In the News: Overproduction in Detroit

On page one of the October 29th, 2004 Wall Street Journal there was an article titles “Big Dealers Pressure Car Makers To Cut Production: Higher Costs, Thinner Margins Are Forcing Major Sellers to Keep their Inventories Lean”. It seems the Detroit automakers’ strategy of offering large rebates and no interest loans of 60 and 72 months are no longer enough to keep overproduction going at the factories.
In Lean thinking and according to the Toyota Production System there are 7 types of waste that erode profit and reduce operational performance. They are:
1. Overproduction
2. Transportation (or Conveyance)
3. Motion
4. Waiting
5. Processing
6. Inventory
7. Defects (or Correction)
The greatest waste of them all is Overproduction. By overproducing you create a false demand and use resources and cash too early or on the wrong things (products which will not sell). While it may have seemed like a good idea at the time to keep the machines and factories running these individual efficiencies are always outweighed by large inefficiencies of the whole system.
Just as in the WSJ article, overproduction leads to excess inventory, ultimately to a downward spiral of pricing, and unhappy customers (dealers) demanding cuts so their lots are not overcrowded. This then forces car makers to reduce production or shutter factories until inventories on the dealer lots are reduced. This is disruptive to auto workers and their families, creating a further damper on demand.
Why do companies overproduce? There are many reasons, and typically it is because a decision has been made (incorrectly) that overproducing is the lesser of two evils. In the case of Detroit, the choice is between reducing production and at factories and making workers go home, or building cars that do not have customer demand. Which is worse? It is a difficult question affecting the lives of many people. Too often the decision made is a short term band-aid that does not address the root cause of the waste..
What is clear is that there is a better way. Toyota builds cars to order in their domestic market. You can order a custom vehicle and receive it in 3 days in Japan. You don’t have to pick from what’s there on the lot (what the car makers “push” on the market). Instead, you determine the exact specifications you want and have it custom built (customer “pull”).
In order to do this, Toyota has refined its production system over many years through kaizen. Such a redesign is needed for Detroit in order for production to be responsive to customer needs and the needs of their workers and their families for a stable income.