Background
Porsche in the 1990’s “was fighting for its own survival.” (Plumer) After orders decreased 70% from 1986 to 1993 “the company was teetering on the verge of bankruptcy, and there were whispers about a possible takeover.” (Henderson) “Recession had crippled sales, and costs were out of control.” (Nash) From such descriptions, its amazing that Porsche is now valued at $27 billion and makes more per car than any other auto manufacturer.
The road to recovery for Porsche was based on lean manufacturing, which the newly appointed CEO Dr. Wiedeking was familiar with from his prior company. He brought in Japanese lean manufacturing consultants as quickly as possible (nearly all of them from Toyota) and they began converting Porsche into a JIT enterprise. Managerial staff were reduced by 30%, reassigned, and willfully submitted to reprimands from the consultants. They succeeded in reducing Porsche’s costs, improving throughput, and eliminating excess inventory but this only tells part of the story.
Part of the story is that lean manufacturing was built on principles of quality manufacturing developed by W. Edwards Deming “The Man Who Taught the Japanese Quality”. One of his central tenets being statistical process control, which I regard as the quantitative method at the core of lean manufacturing and Porsche’s turnaround.
"The traditional craftsmanship for which Germany became famous was filing and fitting parts so that they fit perfectly," Professor Jones said. "But that was wasted time. The parts should have been made right the first time. So the new craftsmanship is the craftsmanship of thinking up clever ways of making things simpler and easier to assemble. It is the craft of creating an uninterrupted flow of manufacturing." (Nash)
The phrase “filing and fitting parts so that they fit perfectly” clearly indicates that the production line was not statistically in control, otherwise parts would not need to be filed and fitted. Time to complete specific job line tasks would also vary wildly “as workers would sometimes climb ladders to look for parts” again pointing to a process not in statistical control.
The tale of the Porsche turnaround is therefore a story of lean manufacturing AND Porsche’s introduction to Deming’s quality management principles. For example, “You can’t inspect quality into a product.” It is there or is absent by the time it is inspected.
Non-Quantitative Methods: Lean Manufacturing
The lean manufacturing methods that Porsche implemented get most of the credit in the press for the company’s transformation, although few of these are quantitative methods and all of them are just logical. “On the first day the consultants arrived, they cut all of the shelves in half.” (Nash) The consultants also said that the factory looked more like a warehouse, with the large number of shelves for inventory. The significance of halving inventory may be lost on non-industrial engineers, so I should point out that inventory requires money to buy and is expensive to have large amounts of it. It also exposes companies to obsolescence risks if there is a drop in demand for a product. Viewed equivalently, all of the inventory sitting on shelves was exactly the same as having stacks of hundred dollar bills on all of the shelves for a month rather than sitting in a bank account. Warehousing is also expensive because space costs money. You need to lease the land, heat the storage space, buy a roof to keep the weather out, pay security to ensure no one breaks in, etc. It is also less chaotic to have only the parts that you need on the factory floor so that you’re not tripping over unneeded parts when trying to complete a task. If you maintain minimal inventory these expenses all vanish.
Now some of you are assuredly asking, but what if you don’t have a part when you need it? Part of the answer is creating a JIT or ‘Just In Time’ delivery system, whereby suppliers agree to deliver parts no earlier than 24 hours before they will be used. The next part of this process is ensuring that parts do not arrive to a station on the production line before they are needed. This is handled with a kanban ‘card’ system which matches inventory requests to the specific job and position on the production line of that job. By controlling the number of ‘cards’ on the production line and forbidding the release of inventory without a card, the amount of inventory is minimized.
Now some readers may be asking, “But how does JIT work if bad weather prevents the delivery of some parts?” This is a valid question that many people have asked. The counterintuitive truth though, is that the costs of warehousing excess inventory are a hundred of times more expensive than a delay caused by a missing part.
Quantitative Methods: Deming and Statistical Process Control
The first matter that the new CEO pursued “was to benchmark every aspect of production to find out how much time, effort, and money was being spent on making a Porsche.” (Mudd) This is a classic Deming principle, that “You cannot manage what you cannot measure” and is easily recognized in the plotting of confidence intervals, trend charts, and segregation of processes as ‘in control’ vs ‘out of control’.
Wiedeking also created the “Porsche Improvement Program, a program designed to measure quality and efficiency and eliminate waste” (Mudd) and its description could well be used as a description of Deming’s lifelong accomplishments or the results of his methods. It’s also noteworthy that consultants were brought in from Japan, probably the one country which adopted the tenets of Deming’s philosophy most faithfully.
Rounding out the overlaps between Porsche and Deming, are that consultants were sent out to Porsche’s suppliers to train them in the techniques (an idea first popularized by Deming) (Nash) and an organizational focus on trust. “Wiedeking views the experience of remaking Porsche as a triumph of trust within an organization. It's a theme he comes back to again and again in the course of an interview. ‘With your workforce, with your employees, as well as with your shareholders, . . . you must build some kind of trust,’ he says.” (Mudd)
Quantitative Methods: Pooling Principle and Simulation
A brief mention of the pooling principle is also in order. Porsche (which owns Volkswagen) deliberately designed the Porsche Cayenne and Volkswagen Touareg to share the same chassis. (Mudd) Explicit calculations in queueing theory prove that this is more efficient than establishing two production lines because it permits random lulls in demand for one model to be naturally offset by random peaks in demand for another. The pooling of production lines helps to deal with demand uncertainty.
Engineers also shifted much of their design to computer simulations as a way of cutting the time for prototyping in half. (Mudd) This has follow-on benefits in that it eliminates raw material costs for prototyping, rapid iteration, and translates well into CAD based manufacturing trends.
Quantification of Benefits
· On arrival to the company, Wiedeking promised the board that he could reduce expenses by 30%, and delivered.
· “By 2007, Porsche was the world’s most profitable automaker on a per unit basis.” (Henderson)
· “Porsche, despite also suffering a sales slump, report a nearly $11 billion profit in the last half of 2008.” (Plumer)
· “As Wiedeking explained, ‘Our sales doubled in just six years as did its revenue through organic growth.’” (Henderson)
· Improvements in operational metrics yield higher profit per car. (Henderson)
o Inventory reduced from 28 days to 1 days. (Nash) (Mudd)
o Assembly time reduced from 120 hours to 60 hours. (Nash) (Mudd)
o “Errors per car have fallen 50 percent” (Nash)
o Work forced reduced 19 percent. (Nash)
o “Factory space has been reduced by 30 percent.” (Nash)
o ‘Concept to Launch’ reduced from 7 years to 3 years. (Plumer)
o Reduced throughput from 6 weeks per car to 3 days per car. (Plumer)
o Parts originally delivered 3 days late are now delivered JIT. (Plumer)
· “Porsche survived [near bankruptcy] -- not only as a cachet name in German automobiles, but as the last remaining independent European manufacturer of sports cars.” (Nash)
Personal Notes
I’m pleased to come across this example of quant CEO excellence. I’ve written about a correlation between company overperformance and quant CEOs before, and Porsche under Dr. Wiedeking (who earned a Doctorate in Engineering) is no exception.
I also wanted to propound a few of Deming’s more theoretical points without substantiating them further.
· There are two sources of variation, systemic and idiosyncratic, of which management can only controls systemic variation.
· Root cause analysis should be pursued, so that the ‘Disease is cured, rather than the symptom.’
· “Price has no meaning without a measure of the quality being purchased.”
Citations
“What’s Driving Porsche?” By Rebecca Henderson and Cate Reavis
“Back In High Gear.” By Tom Mudd. IndustryWeek. December 21, 2004.
Porsche Consulting Company History.
“How Porsche has become one of Europe’s Most Successful Automakers.” By Robert Plume. April 5, 2009.
http://www.helium.com/items/1403075-how-porsche-has-become-one-of-europes-most-successful-automakers
“Putting Porsche Back in the Pink.” By Nathanial Nash. January 20th, 1996. New York Times.
Out of the Crisis. By W. Edwards Deming. Published 1982. MIT Press.
