Saturday, June 20, 2009

G M Bankruptcy

WASHINGTON - JUNE 06:  General Motors CEO Rick...Image by Getty Images via Daylife

Well, General Motors has achieved another milestone on its way back to the future. The black hole of arrogance, greed and cowardice has pulled the once iconic American company into the bankruptcy abyss. As a former Chevrolet dealership general and executive manager, I have some insight based on that experience. The future of GM is hard to prognosticate. However, if history is any indicator, this company has little chance at long-term viability if they do not seize this opportunity and start over with a clean sheet of paper.

During WW II, a gentleman named W Edward Deming Ph. D., helped American manufactures transition from peacetime production of their products to a wartime footing. Production of the material and equipment needed to fight the war was critical and Dr Deming’s contribution helped the transition. It is a well-known and documented story that prominently features Rosie the Riveter but not Dr. Deming. In fact, though he was instrumental in transforming the industrial production capability during the war and instituted quality control concepts that ensured the armed services got high quality material with which to wage the war, he was little known in the US.

After the war, the demand for American products increased dramatically. Efforts at quality control were sacrificed on the alter of higher volume and profit. Managerial focus drifted toward short term results as opposed to long-term viability. With the stock price driving everything, poor quality control and management was inevitable. Then Dr Deming was called to Japan.

He went over in 1947 to assist in preparing for the Japanese census that was to take place in 1951. The Japanese Union of Scientist and Engineers invited him to teach them statistical process control and concepts of quality. He willingly complied and in the summer of 1950 lectured extensively on these subjects. His message was simple. Constant quality improvement will reduce cost, improve productivity and market share. The Japanese took his message to heart and commenced to create a huge demand for their products over the following decades. American manufacturers were not listening, including the big three automakers.

There are two stories that exemplify our refusal to embrace quality. One is about a picture I saw in a book about Deming in the early seventies when I first started selling vehicles. The title and author escape me but the picture is indelibly imprinted in my memory. In the picture, Deming is holding the piston of a Mitsubishi truck in one hand and the piston of an American truck in the other. The caption quotes his saying that one is a finely crafted piece of precision steel and the other looks like the jawbone of an ass.

The other story is about Ford Motor Company’s solicitation of Dr Deming’s help. Finally, in 1981 while their sales were falling precipitously they turned to him for assistance. The company lost some three billion dollars between 1979 and 1982. By 1986, their profits had exceeded General Motors and the change in the management culture and new emphasis on quality was attributed to Dr Deming.
He stressed that better management techniques along with quality improvement were necessary to restore long-term viability. His philosophy and teachings are widely available if not widely accepted in this country. I recommend them to GM’s new board of directors, the auto advisory council appointed by President Obama and the management of GM.

This final restructuring of all the restructurings GM has been through will be extremely painful for a myriad of people. The terminated employees of both GM and its affected vendors and their family’s will pay a heavy price. Stockholders and bondholders stand to lose their investments. Dealers and their employees, vendors and the communities they serve will suffer as much as anyone will. Those needing assistance through this transition will be turning to state and local agencies that are struggling with increased demand for their services and reduced revenues.

Government intervention is a seemingly two-edged sword. If it works all the naysayers will be denying they ever thought it would fail. If it does not work, the current recession will look like a kindergarten tea party compared to the catastrophic financial consequences to follow. As it is, interest rates are likely to increase at least for the short term based on investor caution created by the way the bondholders were placed behind the unions in this case. Changing the rules midstream does nothing for investor confidence and until the results are in, they will be cautious.

I hope that the management will take advantage of this opportunity to completely reinvent GM in a progressive and well thought out manner. There are numerous product strategies, distribution-channeling strategies, marketing strategies and long-term opportunities created by the negation of unbearable legacy cost. If they come out of this with the same old mindset, they are doomed to failure.

The old GM failed because it was poorly managed for a long time. The new GM needs to learn from that history and embrace a management style that values long-term gain over short-term stock performance. They need to make partners of their employees, vendors and potential customers. They need to embrace quality as never before. They can do it. We want them to do it. No one in his or her right mind wants this chance to recreate GM to fail. We will be watching and hoping that the management team just does it.

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