Wednesday, November 19, 2008

Rick Waggoner's Tin Cup

In the Wall Street Journal today, GM's CEO Rick Waggoner opines that GM should be paid welfare because it has laid off 52% of its hourly workforce since 2000 and because GM has "closed the quality and productivity gaps with the imports, as confirmed by J.D. Power and Associates". As well, a poster to my blog named Jason argues that "GM suffers a loss of $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000."

If the problem is that serious, a bailout will not help. Nor is it correct that the fault is with the UAW.

I checked the JD Power ratings and the top quality ratings still go to Lexus and Toyota. The rating is ordinal rather than cardinal so it is difficult to precisely identiy the difference, but Lexus dominates the quality ratings with 5 circles across the board while Toyota has four and five circles. In contrast, GMC has three circles across the board. Why Waggoner refers to JD Powers is unclear, because the ratings seem to contradict his statement in the Wall Street Journal. Admittedly, I am not a car expert, but I'm not convinced that I would get equal quality buying a GM car. Maybe GM should have thought more about quality during the 30 years since this problem has surfaced.

Jason's and Waggoner's belief that direct costs are the source of GM's problem, and their finger pointing at the UAW are misguided. One of the basic principles of incentives, gain sharing and productivity sharing, principles that go back to the days of Frederick Winslow Taylor 100 years ago, is that higher labor costs are often accompanied by lower unit costs. More revealing than costs per vehicle are the blame that GM places on its workers and Waggoner's belief that layoffs are the key to competitiveness. This is misguided.

Unit costs can be lower while wages and benefits higher if processes are managed so that workers are more productive. Toyota has long had lifetime employment, which dramatically raises the quality of work life at the firm. This inflexibility (of not laying people off) would dramatically raise unit costs if Toyota were as poorly managed as GM. But workers at Toyota are more productive than workers at GM because the management is far superior.

Toyota pioneered lean manufacturing and applied TQM processes to it beginning in the 1950s. Part of this process, as described by Edward I. Deming in his book Out of the Crisis is that fear must be driven out of the workplace in order to achieve high quality processes. GM's approach has been to shift plants to Mexico and fire large swaths of workers. This would seem to be a strategy of driving fear into the workplace.

High costs per unit are characteristic of low quality and low productivity per worker. Far from unions being an explanation, high costs per unit suggest that management has failed in its primary task of eliminating special causes of variation and introducing continuous quality and productivity improvement into the plant.

If the UAW is GM's chief problem, then its repeated moving of plants to Mexico ought to have solved its problem. In Mexico, costs are pennies on the dollar compared to costs in the US. Yet, the Mexican strategy seems to have done little for GM.

I am curious if the statistics that Jason cites includes the cost of the Mexican plants, or if it is skewed by just focusing on the few US GM plants that remain.

As well, labor relations management to aim for high productivity and gain sharing is a fundamental responsibility of management. Many firms, including Southwest Airlines, have learned how to manage unions to obtain high productivity and quality. Why has GM been unable to do this?

I can say straight out that the business schools, like American business generally, have been utterly indifferent to human resource management and to questions of quality management and improvement of labor relations and HR. The business schools find HR issues to be boring and unimpressive. The Japanese don't bother with business schools and have much more successful businesses. They aren't so good at lying with statistics, though. Waggoner's spurious claim that cost per unit is a sign of GM's oppression by labor is a good example.

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