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Bridgeton Case

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Bridgeton Industries Automotive Component and Fabrication Plant

The union has worked with us and has even led in cost reduction programs. Now corporate is talking about outsourcing additional products. What more can we do to keep the business?

mike lewis, plant manager

The Automotive Component and Fabrication Plant (ACF) was the original plant site for Bridgeton Industries, a major supplier of components for the domestic automotive industry. The history of the plant dated back to the 1840s when the adjoining river attracted mills that processed the rich lumber resources in the area. The site progressed through several industrial uses, including an early wagon works, until it was finally purchased by the founder of Bridgeton. He opened his first office there in the early 1900s.

All of ACF's production was sold to the Big Three domestic manufacturers. Competition was primarily from local suppliers and other Bridgeton plants. As long as the market was growing and dominated by U.S. manufacturers, this strategy worked. It became less effective when foreign competition and scarce, expensive gasoline caused domestic loss of market share. Suppliers found themselves competing for a shrinking pool of production contracts. Throughout the 1980s, ACF experienced serious cutbacks due to this competitive pressure. However, as the 1989/90 model year budget approached, ACF was still considered a critical plant. Model years ran from September 1 to August 31 and were the basis for budgeting. Production contracts were usually awarded for a model year.

THE ENGINE PLANT SHUTDOWN

ACF first felt the effects of domestic loss of market share in 1985. After the first oil crunch in the mid-1970s, Bridgeton had built two plants for manufacture of fuel-efficient diesel engines in anticipation of a continued growth in the market. One of these plants was at the ACF facility. When the growth in diesel-powered cars was not sustained, one of the operations had to be shut down.

Special studies were made of the relative costs of the two plants, and ACF's facility was the one chosen to be closed. When the production workers at ACF were told they were not cost competitive, they took actions to reduce unit product cost, bringing it down to within a few cents of the competing quote. Despite these efforts, ACF's facility was closed. "Management told us we were not cost competitive. We worked ourselves into the ground and lowered the unit cost, and still lost the business," recalls Ronald Peters, a long-time production worker in the old engine facility.

When the engine plant closed at the end of 1985/6 model year, all of the related production jobs were eliminated. The skilled trades positions were eliminated where possible. However, tradespeople who had unique skills that were needed in other areas of the plant were retained. The physical machinery, equipment, and building were written down and taken off the plant books.

STRATEGIC ANALYSIS

During the 1986/7 model year, the corporation hired a strategic consulting firm to examine all of Bridgeton's products and classify them in terms of world-class competitive position and potential. Four criteria were considered: (a) quality, (b) customer service, (c) technical capability (engineering and sophistication of plant processes), and (d) competitive cost position.

The data used to evaluate quality included warranty failure rates, product rejects per million, percent scheduled maintenance versus breakdown maintenance, customer complaints per million, and published user rating service scales. To evaluate customer service, in addition to interviews, the study examined percent on-schedule production and shipments, percent variation in these schedules, time to respond to requests for information, time to respond to customer complaints, leadtime from design of concept to production of product, and degree of manufacturing flexibility. Technical capability was largely estimated by interviewing customers. Internal data were gathered about product feature innovations, degree of technological know-how, and depth of engineering expertise.

Competitive cost position was evaluated by interviewing financial, purchasing, and engineering personnel and undertaking a cost analysis which examined the cost of production by breaking each product cost into three elements: materials, direct labor and benefits, and overhead. The product costs used for the study were total full-factory costs based on examination of the manufacturing cost reports generated by the facility's cost system. The details were provided by the plant financial personnel. Comparative competitive costs were obtained through plant tours and interviews with engineering and purchasing people at other Bridgeton plants (internal competitors), information from competing component suppliers (external competitors), and discussions with financial personnel.

The budgeted unit costs provided by the plant for the 1986/7 model year study included overhead (burden) applied to products as a percent of direct labor dollars. The overhead percentage was calculated at budget time and used throughout the model year to allocate overhead to products using a single overhead pool. The overhead rate used in the study was 435% of direct labor dollars.

Product costs were analyzed by the consultants to classify products by degree of cost competitiveness. Product classification was finished and reviewed at the corporate level with little plant adjustment or involvement after initial data collection. Products classified as world class (having costs equal to or lower than competitors' manufacturing costs) were considered Class I. Products which had the potential of becoming world class (having costs 5% to 15% higher than competitors' costs) were classified as Class II. Products which had no hope of becoming world class (having costs more than 15% higher than the major competitor) were classified as Class III.

The other criteria (quality, customer service, and technical capability) were weighted into a factor that determined the final classification of the products. The consultants recommended that Class I products should remain at their present locations. Class II products were to be watched closely for improvement or deterioration. Class III were designated to be outsourced (i.e., the business was awarded to another Bridgeton location, or purchased from an outside competitor) or eliminated.

The consultants advised ACF's management that their products fell into the following classifications (for a description of these products see Exhibit 1): (a) Class I: Fuel tanks; (b) Class II: Manifolds, front and rear doors; and (c) Class III: Muffler-exhaust systems, and oil pans.

PRODUCT OUTSOURCING

At the end of the 1987/8 model year, oil pans and muffler-exhaust systems were outsourced from ACF. This outsourcing resulted in a loss of 60 direct labor (production) jobs and 30 indirect (skilled) jobs. These 90 people were transferred to a retraining job pool, which was administered and paid by the union. The job pool cost was not part of plant burden costs.

With this second major cutback, plant management and labor moved toward more cooperation and openness in efforts to retain the remaining business. Several programs were introduced to improve product quality and increase productivity. These programs stretched the traditional union/ management boundaries as both sides worked toward creative solutions to meet these challenges.

One of these efforts, led by Fred Simmonds, an experienced die maker, involved union formation of teams to lower the time required to change dies, a major constraint in the production process. By combining union labor classes and skill levels on press line die change teams, ACF lowered the required time to change dies from 12 hours to 90 minutes. This was the best in Bridgeton. Other locations averaged between four and five hours. The world-class times of Japanese assembly lines, approximately 10 minutes, required special plant layouts.

Another productivity improvement program created by Simmonds and Peters used "hourly to time hourly." In this program, hourly workers kept track of the causes of downtime and categorized them as being related to personal time, tools and equipment, or startup. People from the retraining job pool formed by the union at the time of the prior layoffs were asked to time the lines. Production personnel's knowledge of the process and experience on the line resulted in highly accurate activity times for the operations they observed. Their reporting emphasized the positive side of the information using uptime reports to show progress toward the world-class goal of 80% uptime set by the Japanese. Through identifying problem areas and working with industrial engineers, they increased their uptime from an average of 30% to 65%, the best in Bridgeton.

In spite of these improvements in the production process, manifolds/designated Class II in the initial study, were downgraded to Class III in the 1989/90 model year budget and identified as candidates for outsourcing (for the 1986/7 through 1989/ 90 model year budgets, see Exhibits 2 and 3). Any decision to outsource manifolds was complicated by the possibility that increased emission standards would require new vehicles be fitted with lighter weight, more efficient manifolds. If this occurred, the demand for stainless steel manifolds could increase dramatically and so, probably, would its selling price.

Reacting to the change in status of the manifolds, Lewis called together his plant superintendents and union representatives. "This doesn't make sense. I know we are more competitive. We have made all kinds of improvements, but our costs keep going up and we're still losing business. What more can we do?"

|EXHIBIT 1 |
|BRIDGETON INDUSTRIES Product Lines in 1990 Budget |
|Fuel tanks: These are produced on six stamping lines from coated sheet metal, which is stamped in halves and then placed |
|together and automatically seam welded. |
|Manifolds: Stainless steel exhaust manifolds are produced in a highly automated production process. The parts are loaded |
|on fixture and robotically welded. These manifolds are superior to the older technology cast iron manifolds in pollution |
|control. The disadvantage of using stainless steel is its high relative cost. |
| |
|Front and rear doors: These are the front doors and rear cargo doors for vans. They are produced on four press lines with|
|up to six presses per line. |
| |
|Muffler-exhaust systems: These are formed from sheet metal that is bent to shape and robotically welded. |
| |
|Oil pans: These are small steel stampings. They are produced on two lines containing one press each. |

EXHIBIT 2 – Bridgeton Industries

1986/87 through 1989/90 Model Year Budgets (in $000)

| |Model Year |
| |1986/87 |1987/88 |1988/89 |1989/90 |
|Sales | | | | |
|Fuel tanks |70,278 |75,196 |79,816 |83,535 |
|Manifolds |79,459 |84,776 |89,323 |93,120 |
|Doors |41,845 |45,174 |47,199 |49,887 |
|Mufflers/exhausts |62,986 |66,266 |0 |0 |
|Oil Pans |75,586 |79,658 |0 |0 |
|Total |330,154 |351,071 |216,338 |226,542 |
| | | | | |
|Direct material | | | | |
|Fuel tanks |15,125 |15,756 |16,312 |16,996 |
|Manifolds |31,696 |33,016 |34,392 |35,725 |
|Doors |14,886 |15,506 |16,252 |16,825 |
|Muffler/exhausts |28,440 |29,525 |0 |0 |
|Oil Pans |32,218 |33,560 |0 |0 |
|Total |122,365 |127,363 |66,956 |69,546 |
| | | | | |
|Direct labor | | | |
|Fuel tanks |4,169 |4,238 |4,415 |4,599 |
|Manifolds |5,886 |6,027 |6,278 |6,540 |
|Doors |2,621 |2,731 |2,884 |2,963 |
|Muffler/exhausts |5,635 |5,766 |0 |0 |
|Oil Pans |6,371 |6,532 |0 |0 |
|Total |24,682 |25,294 |13,537 |14,102 |
| | | | | |
|Overhead | | | | |
|1000 |7,713 |7,806 |5,572 |5,679 |
|1500 |6,743 |6,824 |5,883 |5,928 |
|2000 |3,642 |3,794 |2,031 |2,115 |
|3000 |2,428 |2,529 |1,354 |1,410 |
|4000 |8,817 |8,888 |7,360 |7,433 |
|5000 |24,181 |24,460 |20,063 |20,274 |
|8000 |5,964 |5,946 |3,744 |3,744 |
|9000 |6,708 |6,771 |5,948 |5,987 |
|11000 |5,089 |5,011 |3,150 |3,030 |
|12000 |26,954 |28,077 |15,027 |15,683 |
|14000 |9,733 |9,784 |8,025 |8,110 |
|Total Overhead |107,954 |109,890 |78,157 |79,393 |
|Factory profit |75,153 |88,524 |57,688 |63,501 |

EXHIBIT 3

BRIDGETON INDUSTRIES

Description of Chart of Accounts

|Account Number |Description |
|1000 |Wages and benefits for nonskilled hourly personnel such as janitors and truck drivers |
|1500 |All plant salaried personnel expense, including benefits, except industrial engineers (included in account |
| |number 11000) |
|2000 |Production supplies such as gloves, safety goggles, and packing material |
|3000 |Small wearing tools such as grinding wheels, hammers, and screwdrivers |
|4000 |All purchased utilities including coal and compressed gas |
|5000 |Wages for nonproduction employees with specialized skilled classifications used for plant maintenance and |
| |rearrangement; the benefits associated with these wages are in class 14000 |
|8000 |Depreciation, on a straight-line basis, and property taxes |
|9000 |Various relatively constant personnel-related expenses including items such as training, travel, and union |
| |representation |
|11000 |Project expense for one-time setup and some rearrangement of new equipment and machinery |
|12000 |Benefits and overtime premium for production hourly workers including COLA (Cost of Living Adjustment), state |
| |unemployment, and pension (Wages are in direct labor.) |
|14000 |Benefits for skilled hourly workers similar to those for production workers (Wages are in account 5000.) |…...

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...drivers for the desktop delivery service. Midwest charged a price premium (up to an additional 5% markup) for the convenience and savings such direct delivery orders provided to customers. The company believed that the desktop delivery option would improve margins and create more loyal customers in its highly competitive office supplies distribution business. Midwest had introduced electronic data interchange (EDI) in 1999, and a new internet site in 2000, which allowed customer orders to arrive automatically so that clerks would not have to enter data ________________________________________________________________________________________________________________ Professor Robert S. Kaplan prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. Purchased by James Rinier (jrinier22@hotmail.com) on April 03,......

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