Lean Thinking for Motown: The Next Lean Leap

1. Lean Thinking for Motown:The Next Lean Leap A Presentation by James P. Womack President, Lean Enterprise Institute Automotive News World Congress Detroit, MI January 18, 2000 www.lean.org

2. When Machine Was LaunchedOnly a Decade Ago (1990): North American industry was characterized by: • Weak product development teams with long development cycles and high costs • Vertically integrated, high-cost supply base • Batch and queue production systems pushing out high-cost products • A push retailing system unchanged for 70 years www.lean.org

3. Only Ten Years Later: North American industry rapidly becoming lean: • Strong product development teams designing better and more interesting products faster and cheaper • Dramatic de-integration of supply chains • Lean production systems creating flow and pull for lower cost and higher quality • First experiments in rethinking factory-to-customer Congratulations! www.lean.org

4. The Consequence: • A dramatic reduction in work-in-process inventories (but not yet in finished goods) www.lean.org

5. Inventory Turns Manufacturing and Automotive Automotive Manufacturing ’77 ’79 ’81 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99 www.lean.org Source— US Department of Commerce, Bureau of Economic Analysis

6. The Consequence: • A dramatic reduction in work-in-process inventories (but not yet in finished goods) • A dramatic boom in vehicle sales driven by steady reductions in real product prices based on productivity gains www.lean.org

7. The Consequence: • A dramatic reduction in work-in-process inventories (but not yet in finished goods) • A dramatic boom in vehicle sales driven by steady reductions in real product prices based on productivity gains • A surge in OEM dollar profits www.lean.org

8. The Consequence: • A dramatic reduction in work-in-process inventories (but not yet in finished goods) • A dramatic boom in vehicle sales driven by steady reductions in real product prices based on productivity gains • A surge in OEM dollar profits • Dramatic decline of imported units as a fraction of regional consumption and a lull in the trade debate www.lean.org

9. The Consequence: • A dramatic reduction in work-in-process inventories (but not yet in finished goods) • A dramatic boom in vehicle sales driven by steady reductions in real product prices based on productivity gains • A surge in OEM dollar profits • A dramatic decline in finished unit imports (but not yet in parts) and a lull in the trade debate • An overwhelming feeling that the North American industry has made a lean leap! www.lean.org

10. However… • OEMs, Tier 1s, Tier 2s and auto retailers are at best 4% ROS businesses • Auto stocks have managed to miss the entire bull market of the 1990s • Real wages in the industry (salary plus bonuses and options) are stagnant The boom in the sales has also been financed by participants in the industry: No wonder customers love Motown, but…what about you! www.lean.org

11. How Can You Do Better? • Reward your investors and… • Reward yourselves as employee/investors! I assume you want to grow your company share of a continuing boom market, but you also want to: How can you do this in the next decade? www.lean.org

12. A Hopeless Path: Raise Prices • Watch the formation of 6-8 global OEM groups (e.g., VAG, DC, Ford, GM, Toyota) and wait for the re-emergence of price leadership! • Hopeless because: • 6-8 groups with multiple badges per group and roughly equal global shares is too many! And… • Price leadership will depress sales! Forget it! www.lean.org

13. A More Promising Path:A Second Lean Leap • Rethink the value proposition so the consumer is obtaining something different and better • Rethink the delivery of value to take out large chunks of waste/cost Even better: Do both at the same time! www.lean.org

14. Value in the New Millennium Do customers want to buy/lease a series of vehicles and create their own service support network? Or… Obtain hassle-free, image-appropriate, cost-effective mobility? www.lean.org

15. A Mobility Solution • Obtain exactly the vehicles you need when you need them, paid for by time/mileage • With no thought to scheduling, maintenance, repair, insurance, finance, trade-ins, etc. • With pricing referenced to Web-based auctions for mobility elements Long term partnership with a mobility provider to: www.lean.org

16. A Mobility Solution: • Ability to plan ahead on object (vehicle) needs and to smooth production • Ability to conduct life-cycle management of vehicles • Avoidance of switching/search costs for provider and consumer Cost-reducing advantages: www.lean.org

17. Provocative Hypothesis: A hassle-free, image-appropriate mobility solution can be cheaper for everyone than current practices! www.lean.org

18. Who Can Provide Solutions? • Way to move out of manufacturing (except for assembly) and closer to the customer • Hard to provide long-term stream of “image appropriate” objects and avoid switching costs • Constant temptation to push company-owned badges rather than solve customers’ problems OEMs? www.lean.org

19. Who Can Provide Solutions? • Need nation-wide (even global) coverage • Need total solution (financial base to manage fleets, insurance capability, maintenance capability through life cycle) beyond current firm capabilities • Need bullet proof processes to provide completely consistent customer support Traditional dealers (including mega-dealers)? www.lean.org

20. Who Can Provide Solutions? • Process-oriented service firms? (E.g., Amex) • Post-industrial manufacturing firms? (E.g., GE) • Venture capital start-ups with e-commerce focus? • OEM marketing and sales spin-offs? New-entrant mobility-solutions providers? Who knows?! Whoever steps forward needs to rethink value stream to take out large chunks of waste/cost! www.lean.org

21. Lean Path to Lower Cost:Value Stream Mapping • Work backwards from customer to identify all activities currently needed to order and make products • Eliminate those activities which do not create value • Streamline the remaining activities with intelligent use of e-commerce and information technology • In brief: • Optimize the whole to provide better value at lower cost. Then split the savings with the customer, the investor, and the employees! www.lean.org

22. PLAN SCHED. PURCH. PLAN SCHED. MARKETING DEALER ASSEMBLY SUPPLIER Traditional Value Stream (1990) 92% 57% 50% 20 days 20 days 60 days www.lean.org

23. PLAN SCHED. PURCH. PLAN SCHED. MARKETING DEALER SUPPLIER ASSEMBLY After First Lean Leap (2000) 99.95% 90% 68% 5 days 5 days 60 days www.lean.org

24. Summarizing Current State • Value creating time is <1% of total time • Weeks of inventories needed to support timely delivery of right product to end customer • Travel distance measured in thousands of miles; value creating distance measured in hundreds of feet • PPM at the end customer 1/100 of PPM at the beginning of the stream • Demand variation increases by a factor of 10 as you move upstream www.lean.org

25. MOBILITY PROVIDER SUPPLIER PLAN SCHED. PLAN SCHED. INTRANET ASSEMBLY Second Lean Leap > 2000 SLOTS 99.95% 90% 88% 5 days 5 days 5 days www.lean.org

26. Lean Path to the Future: • We’ve recently been conducting many of these macro-mapping exercises at LEI • They clearly show the enormous waste left in your production & retailing systems after first “lean leap” • This waste is the industry’s “bank” for higher margins, share prices, and wages and for stable or lower product prices in the coming decade • But how can you make a withdrawal? www.lean.org

27. Lean Path to the Future: • Conduct a joint mapping exercise with all the value stream players for every product family • Identify waste/cost savings and the investments needed to achieve the savings • Devise a simple formula to divide the loot and share the investment cost so that everyone wins! Our recommendation: www.lean.org

28. Second Lean Leap • Redefine value to give customers what they actually want • Jointly analyze and optimize the whole value stream to take out large chunks of waste/cost The one sure way to create a win-win-win for Motown in the new millennium! www.lean.org