Sunday, May 31, 2015

Sunday Long Read: The Productivity Myth

This week's long read is from the Virginia Quarterly Review on the real effects of the relentless push for more and more productivity in the corporate world.  The city of Sparta, Tennessee played by all the rules and workers turned a struggling factory into one of the most productive manufacturing plants in North America. Lisa Norris and Dave Uhrik were on the management team that put Sparta on the map and the plant was held up as a model of American "reshoring" of jobs.

And then they watched as all the jobs were shipped to Mexico anyway.

The humming Sparta plant had it all. For one thing, the town is within a day’s haul of most US markets—​from New York and Chicago to Atlanta, St. Louis, and Dallas. Tennessee has decent, well-​maintained highways. The plant was union—​a new experience for Norris—​but this IBEW local was steely-​eyed about keeping and creating jobs; it had, for example, accepted a two-​tier pay scale and surrendered contract protections in order to attract a highly automated production line from New Jersey. The press for that new line, known as a Bliss, was nearly three stories high (so big it had to be anchored twenty feet underground) and could stamp out eight or ten massive commercial fluorescent fixtures every minute. It attracted lucrative contracts from hospitals, prisons, grocery-​store chains, and Walmart super​centers. Norris called it “a monument.” Brent Hall, the union rep, described it as a beating heart. “Every time that press rolled over,” he said, “the whole building would shake.”

Other production lines at the plant could push out smaller, custom products tailored to the needs of a specific buyer. A whole swath of the maintenance crew had been sent, on the plant’s dime, to get certified as industrial electricians and welders and millwrights so that they could retool machines on the fly, switching production from one job to the next in a matter of minutes. “Anything they wanted, we’d build it for them,” Scott Vincent, one veteran electrician told me. With Uhrik and Norris at the helm, the plant started buying steel and other inventory on consignment, and trimmed turnaround times to the point that its invoices would be getting paid before the bills on raw materials were even due. Tasked with cutting costs by $4 million, the management team tapped employees to identify inefficiencies in the assembly process, worked with suppliers to reduce components costs, and drastically reduced the number of products with defects. The plant boosted productivity by 7 percent and kept labor costs low, at around 4 percent. Still, thanks to the union, most workers were earning $13 to $15 an hour—​“real decent money around here,” as one maintenance worker told me, especially for a workforce where many had never graduated high school—​with two to three weeks of vacation and a blue-​chip health plan. Employees stuck around for years, knew their jobs inside and out, and had a rare esprit de corps. When they faced tight deadlines, fabricators would volunteer to come in as early as 4 or 5 a.m. so they could get a head start before the paint crew arrived at six. In December 2009 the Sparta facility was named by Industry​Week as a Best Plant of the year, one of the top ten in North America. In the months that followed, it won Best Plant within Philips’s global lighting division as well as the firm’s global “Lean Challenge.” That summer, plant managers invited state officials and legislators to Sparta to celebrate.

Then, one morning in November 2010, a Philips executive no one recognized drove up and walked into the plant, accompanied by a security guard wearing sunglasses and a sidearm. He summoned all the employees back to the shipping department and abruptly announced that the plant would be shut down. Though the workers didn’t know it at the time, most of their jobs would be offshored to Monterrey, Mexico. The two of them then walked out the door and drove off. “It was a shock, I’ll tell you,” Ricky Lack said more than two years later. Still brawny in his late fifties, he’d hired on at the plant in 1977, when he was nineteen years old. “My dad worked there,” he said. “Half the plant’s mom or dad or brother worked there. We still don’t know why they left.”

They left because they thought they would make moeny making light fixtures in Mexico and selling them to Americans.  Then a funny thing happened: we stopped having good jobs where Americans could afford to buy things.

Do read the whole thing.


RepubAnon said...

It's even worse than that - had Phillips run the numbers, they'd have found that keeping the Sparta plant operating was more cost-effective than moving it to Mexico. However, Phillip's management's perception was that shareholders think that offshoring = good management, so they offshore things based on impressing the editorial page of the Wall Street Journal rather than on the underlying numbers (from the article, emphasis added):

...But Lisa Norris’s take seemed the most persuasive: Philips’s model is to concentrate production, and so the particulars of how well a given plant performs—​even if it’s Philips’s best-​performing plant worldwide—​don’t matter. “There’s a momentum that gets in place when people say we’re going to close these plants, and it becomes a point of weakness for anyone to stand up and say, ‘No,’” she told me one evening. “No one feels strong enough to do that. Because they feel like it’s showing some sort of human weakness, that they’re making an emotional decision—​when in fact, there’s a business decision there. And so it gains a sort of momentum in an emperor-has-no-clothes sort of way. And so people are compelled to do the wrong things. And then you start adding incentives based on the execution of those plans and now you’ve got everybody marching straight off a cliff.”

Team Sparta, as they dubbed themselves, did the math, calculating the full cost to Philips of moving production to Mexico, and concluded that Philips would be dramatically increasing customer lead times, which would likely reduce its market share. The team also projected that Philips would have to rely more on distribution centers, raising warehousing costs; that the firm would be shipping fixtures longer distances on worse roads, meaning higher transportation costs and more breakage; that it would be using less automation and end up with more defects; not to mention the estimated $30 million it would cost to excavate those massive machines and rebuild them in Monterrey. Factoring in those costs, Team Sparta was convinced that the local plant could sell fixtures to Philips for less than it would cost Philips to make them in Mexico and still clear at least $1 million in annual profits.

One sees this more and more in industry, as companies get larger and larger, top management gets less connected to the business' underlying reality. Thus, when top management attends a slick seminar on some new fad - they don't see why the fad is really a silly idea. Opposing the fad means losing one's job, so the fad gets implemented. After the business loses enough money, the old fad is replaced by a new fad.

Horace Boothroyd III said...

I heartily endorse this comment.

People react oddly when they see a Social Democrat driving a Lexus while reading the Harvard Business Review, but it's a damned fine car that will last me another twenty years and those eggheads across the Charles River are just as smart as the Faculty of Arts and Science that is the core of University (although I must put in the obligatory slap at the chuckleheads attempting to do public health in Boston - that gang of clueless nimrods is an embarrassment to the entire operation). I don't have the index handy, but this was before Bush cratered the economy so it must have been 2006 or 2007 when this particular case study came out.

The premise was, you are a newly appointed CEO and you have outsourced your operations to the lowest bidder. Now, having done all the obvious first steps like repudiating pension obligations and slashing worker health care subsidies, what are your thoughts for squeezing additional value from the company?

Even then, when those of us who were paying attention were concerned about the inevitable popping of the housing bubble and the deteriorating situation in Iraq even though neither had yet turned outright disastrous, this scenario screamed MANAGEMENT CULTURE IS DEFECTIVE. Yet, a great many rich people not only found it unobjectionable but swam in those kinds of destructive preconceived notions like a fish swims in water.

Or a Maoist guerrilla moves through the peasantry. Personally I hope that we can iron out our difficulties without resorting to violence, but as we are all aware the Kossacks and the FireBaggers are making common cause with the TeaBaggers - who are known for their affinity for 2nd Amendment Solutions. Just in case.

Related Posts with Thumbnails