The Roots of Myopia
How did manufacturing myopia become so prevalent? There are several roots. Probably most pernicious was the separation of manufacturing, marketing, and finance in corporate structures that date back to the mid-20th century. “Turf wars” often unconsciously reinforce those divisions,
Here’s one typical story we recently encountered in a consumer products company: The vice president of manufacturing stated at a meeting that his factories could deliver at lower costs, “but only if R&D can come up with a better factory blueprint and reduce the number of product parts.” Also, he said, it would help if sales provided reliable forecasts “and didn’t ask us for last-minute changes for important clients.” And finance would be less of a hindrance if the CFO would finally approve funding for new machines to simplify operational bottlenecks. The company’s vice president of sales responded that manufacturing needed to eliminate its oversized work force and sharply curtail labor costs by shifting more of the production to low-cost countries. Only then could his team sell significantly more.
The vice president of R&D expressed the opinion that manufacturing still had not managed to sufficiently operate the existing production technology. “We’re simply not up to world-class standards,” he said.
Later, the CEO said privately that he was fed up with all these points of view. None of them had much to do with the problem as he saw it: an unsustainable status quo of rising fixed costs and a widening gap between projected and actual profits.
Manufacturing companies are usually not set up with the kinds of incentives and decision rights that would encourage executives to review plant operations with a full understanding of the company’s competitive cost drivers. Consequently, a narrow, self-interested view of plant performance tends to prevail, even when everyone involved has the best interests of the whole company at heart.
Business education reinforces the division. Students interested in manufacturing are tracked into a “ghetto” in many business schools; they don’t share many classes or associate much with their counterparts in finance and strategy. Nor do they expect to cross over to other positions when they enter the working world. “Once a plant manager, always a plant manager,” people say. Manufacturing functions consequently suffer in the “war for talent”; they recruit from a smaller pool. The result is often an unnecessary tension between manufacturing and finance; manufacturing executives may have far more contact with, and feel more loyalty to, employees than shareholders. And finance executives may not appreciate the strategic importance of manufacturing talent, particularly on the shop floor.
This tendency was exacerbated during the service boom of the 1990s, when it became fashionable to assert that mere manufacturing was not strategically important. Some companies followed cost-cutting strategies that downplayed the importance of their long-standing manufacturing knowledge, and then found themselves needing to rebuild it. This was one of the key components of the decline of the American manufacturer Sunbeam. After being acquired by Allegheny International in the early 1980s, the company’s manufacturing division was “starved of capital to update its factories and refresh its product line,” as management writer John Byrne put it. This ultimately led the shareholders to appoint cost- cutting turnaround artist Al Dunlap as CEO in 1996; manufacturing capacity suffered even more erosion during Mr. Dunlap’s time as CEO. In his book Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price (HarperBusiness, 1999), Mr. Byrne describes how Sunbeam shut down a high-quality, efficient hair-clipper plant in McMinnville, Tenn., and moved production to a chaotic, money-losing, poorly managed new facility near Mexico City.
To counterbalance all these trends, some companies now make deliberate efforts to integrate manufacturing with the rest of the enterprise. Toyota sends manufacturing employees and managers on sales calls — to areas including those where their products have low penetration. ASML, a Dutch company that is a leading producer of lithography and semiconductor manufacturing equipment, went from a 10 percent to a 70 percent market share in its product categories, in part by bridging this gap. ASML’s head of manufacturing started as an accountant, then led a finance function, and only then moved into production. This perspective recently helped the company reduce lead times and generally improve the integration of manufacturing with other functions.
—K.G., C.W., P.V.H.