An interview with P&G and GE CEOs Lafley and Immelt – December 11, 2006:
I saw this yesterday and it jumped out at me, from a FORTUNE magazine interview with Proctor & Gamble's CEO, A.G. Lafley and GE's Jeff Immelt:
“A.G., your company employs more people outside the U.S. than in it and has for a long time. Jeff, at GE it's about fifty-fifty, and you've said you make major appliances in Louisville but can't make a dime of profit doing it. Can American workers compete and raise their living standard in a global economy?
Immelt: It's all about innovation and technology. Look at jet engines. We spend $1 billion here on R&D. We have a dominant competitive position. Our workers are very highly paid and highly skilled, and we can export from Boston or Cincinnati to the rest of the world; 80 percent of our orders come from outside the U.S. We can go toe to toe with anybody, and we'll be able to do that for a long time.
Appliances – we can't do that. Our high-end appliances are now made in China and Mexico. Our responsibility – and again I learned this from Jack [Welch] – is not to throw a bomb in the middle of the place. But every year we'll shut down a line. We'll get 80 percent, 90 percent of the people to retirement and pay to retrain the others, and we'll have a thriving business as we do it. It doesn't do any good to be dishonest with people. We're not going to put big investments in Louisville just to lose money.”
Is Immelt speaking out of both sides of his mouth? Clearly, GE has gone down the outsourcing/offshoring path. But, GE is also supposedly embracing lean, or at least a GE version of lean.
Immelt says, on the one hand, they can be competitive (in certain products, like jet engines) and ship from the U.S., but on the other hand he claims they can't make a dime manufacturing appliances in Kentucky. Would lean change this equation? Is GE even trying?
To say it's all about innovation and technology…. isn't it all about people? Isn't that how Toyota views the challenge, to develop people? Is GE embracing the “Thinking Production System” or just looking to cut costs and to make excuses?
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I’m shocked! Shocked, I say, to find outsourcing going on at GE. And hypocrisy! Unbelievable.
Before we get too excited, let’s think for a moment about why Jeff Immelt sees these two businesses differently. Designing, making, delivering and supporting aircraft engines is an inherently more complex business than doing the same thing with washing machines and refrigerators. There is more scope for GE to compete throgh the excellence of its people and its operating processes. In the appliance business, maybe (and this is conjecture, since I don’t know the facts) just maybe the folks in GE’s plants in Mexico and China are just as far down the lean path as the folks in Kentucky. It’s a less complex business than aircraft engines, there have been other companies and plants in those countries developing skills and capabilities over the years that GE have been able to hire and develop and the capital cost of setting up an appliance plant is clearly way less than an aircraft engine plant. No one person, plant or nation has a monopoly on lean techniques. It’s naive to think that if we can get lean in a relatively high cost location, then we will always be more competitive than businesses in low cost regions. The only way to be sure of survival is to be ahead of the posse and make use of whatever natural advantages your location gives you. In kentucky, that has to mean accelerating the lean journey and delivering a superior level of service to GE’s (mainly US) customers than their internal competitors from Mexico or China.
The thing that jumped out at me was the comment that technology and innovation were the key. Maybe this is a bad parallel, but GM went down the technology path (Roger Smith’s failed “lights out factory” concept) while Toyota was developing people systems, kaizen, and TPS. Technology alone can’t do it, in most industries. Innovation comes from people, which requires a different focus than technology alone.
Technology and innovation count, if that’s what the customer wants (value is defined by the customer). In the case of jet engines, “good enough” isn’t going to win very many customers. With appliances, there is a market for products that are cost optimized as opposed to technology and feature optimized. Refrigerators – – Sub Zero may make better products, from a features and technology standpoint, but I don’t need a Sub Zero to keep a few cans of beverage cold in my garage. So I have a Haier. It was very low cost ($79.00)and it does the job that I wanted. This doesn’t mean that Sub Zero will go out of business, they can continue to innovate and produce high end products that customers want. However, their offerings won’t drive Haier out of business at the low end. It’s the same in many industries, like autos. There’s a market for a wide range of products at different price points and feature combinations.
You have to pick your markets where you can employ your advantages. Think in terms of the economic theory of Comparative Advantage, which explains why different products are made in different areas – – even though one area may have an absolute cost advantage in everything. If one can leverage low cost, minimally skilled labor to produce a product that customers want – – why not?
Lean is not a solution to every situation. Lean does not overcome the natural disadvantages of growing wheat in Alaska vs. Kansas. Lean does not overcome all labor cost differentials. It will make high skill / high labor cost organizations more competitive, but this is not sufficient in all cases. Is it the best use of a skilled Kentucky work force, to make low end appliances? Or would it be better that they be employed in producing products and services that require more skill and talent? I think it is the latter.
What struck me is the irony with their supply chains:
– 80% of their jet engine demand is outside the U.S. yet they manufacture in the U.S.
– Much of their appliance business is domestic, yet they manufacture those overseas.
It’s a funny but sad visual: the GE appliance ship from China passing by the GE jet engine ship from the US somewhere in the middle of the ocean.
The best manufacturing companies set up shop close to their customer base to simplify their supply chain, shorten lead times, and minimize waste (like inventory and transportation).
If this is the case, then why does GE burden itself with these long, costly overseas supply chains?
Maybe GE can’t manufacture jet engines overseas because their overseas operations don’t have the quality capability…
And maybe GE can’t manufacture appliances in the U.S. because their domestic operations are not lean.
Being competitive with local labor costs is a challenge that the best lean companies can solve. See Bill Waddell’s post
Josef’s Geography Lesson.
What struck me is the irony with their supply chains:
– 80% of their jet engine demand is outside the U.S. yet they manufacture in the U.S.
– Much of their appliance business is domestic, yet they manufacture those overseas.
It’s a funny but sad visual: the GE appliance ship from China passing by the GE jet engine ship from the US somewhere in the middle of the ocean.
The best manufacturing companies set up shop close to their customer base to simplify their supply chain, shorten lead times, and minimize waste (like inventory and transportation).
If this is the case, then why does GE burden itself with these long, costly overseas supply chains?
Maybe GE can’t manufacture jet engines overseas because their overseas operations don’t have the quality capability…
And maybe GE can’t manufacture appliances in the U.S. because their domestic operations are not lean.
Being competitive with local labor costs is a challenge that the best lean companies can solve. See Bill Waddell’s post
Josef’s Geography Lesson.
One reason GE cannot manufacture the majority of the jet engines outside the US is primarily due to regulations & quality checks that are required.
GE touts itself as a great leadership school & trust me they earn it. But it is in this case I have to throw a stone at them. The internal GE leaders (all of them or 99% of them) came up through the GE ranks. So in a lot of ways all they know is GE. Most are complacent and self seekers. Contrast this with Toyota. They grow a lot of their leaders from the inside up as well. Difference is they place an emphasis on people, not short term scenarios (reaction to Wall Street) so you have different outcomes & culture that is grown.
Contrast what the Toyota president said last week in the Wall Street journal. His approach is they must re-invent themselves & question everything…even down to how they design circuits….Take what Immelt says….WE CAN’T COMPETE…he doesn’t say anything about challenging his people to rethink the design, business, etc, but takes the easiest path called ‘outsourcing’.
I used to work for GE and have been at the Roper plant (High End Ranges) in Georgia. GE has the people & know how to make it happen. They just need a leader who needs to quit supplicating China & Wall Street by making excuses.