Q&A: Pushing Carmakers to Rev Up Factories

Ronald Harbour explains why efficiency equals quality in auto manufacturing

Ronald E. Harbour is the consummate "factory rat." Every year, for the past two decades, the president of manufacturing consultants Harbour & Associates has visited as many as 60 auto plants. The company's annual "Harbour Report" is the bible of auto manufacturing efficiency. Each June, car executives anxiously await--and sometimes dread--the new report, revealing how their factories stack up to rivals.

Simply put, the report measures the number of hours of labor in assembly, stamping, and engine and transmission work it takes a company to build a car or truck. Nissan Motor (NSANY ) has topped the list for the past seven years, closely followed by Toyota Motor (TM ) and Honda Motor (HMC ). But the ranking isn't the only feature that gets attention. Harbour's report of steady improvement at former problem child General Motors Corp. (GM ) proved a harbinger of the auto giant's comeback. And its finding of stagnation at longtime Big Three productivity leader Ford Motor Co. (F ) was an early warning of that company's stumbles.

For the past three years, Ron Harbour, 45, has headed the company, which was founded in 1980 by his father, former Chrysler (DCX ) manufacturing exec Jim Harbour. The company now advises manufacturers in other industries, from pharmaceuticals to paper. But the auto industry is where Harbour has made its mark. Its independent results are closely tracked by union leaders worried about jobs, politicians concerned about U.S. competitiveness, economists and academics monitoring productivity trends, and Wall Street analysts looking for clues to future profitability. Harbour chatted with BusinessWeek's Detroit Bureau Chief Kathleen Kerwin about the quest for efficiency and its consequences.

Q: How do the Japanese make money in small cars, when Detroit can't?

A: They've been able to command higher prices because of their reputation for quality and the features they offer. Companies that are really succeeding now--Toyota, Honda, Nissan--are the ones that have learned to drive down the investment in new product: all the equipment, tools, labor, everything that you need to spend to bring a car to market.

Let's say you took the best company in the world. It might be spending $400 or $500 less for labor because its plants are productive, or $200 to $300 less per warranty on every car because its quality is better, and perhaps another $400 or $500 less because its capital investment is less. Then it's spending $500 or $1,000 less on incentives. Add it up, and you come up with $1,000 or $1,500 [savings per car].

Q: So where does that money go?

A: Some of it goes into the profit of your company, right? Some of it you say, "O.K., let's say I spend $50 more on a great instrument panel, because that's something that every time you get in the car you see, feel, and touch. If I make it look really rich and outstanding, it may transform your whole image of the quality of that vehicle." So maybe you spend a couple of hundred dollars of that $1,500 or so advantage. Now it's a vehicle everybody wants because of its features, its materials, its perceived quality.

See how it just feeds on itself? That's a car that you don't have to throw incentives on. You can sell more of them and your investment per vehicle goes down even more, because you've got more to spread it over. It's a freight train no one can stop.

Q: The first wave of transplants put a lot of pressure on U.S. carmakers to improve efficiency and quality. Now we're seeing another building boom: Toyota in Indiana, Honda in Alabama, and Nissan in Mississippi--plus expansion at BMW and Mercedes here. Where will this second wave have an impact?

A: It's going to be in trucks, which are now half the market, and that's what these new plants are targeted at. Foreign brands get about 23% of truck sales, compared with their 49% share in cars. But if their market share in trucks follows the same curve as car share, it's a pretty dismal picture for Detroit. The only thing holding [foreign makers] back is capacity.

Q: You say improving productivity and quality are inextricably linked. Why?

A: The plants that have the highest quality are also the ones that are the most productive. That's because a good manufacturing process means guaranteeing quality at each point. You need a mechanism that says, "If I put this together wrong, or if I forgot something in the process, it stops the line." That will make me fix it right there. And if you do that, you don't need all the repair, rework, and inspection people at the end of every assembly line. If you take away all those extra people, guess what happens to labor productivity? It gets a lot better.

Q: Can you give me an example?

A: Here's one from a U.S. Toyota plant: They kept finding a defect at the end of the line and in their dealerships--radiator hoses were leaking. When they asked the team in the plant to help fix it, they found the problem was the clamp on the radiator hose. You put the clamp over the hose, then it has got a pin on the side that you have to pull out. That tightens it down.

Well, sometimes the operator would forget to pull the pin, so it was loose and the hose would leak. So they put this little device next to the line that has a funnel in it with an electric eye. You take the pin out, throw it in the funnel. As soon as it passes the electric eye, you know you did your job and the line continues to run. If a pin doesn't fall in there every 60 seconds, the device senses that you must've forgotten to pull it out and it stops the line.

Q: So what was the result?

A: By getting it perfect on the line, they just completely eliminated a warranty problem at the dealerships. They reduced customer dissatisfaction. Because when that hose leaked, weren't you pissed off? It made a mess on your garage floor, and then you had to get the car towed back to the dealer.

And it was something so simple and cheap--just American ingenuity. The people who came up with that idea work on the line--regular, hourly people--Americans no different than anybody working in a GM or a Ford or a Chrysler plant, once you've taught them the importance of error-proofing the process. Now take that one example and multiply it by hundreds done throughout the line. Guess where the quality of your product goes? Guess where productivity goes when you don't need all those fixers? That's why productivity and quality go together.

Q: In what other areas do the most efficient car companies shine?

A: One of the biggest issues is launching new vehicles. The big difference between the best and the worst is that the best companies launch new vehicles in three or four weeks. Other companies are still taking three or four months.

Q: Even some companies that knew how to launch vehicles well seem to have forgotten how....

A: Ford always had good launches, but they've tripped and fallen on a couple of new cars in the past year or two. The suppliers say it was problems with Ford's design. And then the company will say, "Well, it was bad execution of the designs." I think both the manufacturers and the suppliers are to blame on some of them.

Q: So what does make for a smooth launch?

A: Companies that are good at launches have more evolutionary than revolutionary designs. When a company says it designed this new vehicle starting from a clean sheet of paper, be suspicious, right off the bat. Because I'll guarantee you it's going to have problems. You've got a new design, new engineering, all new components, new workforce, new plant, new suppliers, and on and on. It's going to fail.

Whereas the companies that had the most successful launches try to limit what we call the number of "news." They might have a new body, but they wait to do a new engine two years later. They carry over some of the components, and the manufacturing process. Those who do that have a lot less turmoil, so they're higher-quality, faster launches.

Companies starting to improve now, like GM, see the wisdom in this. They ask, "How can I `commonize' manufacturing processes?" Quietly, [GM Chairman] Jack Smith has pushed that for nine years: Let's operate like one big company, not like six different small companies--which is in a sense what they did.

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