean well. "But you guys are GE. You guys matter. What you are doing here is not only important for GE Appliances Louisville, Kentucky, it's important for the whole country." So some of us say, "Wow, that is pretty impressive." But somebody has to show the way because we can do these things. This is a real. This is a real factory, with real people making real stuff.
Steve Downer: There will be a lot of eyes on this place and we welcome it because these are really exciting times.
Q: Do you think the United States will see a big insourcing trend?
Steve Downer: I think it's going to be case by case [based on] very thorough analysis. I would expect every company to evaluate why this is a good business.
Rick Calvaruso: There are a lot of things being talked about outside of here. If you listen to what [James] Womack [founder of the Lean Enterprise Institute] says, the momentum starts to build back. The whole notion of going to the cheapest labor place isn't always the best answer. You see continued inflation in China. It's not as cheap as you think to put stuff on a boat and ship it half way across the world. Plus you have to have all the inventory and you have to hope six weeks or eight weeks before a customer wants to buy it that you bought the right stuff.
The world changes fast. People may want something different and if you have to wait a long time, they're going to buy something else.
Q: Have you all started buying GE stock?
Steve Downer: Every two weeks. It's a good buy.