OshawaIndustriesCase (1).pdf - Oshawa Industries Case1...

Unformatted text preview: Oshawa Industries Case1 Although Mark Talbot knew that he was developing a reputation as a quick technical and managerial understudy, he never thought he'd be promoted to Plant Manager at Oshawa Industries (OI) after just six months as Assistant Plant Manager at electroplating plant. He wondered how a relative "greenhorn" like himself could effectively manage the complicated situation at the plant. In the six months since he joined the plant, Talbot had found a product pricing system that didn't readily appear logical, inconsistent senior management behavior, labor-management relations and employee morale that were close to rock bottom, outdated equipment, declining sales and deteriorating customer service. Convinced by the Vice-President, Roger Sutherland, that he was the person for the job and that this was the "opportunity of a lifetime for a young manager" Talbot wondered how he should tackle the situation – given he had accepted the job. Oshawa Industries and Oshawa Holdings Limited Oshawa Industries was a subsidiary of Oshawa Holdings, a company of over 25 automobile parts manufacturing, metal finishing and plating plants. For many years, Oshawa Holdings grew under the leadership of Dean Carter (CEO), his brother Jack (Executive VP Manufacturing Operations) and Chet Wainwright, the Executive VP who provided technical leadership. Roger Sutherland was in his forties and had joined the firm approximately a year ago as Vice-President, Administration. As an MBA and a seasoned manufacturing executive, he provided managerial skills and was responsible for administrative systems, human resource systems, industrial relations, and senior management development, as Dean and Jack Carter and Chet Wainwright began to consider retiring. There were other senior executives at the OHL headquarters (e.g., the Chief Financial Officer, the VP Computing and Information Systems, the VP Marketing and Sales), but Dean, Jack, Chet and Roger were the senior decision makers. Much of the past growth was attributable to Dean’s entrepreneurial and administrative skills and Chet’s technical capacities, augmented by Jack’s people-oriented focus and much more recently by Roger’s managerial skills and strategic outlook. While Oshawa Industries was a subsidiary of Oshawa Holdings, the cultures were very different. The OHL Corporate Profile identified three guiding principles: entrepreneurial focused factories, the pursuit of joint ventures and an emphasis on quality in both employee relations and products and services (see Exhibit 1). OHL was a Tier 1 manufacturer to the automotive industry. All but two of the twenty-one Oshawa Holdings operations (averaging approximately 100 employees per plant) were nonunion, had gainsharing plans, profit sharing and operated under participative management 1 All proper names have been disguised. This case is based on the original Oshawa Industries by T. Cawsey and R. McGowan, copywrite the Laurier Institute. -1- principles to encourage employee productivity and loyalty. Plant managers were given a fair degree of autonomy in how they operated their plants but were held accountable for key performance indicators (measures related to cost, profitability, customer satisfaction and employee satisfaction). The commitment of OHL’s plant management commitment to the above principles was evident in the high esteem they were held by both customers and employees. Consistent superior profitability and growing volumes flowed directly from plant actions. Dean Carter commented that the role of head office was to act as the bank and auditor for OHL plants, be the deal maker involving new plants or joint ventures, hire well, and to then get out of the way and let the plant managers run their operations. Oshawa Industries’ (OI) culture and organization, however, were a very different matter. Oshawa Industries was comprised of a single plant, with OHL’s head office located in adjacent single story buildings in a heavily industrialized section of Oshawa. The OI plant, built 25 years ago, specializes in electroplating and metal finishing for steel manufacturers and automotive plants where OI is a Tier 2 supplier. This plant electroplates many different types of products, ranging from fasteners to auto parts to ten ton steel rolls for steel producers. Plant equipment in the electroplating division was a mixture of equipment installed in the 1980's and updated electronic quality testing equipment. The plant housed vats of caustic chemicals, automated racks (which suspend metal parts for coating and heat treatment ovens), and equipment capable of chrome plating up to 10 tons of material at a time. During the past decade, processing lines were added or existing ones expanded within the original facilities, which themselves were not expanded (see Exhibit 2 for the plant floor layout). The plant’s dedicated, continuous process lines operate with cycle times of up to one hour. Automated overhead racks raise and lower the parts in the solutions as well as transporting them along the processing line. Most processing lines consist of a series of tanks containing solutions formulated to degrease, clean and electroplate the parts. At the electroplating tank an electrical current was introduced to the solution causing ions in the solution to deposit on the parts. After plating, some parts were heat treated to increase the life span of the finish. OI had recently installed a "state of the art, high tech" electroless nickel metal plating process that added 17% to its productive capacity, at a cost of $750,000. Because it offered a superior finish at a lower cost, OI was looking to this process for competitive advantage but Sutherland did not believe this had yet to materialize. Most plating jobs involved a standard set of procedures and OI was QS register, to meet the demands of the auto industry. This registration was the product of the efforts of OHL staff who understood how to obtain and retain standards and who had been instrumental in ensuring OI met minimum conditions. However, when employees were faced with orders for unique finishes or those involving nonstandard metals they relied on Wainwright's expertise or in his absence, one of two senior plating technicians. To those who knew Wainwright, it seemed that he believed that plating was an "art" directed by the plater and implemented by semi-skilled workers. Wainwright's hands-on -2- approach meant that most employees had received little formal training in plating or advanced technology. Such process specifications were not documented for the nonstandard jobs that made up approximately 25% of the production, and process problems were often solved by Wainwright or one of the two senior plating technicians, through trial-and-error. However, Talbot discovered that special written instructions from Wainwright were increasingly being overridden by workers who were experiencing confusion as to how to put them into practice and still meet production targets. Talbot also noted that trends which started in 2002 were continuing: late deliveries were increasing, productivity decreasing, and margins were becoming thinner. The hazards of an electroplating plant were well known to the employees and to Dean Carter. Acid bums, cyanide poisoning, electrical shocks, crushed fingers and scalds were common injuries. An improved ventilation system was recently installed at OI to enhance the quality of the air which previously had been tainted by propane and combustion products from forklifts, vats and furnaces. Aging pipes, tanks and spill pails containing chromic, sulphuric and nitric acid and caustic oils were sources of employee concern. In many areas of the plant, natural and artificial light were blocked by equipment both stored and operational and the noise level was sometimes considerable. Employees often joked that OI had a climatically controlled plant - the outside climate controlled the plant's environment! Cost, finish quality, and delivery have traditionally been key success factors in the electroplating industry and OI has had a solid reputation in these areas. Meeting or exceeding customer plating specifications for corrosion resistance, appearance, uniformity of deposit, hardness, wear resistance and finish have been critical to acquiring and maintaining customer contracts. Increasingly however, product quality differences between plating firms have disappeared and OI has found that it is increasingly necessary to focus on cost, order fulfillment (just-in-time delivery was particularly important to firms supplying the automotive sector) and service/responsiveness as differentiators. One competitor, in particular, had become a serious threat to OI. The local plant was part of a large, multinational firm that specialized in the automotive sector, and was one of four electroplating operations that it owned. In addition to services similar to OI, they offered two substitute processes (electro deposit point and nitride finishes) that OI did not offer. Certain key customers were reporting that this firm was steadily becoming more cost competitive and were providing equivalent or superior coating finishes and better on-time performance. OI had experienced the loss of two existing plating contracts to them in the past year that had represented 15% of their total business volume. They were further eroding OI’s position as a local market leader through their recent successes involving contracts for the electroplating of components for two new automotive programs. With the exception of the recently installed metal plating process and quality instrumentation mentioned earlier, new technologies and applications for metal finishing had not been aggressively pursued by Wainwright or OI. OI’s customer base was located within a 200 mile radius, because of their customers’ desire to control the transportation and handling costs related to heavier products that needed electroplating. There were 11 firms competing for business in OI’s market area, -3- but the top three accounted for 80% of the business (based on billings), with OI at 45%, down from 50% a year ago. OI primary focus was automotive and steel industry applications and they did not compete in such sectors as semiconductors, jewelry and medical applications. The industrial electroplating industry in North America was undergoing consolidation, was in the mature stage, and was showing signs of decline as firms switched to the use of plastics and composite materials that did not require electroplating, reduced weight and in some cases costs, and reduced environmental concerns related to the electroplating process. Technical innovations in electroplating were focused on improving quality and cost effectiveness and at addressing environmental hazards associated with the process but traditional approaches still dominated the sectors OI served. Up until now, OI’s customers had demonstrated little appetite for integrating most electroplating applications into their manufacturing facilities, because of environmental and health and safety risks, plus their belief that their needs in this area were best addressed by outsourcing to experts in the field. One exception involved the location of electro deposit paint lines in certain larger plants. Management of OHL and OI For the first eighteen years of his employment with OI and OHL, Chet Wainwright was the GM and then the Executive VP, reporting directly to Dean Carter. The two men formed the nucleus of OI/ OHL. Wainwright's "technical genius" in electroplating and automotive manufacturing processes led to his central role in OI' s operations and his subsequent position as a consultant to OHL's joint ventures and EVP of OHL. OI was their first operation but now represented less than 2% of their total billings. Early in OI’s history, Dean Carter was constantly involved in the commercial and technical aspects of the electroplating plant - it was "his" plant. This constant involvement in the plant became a burden for the technical GM (Wainwright) and other managers. Eventually, employees avoided Carter and the information trickled, rather than flowed upwards. This didn't bother Carter who saw it as “his” plant and he could do as he wished. Carter loathed unions but one was certified at OI twelve years ago, following an organizing campaign by the IAW (International Auto Workers). Carter was known to act decisively, seldom changed his decisions, and developed a reputation as a tough negotiator. He continued to support charities many years after initial contributions, and he was loyal to his staff, most of whom never left the company. Wainwright knew a lot of people in the industry and a lot of people knew him. As one manager said, "Wherever you went they seemed to know Wainwright - even in the States and abroad." Wainwright's technical prowess, savvy, extensive travel experience and a knack for storytelling made him a "legend" of sorts in the industry. It was often Wainwright's reputation that gained OI and OHL access to new customers or market opportunities. Wainwright knew how to read Carter. He knew when to challenge one of Carter’s bids and when not to. In the latter case, Wainwright would move “heaven and earth” to make -4- sure the job was done. For the last several years, Wainwright’s energies were consumed with bringing on new plants for OHL and this meant that Wainwright was away from headquarters for extended time periods and did not maintain close contact with OI. When he went to OI meetings with major customers (which was now occurred infrequently, involving relationship management and damage control), he often had to rely on his background knowledge, internal reports and long-term relationships. In the mid 1990’s Wainwright became EVP, moved to the role of a consultant to OI and spent even less time at the plant. The first post Wainwright plant manager (James Horkey, the former assistant OI plant manager) was replaced two years later (for health reasons) by Gerry Pawlawsky who assumed responsibility for the plant's daily operations. In addition to Wainwright and Pawlawsky, there were Quality (Jim Lavin), Production (Brian Miller) and Maintenance Managers (Robert Harcourt) overseeing the plant's approximately forty production employees (See Exhibits 3 & 7 for the production employee breakdown and organizational chart). The OI Office Administrative Manager (Arlene Matthews) also managed the Fabrication operations. Matthews was originally hired by Dean Carter's father immediately after she completed her high school diploma and had remained with the firm ever since. OI, in fact, had been the only place she'd ever worked. Excluding already mentioned managers, there were approximately ten non-union office staff employees at OI. Employees and Management/Union Relations All plant employees at OI were members of the IAW. There were also two unionized plants within the OHL group of companies. The unionized workers at OI were hourly-paid employees while all management positions were salaried. Gainsharing and profit sharing were not part of the compensation scheme at OI. Carter knew most of the employees by name, either from involvement in their hiring or from his physical presence over the years. Most employees had been with OI for 15 to 20 years and everyone earned similar wages. Union/management relations were brittle at best. Union members felt that the recent plant managers were relatively powerless and that their decision-making was dictated by Dean Carter. Following Wainwright’s promotion to EVP, the plant manager role had changed hands a couple of times and Talbot had heard rumors of a shop floor pool betting on his expected departure date. The Union contract was ambiguous as illustrated by the following excerpt from the contract regarding seniority: It is agreed that each employee shall have a measure of job security and job opportunity based on his length of service and his ability to perform the work available. This, in effect, means that the employee with the greatest length of service shall have the greatest seniority rights to such work as is available, provided the employee is qualified to properly perform the work available. -5- Office/supervisory staff and plant workers rarely mingled. During lunch, office staff and supervisory personnel usually ate lunch at their desks while the plant floor workers ate in the small lunchroom at the front of the plant. Although anyone could eat in the lunchroom, it was usually only used by the shop room workers. With its Spartan furnishings - a rectangular table and soft drink, coffee and snack dispensing machines its appeal was that it was "close to work." OI's seven designated parking spaces were reserved for the Plant Manager, Assistant Plant Manager, Quality Control Manager, Office Manager and three visitors. Other OI employees parked their cars precariously on a first come, first serve basis along the side and back areas of the property, leaving only narrow access corridors for delivery trucks. Finance OI's financial affairs were controlled through OHL by Dean Carter and OHL's staff accountant Al Simpson. Financial statements were developed on a consolidated basis for OHL. After six months at OI, Talbot had little feel for OI's financial position or cash flow. For example, net 30/2% were common terms for customers but Talbot did not yet know their compliance rate. Products or process lines were selected according to the degree to which management believed they affected the contribution to overhead. If there were no parts to finish, the lines would be shut down. Profitability of OI as a whole, rather than that of individual products or plating lines, was the concern. Equipment was seldom removed from the plant floor. Carter's perspective was that equipment that had been bought and paid for should be operated, regardless of its relative efficiency. It was not clear to Talbot how prices were developed. It seemed that Carter and Wainwright or the plant manager of the day would basically quote whatever price was necessary to get the customer. Product pricing seemed to be based on the following criteria used either individually or in some combination: 1. How many dollars per hour can the machine generate? 2. What price can the market bear? 3. Where do you want to hold direct and indirect labor and overhead costs? This frequently depended on what management thought Dean Carter wanted to see. 4. What are the plant's average costs? Hold the average and force it down if possible! 5. How many sales do I want? 6. What do we think it's going to take to get the job? This approach led to pressure on quality and service. Increases in the costs of labor and raw materials were passed on to established customers when it was felt they would accept such an increase. Otherwise OI would be forced to swallow the increase and senior managers would try to figure out how costs could be pared further. -6- There were systems for tracking major variables on a daily basis: labor, raw materials (e.g., chemicals), sales, payables, etc., however, the inventory system for supplies/raw materials was not well developed and there was no specific tracking of utilities or raw materials directly to the processing lines and production runs that used them. Each line was charged an average rate for utilities, chemicals and other overhead costs. These were normally allocated on a percentage of sales' basis. Talbot knew that the lines' usage of water, electricity and chemicals varied considerably but all allocations of those costs to the customer were considered "flexible" and allocated as needed to make the statement "look right." The game was always to make money. Budget statements were finalized through an iterative process, often going through a number of revisions before they "were right." Financial statements and profitability information were compiled monthly for OI (see Exhibits 4 to 6 for financi...
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