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On Strategy: How To Reduce Hours Per Vehicle

Intense price-based competition in the automotive market has led OEMs to launch various initiatives to reduce total costs in an effort to maintain profitability.

Intense price-based competition in the automotive market has led OEMs to launch various initiatives to reduce total costs in an effort to maintain profitability. A key cost element for the OEMs to address after direct material purchases is labor. Labor represents an average of 12 to15 percent1 of a vehicle's manufacturing cost in North America. A recent study that Roland Berger Strategy Consultants conducted for a major OEM determined that a 20 percent improve-ment in hours-per-vehicle (HPV) would save in excess of $800 million annually. The savings would be even greater for larger OEMs. It is clear that labor rates are unlikely to decrease in the near future. It is also clear that there are significant advantages to having vehicle assembly operations close to markets where vehicles are actually sold. Labor, or HPV, therefore is the primary lever available to reduce overall labor costs. Labor usage can be improved through better product design and through the use of technology, lean manufacturing principles, and modern change-management techniques.

The hyper-competitive North American auto industry leaves no room for waste and requires OEMs to utilize every available means to keep labor costs at competitive levels. The competitive pressures continue to increase. The average HPV for vehicles assembled in North America has improved from 29.44 in 1998 to 24.06 in 20042, an average annual reduction of more than 1.0 percent. Roland Berger Strategy Consultants expects the rate of improvement to continue at a similar pace for the foreseeable future.

Product design has a significant impact on HPV. The need to reduce costs does not necessarily require decontenting or cookie-cutter designs; it means designing vehicles and vehicle components that can be more easily and efficiently assembled, sometimes through modularization. It also means preserving function and performance while reducing the number of components-an approach used by many of the Japanese automakers such as Toyota. How do they do it? They achieve it by having significant interaction between Engineering and Manufacturing throughout all phases of vehicle design and product life. Prototype and pilot builds happen at assembly plants with Manufacturing and Engineering personnel working in close collaboration. Most problems and inefficiencies are identified and corrected prior to launch. Complexity is reduced by keeping common components among different models and among replacement models. The opportunity for the errors that drive inefficiency is reduced.

Automation can play a major role in reducing HPV. Recent advances in robotics can improve direct labor efficiency without many of the reliability and flexibility problems that plagued earlier generations of robotics. Automation does not necessarily mean expensive robotics; simple and inexpensive tools continually are being developed and improved that allow for cycle-time reductions and work rebalancing. Automation has its pitfalls, however. Robots do not work for all applications and putting them where they do not belong can lead to significant problems. Capital expenditures also increase fixed costs and make a business much more vulnerable to dips in volume or failure to achieve target volumes. In addition, the impact on flexibility has to be considered. It's important to ensure that automation will not hamper either volume and/or model flexibility.

The implementation of lean manufacturing principles along with the establishment of a culture built on continuous improvement is also a very effective way to reduce HPV, as well as other manufacturing costs. A true lean manufacturing system is difficult to implement within an existing, traditionally oriented manufacturing environment. However, if top management is truly committed to change, it can be accomplished. Just-in-time (JIT) processes are important elements of lean manufacturing. JIT not only reduces material cost, but also material handling cost, as well as material planning and management cost, and product re-work costs, all of which impact HPV. JIT also allows for greater workstation optimization, thereby allowing for a reduction in direct labor as well. Standardized work is an important part of lean manufacturing. Without it, other elements fall apart. It also has a direct impact on HPV. Implementing and using standardized work to manage both the production floor and support operations allows best practices to be standardized across operations, shifts, and plants. And it forms a baseline to improve upon. It's ironic how many manufacturers spend time and money to benchmark other companies without truly benchmarking and standardizing within their own operations. Another element of lean manufacturing is Jidoka, or built-in-quality. Jidoka means building a production system that is reliable and robust, as well as incorporating poka-yoke devices that prevent defects (and re-work) from occurring and systems that halt production so problems can be addressed before they recur. Stopping an assembly line and idling employees for a few minutes is far less costly than continuing to build defects requiring re-work.

The most important change that a manufacturer can make to improve HPV, as well as the most difficult to implement, is creating a culture within which all employees value and pursue continuous improvement. Change within a traditional management system that fails to empower employees is difficult to achieve. Employees are conditioned to believe that "cost reduction" means "labor reduction" and that "labor reduction" means "layoffs." When employees have a reason to believe that their jobs are secure, they are more open to helping management with improvements in HPV. Employees need to be assured that improvements in HPV may lead to new assignments or workforce reductions through attrition, but not to layoffs. They need to understand that by helping to improve HPV, they actually will increase overall job security.

Implementing change is not easy. It takes resources. For example, the Manufacturing Performance Improvement (MPI) method used by Roland Berger Strategy Consultants helps companies properly focus resources by identifying production facilities with the greatest potential for improvement. As opposed to traditional benchmarking, this method assesses true potential by separating operational issues from structural issues and normalizing data for factors that plants cannot control in order to allow benchmarking across all plants. The methodology shows what efficiencies plants realistically should be expected to achieve. The method not only identifies weak points that need to be addressed, but it also highlights best practices that need to be incorporated into an operation.

1 Source: Roland Berger analysis.
2 Source: 2005 Harbour Report; weighted average based on North American production volume. 

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