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ESSAYS ON ISSUES THE FEDERAL RESERVE BANK OF CHICAGO MARCH 1993 NUM BER 67 Chicago Fed Letter Lean m anufacturing: understanding a new m anufacturing system Manufacturing is currently undergoing a transition from a mass production system to a lean production system which emphasizes quality and speedy response to market conditions while utilizing technologically advanced equipment and a different organiza tion of the production process. The new manufacturing system has achieved remarkable productivity advances. The success or failure of the Midwest’s manufacturing sector in climbing on board this revolution will be central to the region’s future pros perity due to the historic role of manu facturing in shaping the region’s econ omy. Successful adaptadon to the lean manufacturing system is likely to re quire significant changes in both the management of factories and the struc ture of the economy; for example, changes in worker training, job perfor mance, public infrastructure, and per haps the location of factories and jobs. The purpose of this Chicago Fed Letter is to outline the differences between the new lean manufacturing system and the prior industry standard, the so called Fordist system of mass produc tion. Examples from the auto industry are used to illustrate the differences between the two manufacturing sys tems, as the auto industry in the past has had great influence on the way many other businesses organize their factories. Henry Ford’s influence on mass production At the end of the 19th century there were hundreds of small machine shops in Europe and America, each produc ing no more than 1,000 cars per day. Automobile manufacturing was revo lutionized when Henry Ford intro duced the use of interchangeable parts and the moving assembly line to the manufacturing process. The Ford ist system of mass production was based on two principles: the Taylorist (after Frederick Taylor) philosophy of separation of intellectual and manual work and the specialization and sepa ration of work activities into easily learned, repetitive steps. These activi ties were administered by means of a hierarchical, authoritarian style of management. According to the Ford ist system, each worker had one or two tasks, which were repeated over and over. This specialization and repeti tion of activities gave rise to high levels of output at low cost, yet the finished products were often plagued by quali ty' problems. For example, a worker is able to install many wheels and tires per hour by repeating a narrowly defined task. But in doing so, the worker may ignore any visible flaws previously made in the production process. Checking for flaws is the task of someone else—once a quality prob lem is spotted, an inspector is alerted. Ultimately, the car will be repaired before it leaves the assembly plant, but only after it has gone through the entire assembly line. Typical of Ford ist automobile assembly is a large number of vehicles at the end of the assembly line, waiting to be repaired. The Fordist system is geared to the mass production of a limited number of models and is unable to respond quickly to changes in demand. Ford ist manufacturing maximizes output of a particular product by running ma chines with as few interruptions as possible, requiring relatively large buffer stocks of inventories set up at the various steps of production. In case a quality problem occurs, for example at a piston machining opera tion, a large buffer stock provides enough correctly machined pistons to allow' for continuous operation of the manufacturing process. This ability' to replace defective parts with parts from the buffer stock reduces the incentive to investigate the source o f quality problems. In combination with the narrowly defined procedures of indi vidual workers, the practice of main taining buffer stocks disguises the interdependencies of the production process and prevents workers from seeing how their actions affect the system as a whole. Fordist manufacturing was very suc cessful at lowering the costs per vehi cle; accordingly, between 1909 and 1916, the price of a Ford Model T fell by 60 percent. By the early 1920s this form of mass production allowed Henry Ford to make 2 million identi cal Model Ts every' year at a very attrac tive price. By the mid-1950s, the Ford ist manufacturing system dominated most of the world’s manufacturing industries. Lean manufacturing In the early 1950s, Toyota discovered that a smaller number of workers, each capable of doing multiple tasks, could turn out cars using less invento ry', less investment, and committing fewer mistakes. Accordingly, under lean or just-in-time manufacturing, tasks are performed by teams in which each member can do any of the team’s tasks, including maintenance, inspec tion, and machine setup. Lean manu facturing encourages worker participa tion and discourages managerial au thoritarianism—a key difference from Fordist manufacturing. In designing the production process, lean manufacturing gives top priority' to quality control. In contrast to the Fordist approach, it regards large in ventory stocks as a source of costs and problems rather than a solution to them. With lower in-process invento ries, quality' problems of a particular assembly operation become visible faster. Thus, tool and equipment maintenance become more important. In addition, the idea of continuous improvement of operations is central to the lean manufacturing philosophy; most of these improv ements are the result of suggestions from the factory' floor. Under lean manufacturing, the worker who installs wheels and tires also maintains the equipment, cleans up the work area upon completion of other duties, and performs quality control functions. If the worker spots a flaw in the production process, he or she alerts the group leader. The man ufacturing error is then corrected instantly, either while the car is still moving on the assembly line or after the line has been stopped by the group leader. Of course, shutting down the assembly line to correct defects requires highly skilled line workers who must be able to recognize and correct defects in order to restart the assembly line quickly. In addition to increasing quality , lean manufacturing systems are able to turn out small batches of customized prod ucts on relatively short notice and at low cost. That makes it necessary to provide flexibility' and quick set up capability' in a factory', e.g. by reducing the time needed to change dies. As a result, lean manufacturing requires a different process flow design and lay out within a plant, usually occupying much less floor space. For example, Jacobs Vehicle Equipment Co., a heavy duty engine brake manufacturer in Bloomfield, Conn., reduced its floor space devoted to manufacturing from 240,000 to 120,000 square feet as a result of the introduction of lean man ufacturing techniques.1 Lean inventories plus the ability to flexibly adapt to changes in demand place great strains on the flow of mate rials. In response, Toyota pioneered the use of the “kanban” method for moving parts and materials across the factory'. Each of the containers trans porting parts downstream in the pro duction process carries a card. As the parts are used up, the card is sent back to the previous production operation where it signals the need to produce more of these parts. By maintaining a continuous, tightly controlled but de centralized flow of parts and materials in the factory', lean manufacturing allows flexible adaption of the produc tion line to changes in the demand for the final product. Manufacturing “cells” increase the flexibility' of the lean manufacturing system. A cell is a cluster of clever ma chines and robots which is able to take instructions directly from a computer aided design terminal. In a truly flexi ble factory it would be possible not only to build different versions of the same car, like a coupe or a station wag on, on the same production line, but also to build completely different cars. For example, at two o f its assembly plants Nissan installed a reconfigurable body assembly jig capable of building several different vehicles by simply reprogramming its software.2 At its engine plant in Anna, Ohio, Honda builds both automobile and motorcy cle engines on the same line. Howev er, investments in advanced technology' do not always pay off. Toyota scaled back ambitious plans to automate final assembly in a plant scheduled to open in Japan in early 1993 because the resulting improvements in quality turned out to be too costly.3 With reduced inventories, the timely supply of materials from outside suppli ers becomes crucial to the success of lean manufacturing. It is therefore no surprise to find relationships between car assemblers and suppliers to be characterized by communication and mutual commitment. These close relationships may help to explain the fact that lean manufacturing assem blers have chosen to buy directly from only a small num ber of “first tier” sup pliers. For example, Chrysler deals with 230 parts and materials suppliers in producing its new LH-platform.4 Its assembly is based on the lean manufac turing system. That compares to 456 suppliers for the 1992 version of the Chrysler New Yorker, a car introduced in 1988 and built according to the Fordist system.3 Ultimately, suppliers must also adopt lean manufacturing techniques in or der to be able to meet the demands of the auto manufacturers. In addition, rather than produce parts according to predetermined specifications, outside suppliers must increasingly conduct product research and development both on their own and in consultation with assemblers. Lean manufacturing comes to North America Expanding the geographic boundaries of lean technology' has also become a hallmark ofjapanese auto companies as the so called transplants have been remarkably successful in North Ameri ca and Europe. In 1982, Honda of America began to assemble automo biles in Marysville, Ohio. Less than 10 years later, during 1991, seven Japanese transplants produced almost 1.4 mil lion cars in the United States (see Fig ure 1). Honda can now produce cars in North America as efficiently as those made in Japan and Nissan’s Sunder land plant in England is referred to as one of the most efficient car plants in Europe.6 From Figure 1 one can see that most transplant assembly firms have chosen locations in nonmetropol itan areas in the Midwest. Further more, joint venture arrangements be tween U.S. and Japanese companies were used to facilitate the transfer of technology'. While technological changes were pioneered and successfully transplant ed byjapanese producers, European and American auto manufacturers have been adopting the new manufacturing techniques in order to effectively com pete internationally. For example, Ford has improved its assembly produc tivity' by 36% since 1980. Some Ford plants have all but erased the labor cost advantage enjoyed by the most efficient Japanese auto producers; among these is Chicago’s Taurus plant.7 Similarly, Chrysler has made strong gains in man ufacturing productivity' during the past three years. Its adoption of lean manu facturing principles becomes visible as 1. U.S. transport*ition motor vehicle assembly plants Plant location Launch date 1991 capacity H onda M arysville , OH East Liberty, OH 1982 1989 360 150 451 * N issan S m yrna, TN 1983 250 134 G M -T o yota (N U M M I) Frem ont, CA 1984 240 207 165 Com pany 1991 production ( ------ in th o u s a n d s - ...... ) M azda F la t R o c k , M l 1987 240 T o y o ta G eorgetow n, KY 1988 218 188 C h ry s le r-M its u b is h i (D ia m o n d -S ta r) N o rm a l, IL 1988 240 154 Isuzu-Fuji (S u b a ru -lsu zu A u to m o tiv e ) Lafayette, IN 1989 120 58 F ord -N issa n A vo n Lake, OH improve quality' and cooperative man agement in order to successfully har ness ideas for improving the produc tion process. Last, but not least, lean inventories render frequent timely deliveries of parts and materials crucially important for the successful application of lean manufacturing. That places great emphasis on a well designed and main tained system of public transportation infrastructure. —Thomas H. Klier xIndustry Week, S ep tem b er 18, 1989, p. 26. J a c k F eeb ler, “Q uick ch ange artist,” Auto motive Neios, N ovem ber 23, 1992, p. 16i. T ota l 1992 135 in '93 1,818 N.A. 1,357 3M a ry A n n Mastery', “S tepping back,” Automotive News, O c to b e r 26, 1992, p. 14i. * T o t a l f o r M a r y s v ille a n d E a s t L ib e rty . S O U R C E : Ward's Automotive Yearbook, 1990 a n d 1 9 9 2 . C a p a c ity m e a s u r e d as s t r a ig h t tim e a s s e m b ly c a p a c ity ; N is s a n , F o rd -N is s a n , a n d S u b a r u - ls u z u c a p a c ity in c lu d e s c a rs , tr u c k s , a n d v a n s ; a ll o t h e r c a p a c ity in c a rs . well in the development of the LFIcars, introduced in the fall of 1992. The LH-car was developed in 39 months with a technical staff of 740, as compared with the development of the K-car, which was introduced in the early 1980s and took 54 months and a technical staff of 2,000.8 GM improved its assembly productivity by 11 % since 1980; one of the most prominent ad justments has been the launch of Sat urn in 1991. Implications for the Midwest If they are to compete globally, the remainder of the region’s manufactur ing industries must follow Midwest automakers and parts suppliers in adopting the more efficient lean man ufacturing standards. A host of partic ular policy issues is crucial for the Midwest in sustaining the successful changeover to lean production in autos, and in broadening it to other manufacturing sectors. International competition and direct foreign invest ment in the U.S. were important ele ments supporting the introduction of lean manufacturing techniques into North America. The success of the Japanese transplants has demonstrated that manufacturing technology can be transferred internationally. Fostering openness to trade and investment are therefore crucial for the Midwest’s and nation’s success in an environment where advances in manufacturing technology' are being made around the world. Within individual states, efforts have been made to support the adaptation of lean manufacturing technologies. For example, Pennsylva nia instituted a “Manufacturing Inno vation Networks” program that sup ports the growth of lean manufactur ing networks by means of nine indus trial resource centers. Other pro grams, like Michigan’s Technology Centers or Ohio’s Edison Technology Centers, are more broadly targeted and serve as an intermediary' organiza tion for technolog)' development in specific industries. Successful implementation of lean manufacturing in factories also rests on the ability' to enhance skills and responsibilities of assembly line work ers within a team oriented manage m ent approach. This wall require job training programs that teach how to 4P Iatfo rm refers to th e structural un d erb o d v o f a car. For ex am ple the D odge In tre p id , Chrysler C o n co rde, an d Eagle V ision are separate m odels, yet are all LHp la tfo rm vehicles. 5W ards Automotive Yearbook, 1992, p. 53. 6The Economist, “Survey: the car industry,” O c to b e r 17, 1992, p. 6. J o s e p h B. W hite, “G M ’s lab o r cost disad v a n ta g e to F ord is placed at $4 billion a y e a r by study,” Wall StreetJournal, O cto b er 6, 1992, p. A2. 8B rad ley A . Stertz, “Im p o rtin g solutions,” W all StreetJournal, O c to b e r 1, 1992, p. A l. K arl A. Scheld, S enior Vice P resid en t an d D ire c to r o f Research; David R. A llardice, Vice P re sid e n t an d Assistant D irector o f Research; C aro ly n M cM ullen, E ditor. Chicago Fed Letter is p ublished m onthly by the R e search D ep artm en t o f the Federal Reserve B a n k o f Chicago. T h e views expressed are th e a u th o r s ’ an d are n o t necessarily those o f the F e d e ra l Reserve Bank o f Chicago o r th e Federal R eserve System. Articles may be re p rin te d if t h e source is credited an d the Research D e p a rtm e n t is provided with copies o f the r e p rin ts . Chicago Fed Letter is available w ithout charge f ro m the Public Inform ation C en ter, Federal R eserve Bank o f C hicago, P.O. Box 834, C h ica g o , Illinois, 60690, (312) 322-5111. ISSN 0895-0164 Auto production has been the center of improvements in manufacturing both for the Midwest and the nation in recent months and is likely to continue to drive manufacturing activity in the months ahead. The Board’s manufacturing index for December increased 0.5%, but only 0.1% excluding autos and trucks. The most recent production plans announced by the domestic auto industry call for a steady increase in car assemblies in the first and second quarters of 1993, rising from an average annualized rate of 5.7 million units in the fourth quarter of 1992 to 6.4 million units in the first and second quarters of 1993. While these plans depend on an accompanying improvement in sales to be sustained, they provide a solid basis for expecting continued improvement in the Midwest’s manufacturing sector. SOU RC ES: T h e Midwest M anufacturing In d ex (M M I) is a com posite index o f 15 industries, b ased o n m onthly hours w orked an d kilowatt h o u rs. IP represents the FRBB industrial p ro d u c tio n index for the U.S. m an u factu rin g sec tor. A utos and light trucks are m easu red in a n n u a liz e d physical units, using seasonal adjust m e n ts developed by the Federal Reserve Board. T h e PMA index for the U.S. is the p ro d u c tio n c o m p o n e n ts from the NPMA survey an d fo r th e M idw est is a w eighted average o f the p ro d u c tio n c o m p o n e n ts from the C hicago, D etroit, a n d M ilwaukee PMA survey, with assistance fro m B ishop Associates an d C om erica. U 1 9 - Z Z Z (Z l£ ) P680'06909 s!ou!llI ‘oSbdiio P £ 8 * 0 9 ‘O d jo u io 3 uoneuuqjui ai{q n j O O Y D IH D i O 3 X V 9 3 A 9 3 S 3 9 T Y H 3 Q 3 3 jDTPq paq oSpaiqp)