Just In Time Manufacturing Is Working Overtime
This should be the best of times for Intermet Corp. With auto sales booming, the Troy (Mich.) auto-parts supplier faces red-hot demand for the iron and aluminum castings it produces for sport-utility vehicles and light trucks. But few of the company's 6,890 employees have time to celebrate. The crush of orders is so huge that Intermet is running 24 hours a day. Lines can't be shut down for needed maintenance. Stressed-out workers are quitting. Meanwhile, escalating production costs--for overtime, repairs, and premium-freight charges--cut third-quarter profits by 20%, to $7.4 million, even as revenue jumped 16%, to $225 million.
Chairman and Chief Executive John Doddridge admits he badly underestimated demand. Consequently, "we had huge, huge turnover of labor and breakdowns at plants," he says. Intermet is not the only old-line manufacturer groaning under the weight of more business than it can handle efficiently.
Despite increased sales, for example, Goodyear Tire & Rubber Co.'s third-quarter profits slipped a stunning 56%, to $97.2 million, in part because executives didn't anticipate a big spike in demand for tires. Candy maker Hershey Foods Corp. tricked itself out of Halloween sales when software upgrades to its shipping and logistics systems--designed to handle record demand--fell behind schedule. The Federal Reserve Bank of Philadelphia in October reported that its new order index--a measure of manufacturing demand--rose from 11.9 to 22.4.
This surprising demand leaves companies in a bind. They must spend to fill orders and keep customers happy, but they can't raise prices because competition won't allow it. So, unless they can keep ahead with productivity improvements, they eat the extra costs for overtime, expensive overnight shipments, melted-down assembly lines, and high worker-turnover rates. "Every supplier I talk to has to deal with extra costs just to keep up with demand," says Brett Hoselton, an auto-parts analyst with McDonald Investments Inc. in Cleveland.
Some industry observers see signs of a bigger danger: Production capacity has dwindled so much that now many companies can't keep up with demand. When manufacturers were pummeled in the 1980s by foreign competition, many shifted to production methods embraced by their overseas rivals. Workforces were cut, just-in-time inventory methods were added, and extra controls were taken on to track production. Such methods helped U.S. companies beat back foreign competition.
MELTDOWN AHEAD? Now, lean operations may have come back to haunt them. "We leaned things out so much, got rid of so many people that you just don't have the capacity anymore," says Bill Swanton, vice-president for manufacturing strategies at AMR Research Inc. in Cambridge, Mass.
And if companies don't get a breather soon, some may literally melt down their lines. Manco Inc., a unit of Henkel Group, for instance, has been running machinery to make duct tape 23 hours a day. The Avon (Ohio) company is delaying preventive maintenance until January and in the meantime is absorbing the extra overtime costs.
In the auto-parts sector, big problems with breakdowns loom next year unless lines get repaired. "If production levels stay at the same levels and companies skimp on maintenance, eventually, the machinery will break down," says Hoselton of McDonald Investments.
At many manufacturers, the No. 1 priority now is to anticipate and head off such disasters. One way is to focus on subcontractors--making sure parts suppliers can deliver on time and in full quantities. General Electric Transportation Systems, for example, faces a backlog of 470 locomotive orders at its Erie (Pa.) plant, but expects to fulfill all without major delays by using certified parts suppliers that are strictly monitored.
Some execs are also concerned about the wear and tear on their employees. Not long ago, trucking firm J.B. Hunt Transport Services Inc. of Lowell, Ark., faced a constant labor crunch: Truck drivers were in such short supply and demand was so intense that the turnover rate grew to 85%. So, says Kirk Thompson, Hunt's president and CEO, the firm started a special program to retain drivers by boosting pay 33% and making sure that drivers get back home every 14 days. "Our turnover rate is half of what it was two years ago, and the accident rate has gone down 41%," he says.
INTERNET OPTION. The risk, however, is adding new fixed costs to address a temporary problem, warns William E. Kassling, CEO and chairman of Westinghouse Air Brake Co. in Wilmerding, Pa. "Those who handle demand by brute force--by overtime and wearing down your equipment--won't last over the long term."
One solution is to use better information systems to pinpoint demand. AMR Research's Swanton says the Net can ease demand burdens by allowing customers to report exactly what they need the plant to make that day. "It's the Dell [Computer Corp.] model," he says.
That's fine, if you can get the technology installed and working properly. Hershey ordered a $110 million order-taking system with software from SAP, Manugistics Group, and Siebel Systems. But it wasn't ready in time for the critical late-summer season when Hershey produces candy for Halloween and Christmas. As a result, third-quarter net income fell 20%, to $87.6 million.
At Intermet, Doddridge says technology can go only so far. His company already produces only what is ordered each day, but it was still overwhelmed. Lean manufacturing systems "have done great things" he says, "but they allow little margin for error." When auto sales surged to 17 million--instead of the 15 million that Doddridge and others had anticipated--Intermet could not turn on a dime: Building more production capacity takes years. By then, of course, the economy may have cooled a bit.