The Fallacy of the Overhead

Quick Fix

Mark F. Blaxill and Thomas M. Hout

Harvard Business Review

No. 91403

This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
 HBR
The Fallacy of the Overhead Quick Fix
Mark F. Blaxill and Thomas M. Hout
It’s a familiar tale known to all senior managers
of large broad-line manufacturing companies. Let’s
call it ‘‘The Lure of the Overhead Quick Fix.’’ As
automation and organizational complexity in-
creases, manufacturing overhead grows until it
dwarfs all other costs. But as competition from lower
cost companies heats up, the pressure to react
mounts. Companies typically choose one of two op-
tions. Option A: the company remains a broad-line
manufacturer, and management fights back by drop-
ping prices and cutting overhead—only to find costs
creeping back after a few months. Option B: manage-
ment accepts that survival hinges on becoming a
focused, low-cost company. It cuts entire product
lines and pares down plant capacity, cutting overhead
as it goes—but in the process, it compromises its
long-held position of market leadership.
In both cases, the company misses the point: over-
head is not only about cost; more fundamentally, it’s
about process. (We define overhead as a company’s
people-related cost, specifically, salaried people plus
indirect and support wage earners.) Getting the man-
ufacturing system right ensures much lower over-
head—in part because direct plant-floor employees
assume more indirect supervisory responsibilities.
Of course, such process change is not easy; it requires
a long-term commitment from the entire organiza-
Mark F. Blaxill and Thomas M. Hout are vice presidents at the
Boston Consulting Group. Mr. Hout coauthored Competing
Against Time with George Stalk, Jr. (Free Press, 1990).
Copyright q 1991 by the President and Fellows of Harvard College. All rights reserved.
This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
JULY–AUGUST
tion. But in many companies, this commitment is
essential for survival.
Companies that pursue change by focusing on cut-
ting costs are only asking for trouble. Take the plight
of a large Midwest specialty-equipment maker—call
it Thornton Equipment Company. Facing stiff mar-
gin pressure a few years ago, Thornton needed to
lower its overhead cost structure. At the same time,
it was intent on remaining a broad-line company. It
conducted make-versus-buy analyses of some major
components—axles, engine shafts, and transmission
shafts—and decided it could save a total of $3 million
by outsourcing a few models from each component
group. In total, the company cut about 10% of its
overhead staff. But the savings never materialized.
Instead costs rose.
This unexpected result came to light six months
into the change program when the accounting de-
partment plotted overhead rates and noticed they
were rising. When management looked more closely,
it discovered a number of causes for the increase.
Many of the outsourced components went through
the same processes as the components that remained
in-house—boring, milling, lathing, and drilling. But
with fewer factory-floor support staff, machine main-
tenance and work scheduling quickly began to suffer.
To solve its short-term problems, the company had
rehired some of the old overhead staff.
Other problems became evident. As the company
outsourced more components, management paid less
attention to improving core process technology. To
 save money, they postponed technological upgrades,
including the purchase of a sophisticated, single-
point flexible multispindle tool. In addition, the lo-
gistics of outsourcing meant the company had to
keep track of a whole new set of orders, billings, and
shipments. A multiple supplier network demanded
more indirect staff, so overhead increased.
Another consequence of outsourcing was excess
capacity. In response, Thornton consolidated its op-
erations. Over an 18-month period, the company re-
duced its 15 plants scattered across the Midwest to
just 10. Still, overhead costs continued to rise be-
cause little thought was given to streamlining opera-
tions. There were the obvious turf battles. Because
departmental vice presidents back at headquarters
fought to keep their staffs intact, few people were
cut as a result of consolidation.
Thornton ended up with fragmented production
processes, fewer but less productive manufacturing
facilities, and higher total overhead. It was less com-
petitive than it had been, it was compromising its
technology by outsourcing key component parts, and
it was becoming more dependent on a much wider
range of suppliers. ‘‘De-massing’’ had led to a weaker
company.
Thornton’s predicament is not uncommon. Too
often senior managers assume that by mechanically
eliminating chunks of business or consolidating op-
erations, they will improve the company’s position.
In fact, only by designing controllable and highly
integrated manufacturing processes—something we
call ‘‘robust’’—can companies lower overhead per-
manently and, at the same time, remain viable broad-
line manufacturers. All processes must be addressed:
product design, manufacturing, logistics, distribu-
tion, and all supplier and customer relationships.
Process Controls Cost
Everything follows from robust processes: higher
quality, better cycle time, and much lower overhead.
Toyota is a dramatic example of this cause-and-effect
relationship. In one leading-edge forging cell, ma-
chine uptime (a measure of a well-controlled process)
averages 90%, while uptime at comparable U.S. com-
petitors hovers around a 50% rate. What is most
disturbing for the competition is that Toyota’s over-
head cost in this process is the lowest in the industry.
It averages less than one person for every $1 million
in sales, compared with around five people per $1
million of sales among U.S. competitors.
In another example, Hashimoto Forming Industry,
a Japanese auto-parts maker specializing in bilami-
HARVARD BUSINESS REVIEW July–August 1991
This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
nate moldings, controls its rolling-mill operation so
precisely that it uses virtually no lubrication. To
achieve the same throughput, the competition must
bathe the tooling in their rolling mills with oil. Such
tight process control helps Hashimoto keep its over-
head costs down: the number of indirect and salaried
employees is less than half that of its average U.S.
competitor.
These are just two examples of the relationship
between process control and cost. Savings multiply
when well-controlled processes are linked to other
robust processes both up- and downstream. Indeed,
it is the integration of Toyota’s forging cell and Hashi-
moto’s rolling mill with other operations in their
total production pipelines that enables both compa-
nies to achieve lower overall cost.
Unlike Toyota and Hashimoto, too many manufac-
turing companies still attack overhead the Thornton
way—head-on. This worked when they were com-
peting with like-minded companies, but in the face
of robust competition, these methods are ineffective.
Indeed, it is untenable to rely on incremental cost
cutting to compete against the likes of Toyota. The
more you cut, the less you have. The less you have,
the less competitive you become.
Structure Determines Overhead
Companies need a new way of thinking that helps
them transcend the cost-cutting mind-set. That
means looking at overhead in a new light. In a recent
comparison of more than 100 manufacturing compa-
nies in the United States, Europe, and Japan, we cap-
tured the causal relationship between organizational
type and overhead. It is clear from the data that high-
overhead bureaucratic companies cannot hope to
compete without changing the fundamental struc-
tures and characters of their business.
We focused on mainstream industrial companies
where leading-edge product technology was not a key
factor for competitive advantage. Industries included
automotive components, home hardware, forgings
and castings, plastic fabrication, gearboxes, and ma-
ture electronic devices. Among these companies, we
identified three distinct organizational types. (See
the graph, ‘‘Overhead Cost Differs According to
Company Type.’’)
The bureaucratic company is typically an old-
guard industrial corporation with large production
facilities. It has a centralized organizational struc-
ture with specialist departments such as quality as-
surance, scheduling, and purchasing each performing
key support functions. The bureaucratic company
95
 Overhead Cost Differs According to Company Type

$10.0
Overhead and Indirect Staff per Million Dollars of Sales

8.0

6.0
D

4.0
C
A

2.0

E
1.0

0.8 B

0.6

0.4
$2 5 10 20 50 100 200
Plant Sales per Product Family in Millions of Dollars

A total of 102 manufacturing plants were analyzed and divided into three categories, according to size of plant
and organizational structure:
Bureaucratic Niche Robust
Bureaucratic Company A faces competition from Companies B, C, D, and E – but which one should it worry about most?
In a world of complete information, there would be no debate: robust Company B poses the biggest threat because it
operates at only a fraction of Company A's overhead cost.

often has an older work force and a less flexible pro- $3 million to $50 million. (For more about this type
duction system than its competition. Its overhead of organization, see the insert, ‘‘Niche Companies
system has evolved over the years into a complex, Need Robust Processes Too.’’)
formalized hierarchical structure. We found exam-
ples of bureaucratic companies among the industry The robust company combines the best of big with
leaders in all of the industrial markets we surveyed. the best of small. Its manufacturing systems are well
The sample includes 36 bureaucratic plants with an- understood, well controlled, and flexible. Superior
nual sales ranging from $40 million to $650 million, design and execution of the manufacturing process
each with between three and ten product families. means short cycle time, superior quality, and low
overhead. Examples include Forming Technology, a
The niche company gets its strength from focus Michigan-based metal-forging company, and Nip-
and flexibility; fewer product lines and management pondenso, Japan’s largest electrical and electronic
levels allow it to adapt quickly to changes in market auto-components company. Our sample included 28
demand. It is typically younger and smaller than its robust plants with annual sales from $15 million to
bureaucratic counterpart and has relatively low over- $600 million, each with from two to six product
head because of a flat, uncomplicated organizational families.
structure. Examples of niche companies include A key difference between bureaucratic and robust
Magna International, a Canadian auto-parts manu- companies is their overhead structures. At any given
facturer, Nucor, a specialty steel maker, and Baldor level of output, bureaucratic companies have higher
Electric, a maker of low-horsepower engines. The 38 overhead per unit of sales. In addition, as output
niche plants sampled each have between one and increases, unit overhead declines more slowly for the
three product families and annual sales ranging from bureaucratic companies than for robust compa-

96 HARVARD BUSINESS REVIEW July–August 1991

This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
 Niche Companies Need Robust Processes Too
It is not just old-line bureaucratic companies that
must rethink overhead. Small niche companies facing
world-class competition find themselves increasingly
uncompetitive in terms of cost. Once they lose their
cost advantage, they lose their competitiveness. They
may still be flexible and responsive, but sophisticated
robust competitors are equally so.
The emergence of robust competitors is a serious
threat to niche companies because they have not only
substantial organizational resources but also lower
overhead cost structures. The graph, ‘‘Overhead Cost
Differs According to Company Type’’ illustrates a recent
comparison of more than 100 companies. From the data,
we determined that overhead per unit of sales at niche
companies is generally higher than overhead per unit of
sales at robust companies for all levels of plant capacity.
This poses a threat to survival.
In the early 1980s, Rolm Corporation, then a $600
million maker of private-branch-exchange equipment,
began to feel competition from both NEC and Northern
Telecom. Rolm’s traditional competitor had been the
regulated AT&T, a higher cost and slower competitor
than these two new entrants. NEC soon became the
industry leader in customer service and manufacturing
cost, and Northern Telecom led the market in rapid
product development. Because of its established distri-
bution network and its willingness to meet the competi-
tion’s prices, Rolm managed to hold its market position
against these new competitors but found it increasingly
hard to turn a profit. The company was acquired by
IBM in 1984.
Niche companies face other threats. By being too nar-
rowly focused, many end up captives of one group of
large customers. Others are constrained by an over-reli-
ance on a few key suppliers. If demand conditions
change or if there are problems with suppliers, the niche
company can find itself in serious trouble.
Another problem can be rapid growth. Typically, as
market share grows, niche companies expand into new
product lines and open new facilities. Overhead often
grows faster than sales, and organizational complexity
begins to slow down the company. Because growth is
so rapid, not enough attention is given to the long-term
design of manufacturing processes.
Magna International suffered from both these prob-
lems—it was very successful, and it was dependent on
only a few leading automobile customers. The $2 billion
Canadian auto-parts maker was hugely successful in
the late 1980s, it doubled sales in four years, and it built
a number of new focused factories to keep pace with
demand. But it faced an overhead crisis when the auto
market contracted in 1990. Magna closed some factories
and cut 300 employees.
HARVARD BUSINESS REVIEW July–August 1991
This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
It is essential for niche companies to keep control of
their overhead as they combat robust competitors and
deal with other strategic problems. Improving manufac-
turing processes is central to remaining competitive.
Well-controlled processes lead to higher yields, quicker
cycle time, better quality, and lower overhead.
Look at $50 million Titeflex, a Massachusetts com-
pany that makes high-pressure hose and hose connec-
tors for aerospace and industrial markets. During its
75-year history, Titeflex had carved out a lucrative
niche, focusing on high-precision fuel connectors. But
by 1987, competition from flexible, lower cost competi-
tors drove down profitability and slowed sales. Over-
head had risen during the decade and hovered near 60%
of total cost, much higher than the competition’s.
Titeflex tried first to solve its problems by introducing
a new MRP II system. But this only made matters worse
because the system masked the company’s poor process
control. For instance, one machining process had many
unnecessary inventory holding points. Instead of sim-
plifying the process and eliminating unwanted inven-
tory, the MRP II system computerized the existing
inventory needs.
Having made no progress, management took another
tack. It examined all processes—customer service, order
entry, fabrication and assembly, production planning
and scheduling—and concluded that the aerospace and
industrial product groups each had unique customer
requirements. Aerospace products typically had low-
volume production runs; industrial products fit a high-
volume, make-to-stock business model.
The company separated the two businesses and used
flow charts to redesign each unit’s processes. It used
cellular manufacturing processes to improve coordina-
tion between processing steps, and it gave product teams
the responsibility for shepherding products through de-
sign and manufacturing.
This physical separation worked well. Two years into
the change program, lead times for aerospace products
fell from 20 weeks to 12 weeks, while industrial prod-
ucts lead times went from several weeks to just 3 days.
On-time delivery was up from 15% to 80%; scrap and
customer returns were down 42% and 60%, respec-
tively; and sales were up 30%. Changing the process
cut total overhead by 20%, which included the elimina-
tion of a 23-person quality-assurance team.
The same principles can be applied to all niche compa-
nies, no matter what their structure or how fast their
growth. Indeed, it may be the most successful niche
companies that need to worry most about manufactur-
ing processes. If they are growing rapidly and are not
dealing with the threat of robust competitors, they are
putting their futures at risk.
97
 ‘Good’ versus ‘Bad’ Overheard
Bureaucratic
Number
Core Management 36
Process Improvers 19
Problem Fixers 97
Total Overhead Staff 152
The company on the left is a bureaucratic manufacturer of automotive parts. The one on the right is its robust competitor. Not only do the number
of overhead employees differ dramatically but the type of overhead differs as well. In general, process improvers are ‘‘good’’ overhead, while
problem fixers are ‘‘bad.’’ Not surprisingly, the robust company has a much better mix.
nies—as output doubles, overhead for robust compa-
nies drops by approximately 30%, compared with
about 20% for both bureaucratic and niche compa-
nies. Bureaucratic companies traditionally gained
competitive advantage through economies of scale,
but the data show this strategy is ineffective against
the cost competitiveness of robust companies.
So how does a bureaucratic company compete?
Not by simply pruning costs. Compare points A and
B in the graph. Both companies are auto-parts makers
with about the same output, the same number of
product lines, and both supply the same end market.
For the average product line, bureaucratic Company
A employs five times as many overhead people as
robust Company B—about 450 compared with 90.
To lower its average overhead cost to Company B’s
level, Company A has two choices. It could simply
eliminate 360 people from its plant—by outsourcing
or downsizing or both—while trying to maintain the
same level of output. This would no doubt result in
major organizational collapse, as entire departments
become dysfunctional. Alternatively, Company A
could work toward transforming its manufacturing
operations so it does not need 450 overhead people
to produce at the current output level. This would
mean redesigning all manufacturing processes.
Of course, the choices are never this stark. Typi-
cally, Company A has incomplete information and
faces competition from many different companies—
for instance, from companies B, C, D, and E in the
graph. Each of these competitors may have slightly
different product lines, cost structures, and competi-
tive strategies. Company A’s most visible competitor
could be Company C, because it has made the biggest
inroads into Company A’s market share in one of its
primary product lines. By cutting overhead by say,
10%, Company A can achieve a cost advantage over
Company C and position itself to regain lost market
share.
But such a victory would be hollow. Company B
is still operating with a fundamentally superior cost
structure and production system. Company A may
gain ground on Company C, and it may even overtake
98
This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
Robust
Percent Number Percent
23.7 25 31.2
12.5 32 40.0
63.8 23 28.8
100.0 80 100.0
it, but Company B and other robust manufacturers
like it will inevitably eat away at Company A’s busi-
ness. There is no alternative for the bureaucratic
company but to face up to its robust competitors.
The first step is to compare its manufacturing pro-
cesses and overhead structures with those of other
companies.
Change the Thinking
A few years ago, a battered Detroit-based auto-
parts manufacturer faced fierce competition from a
few low-cost robust rivals. With cost-cutting plans
on the table, management made an eleventh-hour
visit to a Japanese affiliate to tour its manufacturing
operations.
The systemic differences were profound. The Japa-
nese company’s plant was more decentralized and
had a flatter, more cellular organizational structure.
The equipment uptime was high, there were no re-
work stations, and work-in-process inventory was
low. For the same production volume, the Japanese
company’s overhead was typically less than half the
U.S. company’s.
After returning stateside, the managers scuttled
their plans to cut costs. They realized there was more
to the Japanese company’s operations than just lower
cost. They formed a cross-functional team to look
more closely at operations so they could redefine all
job functions.
The team began to think in terms of the contribu-
tions of overhead employees. After much debate, it
settled on three categories for overhead staff: core
management, process improvers, and problem fixers.
Core management comprised people who ran the
plant—the general manager, facilities-maintenance
people, and production-control engineers. Process
improvers included process engineers, R&D engi-
neers, materials engineers, and purchasing managers.
Their goal was to make things better through contin-
uous improvement. The problem fixers were the in-
HARVARD BUSINESS REVIEW July–August 1991
 spectors, expediters, extra materials handlers, and
troubleshooters. They kept the work moving.
With roughly half the total head count, the Japa-
nese manufacturer allocated almost twice as many
overhead employees to the future in the form of pro-
cess improvers. (See the table ‘‘ ‘Good’ versus ‘Bad’
Overhead.’’) The U.S. company, on the other hand,
dedicated four times as many people to fixing today’s
problems.
The team identified still more differences. While
both companies used manufacturing cells, the Japa-
nese company was more sophisticated. For instance,
it organized multifunctional teams around products
and technologies. These teams worked to improve
machine performance, process yield, and machine
uptime, and they thought in terms of systems—the
subtle ways machines, materials, and people inter-
act. The Japanese company designed and built opera-
tions that relied on quality materials rather than
accepting inadequate inputs and then expecting the
rework team to fix the defects.
Integration and cooperation was a part of the Japa-
nese company’s strategy. It put process engineers on
the plant floor instead of in distant offices, and it
rotated each new engineer through all production
stations. Senior engineers were sent to large custom-
ers or suppliers for training for as long as one month.
While the Japanese engineers vied for these assign-
ments, the U.S. engineers considered this kind of
training insulting. In addition, all direct employees at
the Japanese company were multiskilled—machine
operators maintained their machines, checked for
quality, and made local scheduling decisions—and
were involved in the design and specification of new
machine tools from the supplier. And formal groups
of product engineers, purchasing people, process
technicians, and machine operators worked to design
production lines for new products.
Managers at the U.S. company began to understand
the cause-and-effect relationship between control-
ling the process and achieving low overhead. And by
renaming the various categories of overhead employ-
ees, they got a better sense of the nature of overhead.
One of the first steps the U.S company’s management
took was to track the new overhead categories—core
management, improvers, and fixers—in the com-
pany’s accounting system and drop the traditional
categories of ‘‘plant burden’’ and ‘‘hourly versus sala-
ried overhead,’’ neither of which gave useful informa-
tion.
Becoming Robust
By rethinking processes and redefining overhead,
it is possible to begin moving toward robust manu-
HARVARD BUSINESS REVIEW July–August 1991
This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
facturing. As with any change program, the rethink-
ing process is a journey, not an event, and it entails
significant behavioral and cultural changes. To get
started, management has to define all its processes
clearly and to redefine the traditional direct versus
indirect relationships. This involves three basic
steps: segmenting, mapping, and measuring each
process. The combination of steps makes it easy to
identify the root causes of process problems and to
find opportunities for improvement.
Process segmentation helps management divide
the manufacturing system into workable pieces. Seg-
ments can be defined in many ways, depending on
the industry. For instance, at one company each
major machining cell and each assembly cell are de-
fined as separate process segments; each includes its
own tooling, material, scheduling, and people issues.
Other distinguishing segment characteristics may be
important: support versus main processes; highly
customized products versus standardized products;
or even high versus low inventory turns, labor con-
tent, or automation. A company may even define
segments according to customer groups.
Mapping has two components: the conceptual map
and the practical map. The conceptual map is essen-
tial for identifying the relationships between process
goals and specific action. It spells out how a company
goes from the idea of continuous improvement to
implementing continuous improvement. (See the
table ‘‘Mapping Out Process Change.’’) The practical
map focuses on activity and material flow charts for
each segmented process so each step is well defined
and all decision points are identified.
Measuring process means quantifying such things
as machine uptime and materials yield, cycle time,
work-in-process turnover, and product quality. Mea-
surement is necessary for diagnosing problems and
identifying where process revision is possible.
Segmenting, mapping, and measuring are the ana-
lytical first steps toward understanding and control-
ling each process—from product design to shipping
finished product to the customer. It is by understand-
ing and controlling processes that companies become
robust and realize significantly lower overhead cost.
Thornton Revisted
To see the dramatic overhead cost effects that pro-
cess control and continuous improvement can have,
look again at Thornton. The company was in serious
trouble from its initial outsourcing and consolida-
tion strategy—sales were declining, costs were ris-
ing, and quality was suffering. In 1986, after two
years on this course, senior management concluded
99
 its original plan was doomed. The company’s chief
executive convened a senior-level team and charged
it with the task of turning the company around.
The team’s first move was to halt all future out-
sourcing plans while it studied Thornton’s predica-
ment. The team agreed that the current strategy of
outsourcing core components was counterproduc-
tive to the company’s long-term goals. Outsourcing
could make sense—but not the way Thornton was
doing it. The CEO agreed.
Thornton began rethinking its manufacturing ap-
proach. It started to bring all outsourced components
back in-house so it could relearn and regain control
of its core processes—the boring, milling, lathing,
and drilling operations. Management realized the
best overhead-reduction opportunities were in these
complex processes because each process was well
understood and the company could maintain strict
control of every step. Thornton pioneered many of
these core processes, and to give them up was to lose
part of the company’s core competence. Besides, the
managers saw how a robust competitor was able to
achieve low cost and complex processing, and they
were determined to follow its lead.
This was an important turning point for Thornton
and heralded in a long-term commitment to signifi-
cant structural change. First of all, Thornton seg-
mented, mapped, and measured all key elements in
each core manufacturing process and then began a
concerted process-change program. The program in-
volved more thorough specifications of material
quality and better management of machine yields
and uptime. To do this, Thornton began cross-func-
tional training for all plant-floor supervisors and ma-
chine operators. These people were integrated into
the decision and improvement process, and every
operator was given responsibility for his or her own
machine maintenance and product quality. No
longer did the company rely on separate, indirect
employees to collect these data and correct problems.
Thornton also enhanced control by upgrading
some machining cells—including buying a single-
point multispindle tool that had been canceled two
years earlier. Management had thought the machine
was too expensive; it was now considered vital to
ensuring process improvement and overhead cost
control.
Introducing new technology also improved flexi-
bility of work cells by improving reliability, shorten-
ing set-up time, and building in a greater range of
tooling. Thornton could now economically run
smaller lot sizes and improve its customer respon-
siveness. The company eliminated overhead because
finer machine control generated less scrap and re-
work and meant work scheduling could be done by
the machine operator.
100
This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.
Because Thornton was focused on its core pro-
cesses and products, it redesigned its factory to
optimize work flow. Both managers and factory
workers were organized around product and process
families instead of within traditional functional cost
centers. The physical layout of the plant also changed
so that networks of interdependent machine cells
were positioned closer together. This improved com-
munication and hastened problem solving on the
production line. Through improved process control
and greater plant flexibility, total overhead employ-
ment dropped by 30% over two-and-a-half years.
Thornton still outsourced, but the decision was
now based on relinquishing control of noncore prod-
ucts. To this end, management outsourced marginal,
low-volume whole products and low-value-added
parts. Whole products included low-volume, special-
purpose vehicles and some optional attachments.
Low-value-added components included more than
4,000 items, like screw-machine parts. Neither
whole products nor low-value-added parts shared
common machine processes with core components.
Thornton engineers still designed the whole prod-
ucts, but the manufacturing was subcontracted to a
nearby supplier. All manufacturing overhead—
scheduling, tooling, testing, inventory, and logis-
tics—became the responsibility of the supplier;
Thornton was therefore able to eliminate 21 over-
head jobs. As for the 4,000 parts, Thornton gave spe-
cial attention to contracting with the fewest number
of suppliers. As a result, the supplier base shrank by
a factor of three, and unit cost on each of the parts
dropped by an average of 18%.
Unlike its first failed attempt at outsourcing,
Thornton realized $18 million in sustainable annual
overhead savings. In all, the company eliminated
nearly one-third of its overhead staff without com-
promising volume or product diversity.
At the same time it was revamping its outsourcing
strategy, the company addressed the product-devel-
opment process. Because there were some big prob-
lems in Thornton’s development-cycle time and
cost, top management assigned a management team
to pinpoint the root causes. It soon discovered that
projects were highly compartmentalized, distant
from manufacturing, and generally overmanaged.
Moreover, low-priority projects choked the R&D
pipeline. The company found that a robust affiliate
was operating at a 30% lower R&D overhead rate.
Thornton accepted that it must keep R&D in-
house—some managers argued forcefully that with-
out R&D, the company would be out of business
within 10 years. Thornton’s management concluded
that the only way to create meaningful change was
to remove the vice president of R&D. Although he
was a well-respected industry visionary and a 24-
HARVARD BUSINESS REVIEW July–August 1991
 Mapping Out Process Change
Process concepts . . . Lead to specific actions . . . Which translate into real benefits
Pursue process design as a separate Perfect existing processes to their full Higher machine uptime
discipline potential before designing new ones Predictable, better material utilization
Understand and manage requirements Design ‘‘hand-in-glove’’ fit between and less scrap
for process success materials, tools, and operations Faster work-in-process inventory turns
Instruct and involve all employees in Arrange for continuous work flow: think Faster cycle time
process improvement of the plant as a pipeline
More reliable schedules and shipments
Do all these things continuously Constantly tighten specifications for
materials, tools, and operations Lower overhead
Simplify local process control and
maintenance
A crucial first step in any process change program is to identify the fundamental concepts the company wants to adopt, to spell out how to
accomplish them, and to measure the benefits produced. This flow chart maps out how one company took this first step. It identified four concepts,
translated them into five actions, and identified six categories of measurement.
To a typical bureaucratic company, adopting such a process-improvement map appears to require more overhead than it now uses. In fact, it
requires less. Once employees begin to rethink and reinvent what they do every day, they discover—and eventually eliminate—the source of
wasted time, poor quality, and redundant overhead that clogs the system.
The quality of overhead also changes. The company adds more upstream overhead (its product and process planners) and reduces downstream
overhead (the inspectors and reworkers). The net result is less total manufacturing overhead staff.

year company veteran, his ideas about process were
at odds with what management felt it needed to do,
and he was resistant to change.
After much debate, the CEO asked the vice presi-
dent to resign, and he replaced him with a man will-
ing to make radical changes. Immediately, the new
R&D head revamped the product-development pro-
cess with a focus on continuous improvement. This
included a formal ranking of development projects
based on customer needs; assigning teams of design
engineers, materials purchasers, and manufacturing
engineers to work on major design projects; better
and more formal communication between the shop
floor and the design center; and the standardization
of most machine tools. Within five years, the results
were substantial.
▫ a 34% drop in average cost of design engineering
for new parts;
▫ a 26% decline in the ratio of engineering over-
head—including specification, database, quality
assurance—to direct engineering; and
▫ a 40% drop in product-development time.
Thornton’s turnaround proves that even a com-
pany starting from a dangerous position can make
strides toward robust manufacturing. Like Thornton,
all companies facing high costs and robust competi-
tion must learn a difficult lesson: to lower overhead,
they must reexamine and then change manufactur-
ing processes. Only then are improved competitive-
ness and sustainable overhead savings possible.

HARVARD BUSINESS REVIEW July–August 1991 101

This document is authorized for use only in Prof. Arun Misra's IIM SAMBALPUR/TERM-2/Management Accounting at Indian Institute of Management - Sambalpur from Oct 2023 to Jan 2024.