Ford The Right Way Forward

By Irwin Speizer

Mar. 24, 2006

I n the job-hemorrhaging world of Detroit, where bankruptcy court represents a tantalizing way to salvage a sinking enterprise, Ford Motor Co. stands out. Unlike GM, which analysts suggest will have a tough time avoiding bankruptcy protection, or auto parts maker Delphi, which is already there, Ford continues producing profits, and the company insists that it can recover its financial footing without the help of a bankruptcy judge.

    Ford’s bid to rebuild before it goes broke depends on the success of an ambitious people management restructuring plan for its U.S. operations, the one part of its global business that continues to lose money and threatens to drag down the entire corporation. Its Way Forward plan will attempt to transform the company’s workforce from a culture of bureaucrats monitoring clock watchers to a collaborative team focused on making customers happy. It seeks to restore North America to profitability by 2008.

    “We are going to be a big company that thinks like a small company,” Ford chairman and CEO Bill Ford announced in January.

    The plan is heavy on job cuts and factory shutdowns (up to 30,000 North American factory jobs to be eliminated by 2012). But it also proposes a dramatic shift to a less bureaucratic and more responsive and flexible management style with the ability to produce vehicles that will lure customers away from hot Japanese models. The tough part of the Way Forward plan is the second phase, which requires a major overhaul of how Ford trains, compensates, manages and motivates its workers.

    The company plans to employ a number of methods to accomplish its goal. As explained by top Ford executives, the firm will expand the use of pay incentives to reward initiative. It will cut back on layers of management to create a flatter organization that gives workers more direct access to top bosses. It will use various lean manufacturing methods designed to ensure that workers are more productive and less wasteful. And it will encourage more employee input in company decisions and innovations.

    The automaker already has set up a Web-based tip hot line where workers can offer creative suggestions on improving the company’s methods or products. Workers have bombarded the hot line with more than 2,500 suggestions since it was launched November 28. It also has distributed a brochure to employees on innovation that includes a suggestion card. So far, workers have sent in about 2,100 suggestions.

    The job cuts at Ford won’t affect only blue-collar workers. In addition to its plant reductions, the company plans to eliminate 12 percent of its officers and top managers.

    As outlined by Bill Ford, the goal of the program is to cut through layers of management hierarchy that turned what was once a spry company steeped in innovation into a creaky bureaucratic behemoth unable to respond quickly to changing markets or consumer demands.

“We can’t solve this problem alone,
not when health care costs nationally are rising 8 percent a year and the system is full of disincentives to
control costs. This problem will only be solved with business and government working closely together.”
–CEO Bill Ford

    “Here’s what we will not stand for: incremental change, avoiding risk, thinking short term, blocking innovation, tying our people’s hands, defending procedures that don’t make sense and selling what we have instead of what the customer wants,” Ford declared in his January announcement. “In short, we will not stand for business as usual.”

Short on particulars
For the moment, the company has offered few details of exactly how it will carry out the Way Forward plan beyond the job cuts and plant closings. For example, although it has launched the idea bank, it has not yet created a budget and staff to manage and implement the ideas that are generated.

    While analysts and consultants applauded the downsizing as a necessary and helpful move, they caution that the ultimate success of Way Forward and Ford itself depends on whether the company can truly shake up the way it manages and operates. The skeptics are plentiful, with many complaining that, with the exception of the plant closings and layoffs, Ford offered little beyond slogans in its explanation of how it will transform its operations.

    “The rhetoric at Ford is at an all-time level,” says Pete Hastings, an auto analyst at Morgan Keegan in Memphis, Tennessee. “Now they must make the organization understand the urgency. They have to change into one of the world’s best rather than an also-ran.”

    The problem for Ford is that its U.S. operations are dragging down a global corporation that makes money in other businesses and in other parts of the world. The Ford operation also includes other nameplates: Volvo, Mazda, Jaguar, Land Rover. Operations are profitable in Europe, South America and Asia, as is Ford Motor Credit Co. But the North American auto business continues to struggle with overproduction of vehicles that customers bypass in favor of those coming out of Toyota and other Japanese automakers.

    While Ford is shuttering plants, Toyota is adding capacity in the U.S., with a new $850 million truck plant scheduled to open in San Antonio this year that will employ 2,000. In effect, a Detroit automotive legend is in full retreat before a foreign company that is doing a booming business manufacturing vehicles on U.S. soil with U.S. workers.

    The problem for Ford and the rest of Detroit is that foreign companies like Toyota produce high-quality vehicles that consumers want–and Toyota spends less time and money building them. One simple statistic tells the story. Toyota leads all North American auto and truck makers in efficiency, taking 27.9 hours to make a vehicle in the U.S. in 2004, according to the Harbour Report, an industry analysis. That’s an 8 percent improvement from 1998. In last place: Ford, which takes 36.98 hours, almost exactly what it took in 1998.

    “Why is it so different at Toyota?” asks Allan Wilson, CEO of Factory Logic of Austin, Texas, a manufacturing consultant to the automotive industry. “How can a Japanese plant in North America behave so differently? There can only be one answer: The management team behaves differently, and the workforce accepts that. The problem does not lie with American workers. It’s the way those workers are managed.”

Union challenges
    Changing Ford’s managers and its workforce will take more than a simple edict. Workers are covered by detailed United Auto Workers contracts that include not just pay and benefit levels but work rules that govern a broad array of actions on the shop floor. Many of the changes Bill Ford envisions require contract negotiations with a union that has already responded icily to the deep job cuts.

    As an example of how those work rules can hamper change, Hastings tells the tale of a tire supplier at a Ford plant. The facility was set up to receive tires in an awkward place and manner, which caused delays and added work for both the plant and the vendor. The vendor suggested changes to the production line that would speed things up and make the job easier for both the vendor and Ford. It would also eliminate some jobs at the plant.

“We try to do what is best for Ford, not what is best for Toyota.”
–Jon Pepper, Ford

    “The line manager said it was a nonstarter because the union would never accept it,” Hastings says. “Even though it meant several hundred thousand dollars in savings on just that one shift, he dismissed it out of hand because of work rules and the threat to union jobs.”

    It’s unclear how Ford would handle that same situation under the Way Forward plan. The workplace initiatives are still under development, and the company won’t comment on specifics, says Marcey Evans, human resources and labor affairs spokesperson for Ford. “It is premature for us to get into any additional detail,” she says.

    That leaves big questions about how various initiatives would work, how much they would cost and what the expected gains would be. For example, the company says it will add a section in its employee evaluations on innovation, but it has not said exactly how it will rate a line worker in this area. The firm also says it will devise a way for employees dissatisfied with the response of an immediate boss to a suggestion or complaint to appeal directly to higher-ups.

    But that raises questions: Why can’t an employee just contact a manager higher up the chain now? Would this new appeal system supplant the grievance procedure in union contracts? And if Ford needs to create a process to establish some process to connect higher-ups and workers, doesn’t that simply compound the bureaucracy?

    Hammering out these details could be slow going if the unions balk. And no one expects unions facing thousands of job cuts to quietly accept an overhaul of management-worker relations.

“I’d love to see them sit down with the union, at the highest levels, and totally redefine their relationship,” says John Shook, a consultant and program director in the industrial engineering department at the University of Michigan. “But many others have had that on their wish list for a long time, including many Ford executives.”

Thinning management
    But while Ford faces hurdles in revising how it relates to line workers, it can certainly begin attacking its management ranks. Again, one place to look for ideas might be Toyota, which has long championed the idea of flat management, which puts few managers between workers and the top boss. Executive cafeterias are discouraged; close contact between managers and workers is encouraged. The result is that when a shop floor problem arises or when a worker sees a simpler and faster way to get a job done, the decision to change comes swiftly.

    The system isn’t flawless, of course. Japanese companies have encountered difficulty as they try to set up shop in the South and find and train workers capable of not only carrying out line tasks but at the same time also thinking independently and critically. Still, Japanese companies have had so much success with their methods that other companies have adopted similar systems.

    Consultant Wilson cites Johnson Controls, a highly successful automotive parts supplier. When President Bush rolled out his push for energy efficiency through innovation, one of his first stops was at Milwaukee-based Johnson Controls. “How many tiers of management are there from the factory worker on floor to the CEO of Johnson Controls? Four,” Wilson says. “It’s probably close to four at Toyota. In GM or Ford, it is probably 12. There are managers of this, directors of that, functional heads. Everything is tiers of management. What does it do? It creates costs. It creates bureaucracy. It takes an arm and a leg to get anything done.”

    Does Ford really have a dozen layers of management now between the shop floor and the CEO’s office? Labor affairs spokesperson Evans couldn’t come up with a number, saying Ford is too complex a business to be reduced to that sort of metric. But it’s safe to say that Ford is convinced there are too many chiefs in its domestic car business.

    Still, Ford has instituted a number of innovative and efficient methods of its own, and many of its plants now operate with a much higher level of efficiency than they did a decade ago. But in the critical workforce management field, Ford clearly has a long way to go to match Toyota. “Ford has incorporated virtually none of Toyota’s management, deployment, training and compensation practices,” Shook says.

    The response from Ford is that it has no intention of mimicking Toyota even as it experiments with similar methods. “We try to do what is best for Ford, not what is best for Toyota,” Ford spokesman Jon Pepper says. “Toyota has its own way of doing things.”

Stopping the slide
Whether Ford adapts Toyota’s methods or devises its own, it ultimately must come up with a better way of managing its North American workforce and business. The strategies used until now clearly won’t carry the company forward. A glance at Ford’s situation reveals why. In 1990, Ford had about 24 percent of the North American market, GM had about 36 percent and Toyota about 7 percent. Toyota’s share has more than doubled since then at the expense of Detroit. Power Information Network, a division of J.D. Power and Associates, reports that sales during the first two weeks of February gave GM a 21.8 percent market share, Toyota 17.1 percent and Ford 15.2 percent.

    Ford today produces more cars than it can sell, with nearly 25 percent more domestic capacity than customers. Toyota and other foreign makers are building new plants in North America. With no sign that those lost customers are coming back any time soon, Ford has decided to get rid of the extra capacity. One of the main goals of the Way Forward plan is to match Ford’s production capacity with anticipated demand for its vehicles. By shuttering as many as 14 facilities, Ford will end up producing 1.2 million fewer vehicles per year–eliminating about a quarter of its North American capacity.

    Mass layoffs and plant closings are not cheap. Ford plans to spend $250 million in settlement-related costs to complete the layoffs of hourly workers. It will write off another $220 million in fixed assets.

    The changes promise to keep Ford’s North American operations in red ink for years to come. Ford reported a pretax loss of $1.2 billion for its domestic auto business in 2005. Fortunately, it made plenty of money elsewhere, resulting in net income of $2 billion last year. In effect, the rest of the world is subsidizing Ford’s bid to make its domestic business profitable.

    For Ford, winning the battle in North America doesn’t mean recapturing very much of the market share it lost over the past 15 years. Ford simply wants to stop the slide and claw back to an 18 percent share.

    Ford’s bid to find the right people, train them and encourage them with the right rewards could help the company design more appealing vehicles and produce them more cheaply. It won’t be easy, but Ford has little choice but to change.

    “We are trying to reduce the structure of the company, the bureaucracy and make it reach decisions faster,” spokesman Pepper says.

    Urgency is key. With Toyota, Nissan and Honda in the passing lane, Ford had better step on it.

Workforce Management, March 27, 2006, p. 1, 24-30Subscribe Now!

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