Cases BRIDGITON INDUSTRIES AUTOMOTIVE COMPONENT AND FABRICATION P1 ANT The union has worked with us and has even led in cost reduction programs. Now corporate is talking about out- sourcing additional products, What more can we do to keep the business? Mie Lois, Plant Manager ‘The Automotive Component and Fabrication Plant (ACE) was the original plant site for Bridgeton Indus- tries, a major supplier of components for the domestic automotive industry, The history of the plant dated hack fo the 18405 when the adjoining river attracted mills that processed the rich Iumber resources in the area The site progressed through sevetal industrial uses, cluding an carly wagon works, until it was finally pur- chased by the founder of Bridgeton. He opened his first office there in the early 1900s All of ACF’s production was sold to the Big Thee domestic manufacturers. Competition was. primarily from local suppliers and other Bridgeton plants. As long as the market was growing and dominated by U.S. man. ulucturers, this strategy worked. Tt became less effective when foreign competition and scarce, expensive gaso- fine caused domestic loss of market shure. Supplicrs fond themselves competing for a shrinking pool of production contracts, Throughout the 1980s, ACF expe- Hienced serious cutbacks due to this competitive pres- sure. However, as the 1989/90 model year budget ap- proached, ACP was still considered & ctitical plant Model years ran from September | 10 August 31 and were the basis for budgeting. Production comtencts were usually awarcled for a model year The Engine Plant Shutdown ACF first felt the effects of domestic loss of market share in 1985, After the frst oil crunch in the mid- 1970s, Bridgeton had buill two plants for manufacture of fuel-eflicient diescl engines in anticipation of a con- tinued growth in the market. One of these plants was at ‘This case was plepaned by Paula. Most, Research Associate (une the ‘sapecvsion nf Associate Profetsar Rabin Cope, ‘Copyright © 1990 by the Prsideat an! Felon of Harvard Cole tare ‘ard BusineteSehoal ease 100.085, 8 the ACF facility. When the growth in diesel-powered ‘cars was not sustained, one of the operations had ta be shut down, Special studies were made of the relative costs of the two plants, ancl ACF's facility was the one chosen to be closed, When the production workers at ACF were told they were not cost competitive, they took actions to te= duce unit product cost, brining it down to within. a few cents of the competing quote. Despite these ciforts, ACE's facility was closed. “Management told us we were nat cost competitive. We worked ourselves into the ground and lowered the unit cost, and still lost the business,” recalls Ronald Peters, a long-time production worker in the old engine facility. When the engine plant closed at the end of 1985/6 model year, all of the related production jobs were elim- inated. The skilled trades positions were eliminated where possible, However, tradespeople who had unique skills that were needed in other areas of the plant were relained. The physical machinery, equipment, and build- ing were written down and taken off the plant books, Strategic Analysis During the 1986/7 model year, the corporation hited a strategic consulting firm co examine all of Bridgeton’s products and classify them in terms of world-class com- petitive position and potential. Four criteria were: con- sidered: (a) quality, (b) customer service, (c) technical capability (engineering and sophistication of plant processes), and (d) competitive cost position, ‘The data used to evaluate quality included waranty failure rates, product rejects per million, percent sched- uled maintenance versus breakdown maintenance, cus- tomer complaints per million, and published user rating service scales, To evaluate customer service, in addition 10 inter views, the study examined percent on-schedule: produg- tion and shipments, percent variation in these schedules, time to respond to requests for information, time to re~ spond to customer complaints, lead-time from design of concept to production of product, and degree of mans- facturing flexibility, Technical capability was largely estimated by inter- viewing customers. Imemmal dala were gathered aboutCHAPTER 1 Product feature, innovations, degree of technological proprietary, and depth of engineering expertise. Competitive cost position was evaluated by inter- viewing financial, purchasing, and engineering person- nel and undertaking a cost analysis which examined the cost of production by breaking euch product cost into Ihre elements: materials, direet labor and benefits, and Overhead. The product costs used for the study were to- tal folfactory costs based on examination of the man facturing cost reports generated by the facilily’s cost system. The details were provided by the plant financial Personnel. Comparative competitive costs were ob- tained through plant tours and interviews with engineer. ing and purchasing people at other Bridgeton plants (in- femal competitors), information from competing conaponent suppliers (extemal compelitors), and discus. sions with financial personnel ‘The budgeted unit costs provided by the plant for the 1986/7 model year study included overhead (burden) applied to products as a percent of direct labor dollars. ‘The ovethead percentage was calculated at budget time and used throughout the model year to allocate over- head to products using a single overhead pool. The overhead rate used in the study was 435% of direct la- bor dollars. Product costs were analyzed by the consultants to Classify products by degree of cost competitivencss Product classification was finished and reviewed at the corporate level with little plant adjustment or involve ‘ment after initial data collection. Products classified as World class (having costs equal o or lower than com- Petitors’ manufacturing costs) were considered Class I. Producis which had the potential of becomting world class (having costs $9 to 15% higher than competitors" costs) were classified as Class Products which had no hope of becoming world class (having costs more than 15% higher than the major competitor) were clas- sified as Class TL, The other criteria (quality, customer service, and technical capability) wete weighted into a factor that determined the final classification of the products. The consultants recommended that Class I products should emain at their present locations. Class IE products were to be watched closely for improvement or deterioration. Class IL were designated to be oulsoureed (ie., the business was awarded ro another Bridgton location, or purchased from an outside competitor) or eliminated, The consultants advised ACF’s management that their products fell into the following classifications (for COST AND PERFORMANCE MANAGEMENT SYSTEMS 9 2 description of these products see Exhibit 1): (a) Class I: Fuel tanks; (b) Class TI: Manifolds, front and rear doors; and (¢) Class INT: Muffler-exhaust systems, and oil pans, Product Outsourcing At the cnd of the 1987/8 model year, ofl pans and muf- fler-oxhaust systems were outsourced from ACE ‘This Outsonrcing resulted in a loss of 60 direct labor (pro- Guetion) jobs and 30 indirect (skilled) jobs. These 90 people were transferred to a retraining job pool, which was administered and paid by the union. The job pool Cost was not part of plant burden costs ‘With this second major cutback, plant management and labor moved toward mote cooperation and open- ‘ness in efforts to retain the semaining business, Several Programs were introduced to improve product quality and inerease productivity. These programs. stretched the traditional union/management boundaries as both sides worked toward creative solutions to meet these challenges, One of these efforts, led by Fred Simmonds, an experienced dic maker, involved union formation of teams to lower the time required to change dies, a mac jor constraint in the production process. By combining union labor classes and skill levels on Press line die change teams, ACF lowered the required time to change dies from 12 hours to 90 minutes. ‘This was the best in Bridgeton. Other locations averaged between four and five hours, The world-class times of Japanese. assembly lines, approximately 10 minutes, required special plant layouts, Another productivity improvement program created by Simmonds and Peters used “hourly to time hourly.” In this program, hously workers kept tack of the causes of downtime and categorized them as being related 10 personal time, tools and equipment, or startup. Peaple from the retraining job pool formed by the union at the time of the prior layoffs were asked (o time the lines Produotion personnel’s knowledge of the process. and experience on the Ting resulted in highly accurate activ- ity times for the operations they observed, Their teport- ing ernphasized the positive side of the information us- ‘ing uptime reports to show progress toward the World-class goal of 80% uptime set by the Japanese. Through identifying problem steas and working with industrial engineers, they increased their uptime from an average of 30% to 65%, the best in Bridgeton,10 CHAPTER 1 In spite of these improvements in the production process, manifolds, designated Class 1 in the initial study, were downgraded to Class TIL in the 1989/90 model your budget and identified as candidates for out- sourcing (for the 1986/7 through 1989/90 model year budgets, see Exhibits 2 and 3). Any decision to out- source manifolds was complicated by the possibility that increased emission. standards would require new vehicles be fitted with lighter weight, more efficient manifolds. If this occurred, the demand for stainless steel manifolds could increase dramatically and so, probably, would its selling price. Reacting to the change in status of the manifolds, Lewis called together his plant superintendents and tunion representatives, “This doesn’t make sense. 1 know We ure more competitive. We have made all kinds of improvements, but our costs keep going up and we're still losing business. What more can we do?” COST AND PERFORMANCE MANAGEMENT SYSTEMS EXHIBIT 1 BRIDGETON INDUSTRIES Product Lines in 1990 Budget Fuel tanks: These are produced on six stamping lines from coated sheet metal, which is stamped in halves and then placed together and automatically seam welded, ‘Manifolds: Stainless steel exhaust manifolds are produced in a highly automated production process. ‘The parts are loaded on fixture and robotically welded. These manifolds are superior to the older technology cast iron manifolds in pollution control. The disadvantage of using, stainless Steel is its high relative cost Front ard rear doors: These are the front doors and rear cargo doors for vans, They are produced on four press Jines with up to six presses per line. ‘Mufler-exhaust systems: These are formed from sheet metal that is bent to shape and robotically welded. Oil pans: These are small steel stampings, They are pro- duced on two lines containing one press each EXHIBIT 2 BRIDGETON INDUSTRIES 1986/7 through 1989/90 Model Year Budgets $1000) ‘MODEL YEAR 1986/87 _ 1987/88 1988/89 1986/90 Sales Fuel tanks 70,278 75,196 79,816 «83,535 Manifolds 79459 84,776 89,323. 93,120 Doors 41,845 45,174 47,199 49,887 Mutfler /exhausts 62,986 66,266 0 0 Oil pans. 75,586 _79,658 0 Qo ‘Total 330,184 351071 216338 226,542 Direct material Fuel tanks 15,125 15,756 16,312 16,996 Manifolds 31,696 33,016 34,392 35,725 Doors 14886 15,506 © 16.252 16,825 Muffler/exhausts 2840 29,525 0 a Oil pans. 32218 _33,560 0 a Total 122,365 127363 66956 | BBG Direct labor Fuel tanks 4169 4238 4415 4,599 Manifolds 5886 6.027 6.278 6 840 Doors 2621 2731 2.884 2,963 Muffler/exhausts 5,635 5,766 0 0 ill pans 6371 6532 9 0 Total 24682 35,208 13537 Th 102 (continuedCHAPTER 1 EXHIBIT 2 (cont) Overhead by account number COST AND FERFORMANCE MANAGEMENT SYSTEMS 1 100077137806 5,572 5,679 1500 6,743 6824 5.883 5.998 2000 3.642 3,794 Bost 115 go00 247825291354 Lato 4000 8.817 888873607433 5000-24181 24460 20063 20,274 8000 5,964 5.986 3.7443 744 9000 6708 6771 5948 5,987 1000 5,089 5.011 3.150 3,030 12000 26,954 28,077 15,027 154683 14000 9,733 9,784 «8.025.110 Total 107,954 109,890 78.187 79,303 Factory profit 75,153 88524 57,688 63,501 EXHIBIT 3 BRIDGETON INDUSTRIES Description of Chart of Accounts ACCOUNT NUMBER DESCRIPTION 1000 1500 2000 3000 4000 5000 8000 9000 11000 12000 14000 Wages and benefits for nonskilled hourly personnel such as janitors and truck drivers Alll plant salaried personnel expense, including benefits, except industrial engineers (included in account number 11000) Production supplies such as gloves, safety goggles, and packing ‘material ‘Small wearing tools such as grinding wheels, hammers, and screwdrivers: Alll purchased utilities including coal and compressed gas Wages for nonproduction employees with specialized skilled classifications used for plant maintenance and rearrangement; the benefits associated with these wages are in class 14000 Depreciation, on a straight-line basis, and property taxes Various relatively cotistant personnel-related expenses including items such ag training, travel, and union representation Project expense for one-time setup and some rearrangement of new equipment and machinery Benefits and overtime premium for production hourly workers including COLA (Cost of Living Adjustinent), state unemployment, and pension (Wages are in direct labor.) Benefits for skilled hourly workers similar to those for Production workers (Wages are in account 5000.)