Since the invention of double-entry bookkeeping, managers have judged a company's worth by sales and profits. Now Richard Schonberger exposes the fallacies of this timeless practice. Schonberger's pathbreaking new research reveals that, from 1950 to 1995, while "financials" dipped and soared repeatedly, industrial decline and ascendancy correlated perfectly with inventory turnover -- one of two key nonfinancial indicators and a bedrock measure, along with customer satisfaction, of a company's power, strength, and value. In this immensely readable book, he captures these new metrics -- the true predictions of future success -- in 16 customer-focused principles created from self-scored reports supplied by over 100 pioneering manufacturers in nine countries. Armed with new world-class benchmark data, Schonberger redefines excellence in terms of competence, capability, and customer-focused, employee-driven, data-based performance.
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Richard J. Schonberger, a world-renowned scholar, theoretician, and guru of production and manufacturing, is the author of the best-selling Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity and World Class Manufacturing: The Lessons of Simplicity Applied. He is president of Schonberger & Associates, Inc. in Seattle, Washington, where he resides.Excerpt. © Reprinted by permission. All rights reserved.:
Chapter 1: Industrial Decline and Ascendancy
We've learned more about running a manufacturing enterprise in the eighties and nineties than in all the rest of the century. And the manufacturing renaissance has not yet run its course. In fact, it has spread to less developed countries and out of manufacturing into the service sector. The many new lessons have transformed consultants into educators, invigorated sleepy community and technical colleges, and made employee training a significant budget item.
Training wasn't important in the sixties and seventies. The existing subject matter was stale and simply did not lead clearly to success. Today's is fresh and does drive success. Widely applied new concepts have transformed industry.
MANUFACTURING PERFORMANCE: DOWN, THEN UP
Consider manufacturing performance in just the last half of this century. It takes the shape of a wide V. It declined for twenty-five years and has been rising ever since:
This twenty-five-down, twenty-five-up phenomenon is a global composite, shifting somewhat by region. For Japan the bottom of the V occurred in the mid-1960s. Then total quality control and the Toyota system kicked in, raising Japan to industrial prominence. Prestigious North American manufacturers -- Japan's natural target in view of the massive U.S. market -- knew they were in trouble by 1975. European manufacturers did not know they had a serious problem until the mid-1980s.
The wide V pattern does not show up clearly in plots of profitability, return on investment, sales, or market share. These "financials" rise and fall with the economic cycle, are influenced by state fiscal and monetary policies, and are easily skewed by protectionist trade practices and internal company manipulations. What, then, might support the wide-V contention?
Anecdotal evidence, for one thing. The research method used by Naisbitt, resulting in his book Megatrends, is to pile up stories from the press to indicate trends. In the late 1970s and early 1980s, the U.S. business press was abubble with stories about a "productivity crisis" and the "hollowing of industry." H. Thomas Johnson provides a concrete case-study example: the once-redoubtable machine-tool maker Burgmaster. It's history, Johnson notes, "falls into two phases: twenty years of excellent growth and profitability in the hands of a brilliant, customer-focused engineer who founded the company, followed by twenty years of decline into bankruptcy in the hands of finance-driven, numbers-oriented professional managers." (The company had been a leveraged buy-out victim of Kohlberg, Kravis, Roberts in the mid-1960s.)
We need not rely on case studies or news clippings. One statistic extractable from corporate annual reports tells the story with surprising accuracy: inventory turnover (cost of sales divided by on-hand inventory). It happens that when a company manages its processes poorly, wastes in the form of inventory pile up.
Exhibit 1-1 shows the pattern of declining inventory removers for several venerable manufacturers. Ford's, Emerson Electric's, Motorola's, Whirlpool's, and Eaton's descents were precipitous. Du Pont's, Eastman Kodak's, Cummins Engine's, Johnson & Johnson's, and Outboard Marine's declines were a bit less sharp but were steady. GE defied the trend somewhat, enjoying rising inventory turnover from 1951 through 1961; but then, reverting to pattern, its turns fell steeply.
IBM, however, gets the prize for longest, steepest decline. Its inventory turnover up to 1961 (the inaugural year for IBM's 360-series computer) was spectacular: in the twenties in 1958 through 1961, then down to twelve and eleven in 1962 and 1963. Exhibit 1-1 picks up IBM in 1964 when its turnover was 6.3; from there it plunges, finally bottoming out twenty-one years later at a miserable 2.1 turns.
The long period of decline would be depressing were it not for what happened next. By the early 1980s, the Toyota system had reached Western shores. U.S. manufacturers, first to try it, may have had their share of false starts. On the whole, however, the system proved to be eminently transportable. Exhibit 1-2 and the following discussion provides some of the evidence: sustained high rates of improvement, noted in the form of inventory turnovers, for numerous companies.
The star performers are Ford, Deem and Company, TRW, Eaton, PepsiCo, and Hon Industries. All have double-digit rates of improvement in inventory turns -- from 4 percent per year for TRW to 3.6 percent for Ford and 3.3 percent for Eaton. All have been improving turns nearly as long as many of the top Japanese waste cutters -- since 1975 for Ford; 1978 for Deem; 1974 for TRW, Eaton, and PepsiCo; and 1980 for Hon.
Honorable mention -- for annual turn improvements in the 2.5 to 4 percent range for at least ten years -- goes to Cummins Engine, Outboard Marine, Caterpillar, Black & Decker, General Motors, Motorola, Dover, Honeywell, Emerson Electric, and Timken. General Electric has been improving its turns at a roaring rate but only for about five years, which corresponds well with the ascendancy of GE's common stock price and overall esteem.
The U.S. is not alone in showing remarkable rates of improvement in inventory turns. The Paris-based consulting firm Proconseil has provided data from seven of its client companies plus one nonclient. The data, dating back to 1979, use sales rather than cost of sales in the numerator of the inventory turnover equation. This upwardly biases the computed turnovers, but the trends are fully valid.
Graphic results in Exhibit 1-3 are for the top four French performers among the eight. Valeo, the automotive parts manufacturer, is the superstar, which is no surprise. In a five-year period starting in about 1984, Valeo completely converted its LaSuze radiator, heater, and air-conditioning plant to cells, called zones autonome de production (ZAP). Each ZAP has its own mix of metal-forming and plastic-molding equipment, tools, product specifications, problem displays, team of ten to twelve associates (per shift), and technical support staff. Valeo's rate of improvement was good from 1979 to 1989 -- and then sharply accelerated. For the whole fifteen-year period its improvement averaged 4.6 percent per year (from 4.2 to 13.6), slightly above that of TRW. Valeo, TRW, and Dana (U.S.) and Lucas (U.K.) are in about the same kind of business -- large, multiplant auto parts manufacturers. They are the West's answer to Japan's Nippon Denso. Like Nippon Denso, their implementation of world-class manufacturing has generally been more impressive than that of the major automakers they supply.
The other three companies represented in Exhibit 1-3 have the following rates of improvement in inventory turnover: Renault (cars), an erratic 4.4 percent for thirteen years; Plastic Omnium (auto pans), 3.9 percent for fourteen years; and Legrand (electrical appliances), 4.9 percent for nine years. In the honorable mention category are Carnaud Metalbox (packaging, affiliated with Crown Cork & Seal), 3.5 percent for thirteen years; Pechiney (aluminum and packaging), 3.1 percent for ten years; Le Carbone-Lorraine (carbon applications), 2.6 percent for eleven years; and Peugeot (cars), 2.2 percent for thirteen years. While both Renault's and Peugeot's improvements extend over the same number of years, Renault's rate far exceeds Peugeot's. Of all the companies whose inventory trend data I've looked at, Peugeot is the only one that experienced a recent several-year decline. Its turns rose steadily from 4.1 in 1979 to a peak of 7.9 in 1988 and then fell for the next five years to 5.8 in 1992 and 5.9 in 1993. Over the last ten years Renault has become a respected, lean, financially sound automaker; Peugeot has survived but not thrived.
Obstacles and Openings
Some companies are doing well despite unimpressive inventory turnover trends -- Coca Cola, for example. (Coke is a beverage company. Stellar inventory performer PepsiCo is in a different business, since two-thirds of its sales come from snack food and restaurants.) Companies that are in the midst of global expansion may have to deal with uncertain markets, perverse laws and tax codes, corrupt officials, and lack of infrastructure (good highways, point-of-sale data capture, electronic data interchange, and the like). These factors add up to marketing mistakes, logistics difficulties -- and heaps of inventory here and there. In such consumer-goods companies' own developed markets, no excuse.
Other highly successful firms with poor inventory trends have a double difficulty: highly volatile businesses serving those same uncertain world markets. Motorola, Texas Instruments, Intel, and Hewlett-Packard fit the description. This does not necessarily mean that volatile, multinational manufacturers are stuck with static inventory performance. H-P mounted an inventory reduction crusade in 1994 that is off to a good start.
What made the ten star and fourteen honorable-mention companies (U.S. and French) so smart? Westerners were unaware of the Toyota system until about 1980, and it takes a while for knowledge to translate into action. Perhaps a more pertinent question is, why did it take so long for so many companies to see the wastes in front of their eyes? The top ten evidently did see the wastes -- some of them well before they learned about the Japanese success story. Notably, however, each considerably accelerated its rate of improvement after about 1985 or 1986 in the United States and about 1988 or 1989 in France. By then, it was no longer the Toyota system. It was manufacturing excellence, or world-class manufacturing, or lean production.
These data are only for top-performing publicly held companies. Their annual reports, and therefore inventory turnover data -- are open to scrutiny. Privately held companies, however, seem to be at least as adept as public ones in implementing a world-class agenda. This conclusion is based on data from just a few private companies that were willing to assist in this research. For example, Charles Machine Company, maker of the Ditch Witch line of digging equipment, improved its turns by over 3 percent yearly in a recent decade. Haworth, a maker of office-equipment, improved even more. And Steelcase, the largest office equipment maker, improved its inventory turns by about 5.9 percent per year. Haworth and Steelcase were not under pressure to compete with a foreign juggernaut. Rather, these improvements took place in a golden decade for the office-equipment industry; each of the majors increased sales at spectacular rates through the 1980s.
We have seen some eye-opening data on inventory trends and noted the apparent connection between inventory turns and long-range competitiveness. Perhaps, therefore, trend in inventory turnover is a fairly reliable predictor of future success for a company or business unit. Whatever merit that conclusion has, still other indicators beg our attention.
One of the most important, if only it could be measured reliably, is customer satisfaction. During its dominating years, IBM was renowned for its dogged pursuit of customer-satisfaction information. Its excellence in customer service was largely reactive, but in the 1950s and 1960s a well-oiled reactive approach to customer service was world class.
Today's standards are higher. We recognize the need to give equal or greater weight to customers' present and future needs. Since those needs can change quickly and with little notice, speed and flexibility have become mainstream criteria of customer satisfaction. Furthermore, total quality calls for placing more weight on prevention of difficulties and less on recovery when things go wrong. In other words, by today's standards IBM's hand-holding approach was overly narrow.
Broad-Based Customer Data
Today's broadened approach may be found in criteria for prominent quality awards. The Malcolm Baldrige Quality Award in the United States designates 250 of 1,000 possible points for "customer focus and satisfaction." (IBM's business unit in Rochester, Minnesota, was a Baldrige winner in 1990). The European Quality Award puts 20 percent weight on customer satisfaction.
Of all the Baldrige honorees the company with the most comprehensive customer intelligence gathering system may be 1991 winner Solectron, Inc. Solectron specializes in assembly of printed circuit boards and subsystems for makers of computers and other electronic products. Many of its customers are well-known, for example, Hewlett-Packard, AT&T, and IBM. Solectron's customer satisfaction index (CSI) aims at grading the company's performance on five service criteria for every customer every week. According to Les Nishimura, general manager of Solectron Washington (one of the company's newer business units), "It isn't easy to get that information every week. Sometimes we have to almost pry the information out of the customer." Xerox collects customer satisfaction monthly. A few of the participants in a research project discussed in the next chapter were proud of surveying their customers yearly. Most companies don't do it at all.
Solectron's CSI Feedback Form is shown in Exhibit 1-4. Salespeople administer the CSI and are measured on their rates of completed forms; an 85 percent completion rate is typical. Most CSI responses are conveyed in written form -- by fax or E-mail -- although Solectron will accept oral responses.
The CSI does not fully reveal the extent to which the system gets at customers' real and changing needs. Both Solectron and most of its customers intend their commitments to extend from product development partnerships all the way through to funds transfer and after-delivery postmortems. Thus, any low CSI scores can trigger formation of improvement teams, often with customer representatives. Solectron's target satisfaction score is 95 percent. Thus, if a customer grades any of the five criteria (quality, delivery, communication, service, and overall) as low as C (zero), an overall score of 95 percent is impossible. This triggers corrective action and a response to the customer.
At the same time, Solectron gets its people into two kinds of teams, both customer-focused. Project-planning teams work with customers to plan, schedule, and set forth specifications and response times. Total-quality-control teams meet weekly to monitor and evaluate production. Walt Wilson, Solectron's president, says, "The teams here are...fiercely loyal to [customers]....Ask anyone what team they're on, and they'll tell you. They'll say they work for Intel or IBM or H-P and that Solectron just signs the checks. That's customer focus at its best."
Nishimura has a mental model. It is a four-by-four matrix with customer needs on the x-axis and Solectron's capabilities on the y-axis. He observed that his company's challenge, not always achieved, is to be in the fourth cell (see Exhibit 1-5): all customer needs covered fully by Solectron capabilities. However, Nishimura continued, there is an all-important z-axis: time. Customer needs change, and the changes must be captured and employed to alter Solectron's processes, products, and systems. No matter how good we are, he noted, we need to be quick to change.
Few manufacturers plumb consumer satisfaction as deeply as Solectron does. However, help is on the way. Claes Fornell and his colleagues at the National Quality Resea
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