Lean Business in Modern Automotive Manufacture: Porsche

In the early 1990’s, Porsche faced a severe crisis with profits plummeting from a height of $258m to losses of more than $180m at the company’s lowest ebb. After a 70% decrease in sales orders between 1986 and 1993, the company was left teetering on the verge of bankruptcy, and rumours of an impending takeover abounded. The company was competing with Japanese companies producing ‘look-alike’ sports cars for as little as half the price of a Porsche model – competitors who had virtually annihilated Porsche’s foothold in the vital US market. In basic terms, Porsche was fighting for survival; sales had been crippled by the recession and costs were out of control.

Arno Bohn, CEO at Porsche from 1990 to 1992 blamed the company’s problems on external economic factors, saying “we are currently in an economic crisis” and stating that “Purchasers of luxury sports cars react more sensitively to the slump than customers of a middle-class vehicle.”

Other commentators were less convinced. In 1991, respected business publication Manager Magazin reported that “There is a lack of a clearly defined strategic approach that is instilled in the managers,” while as far back as the mid ‘80s writers for Wirtschaftwoche identified a root cause of the company’s financial woes in the statement “four cylinder models, six cylinder models, eight cylinder models – Porsche has everything that leads to high production costs.

The truth was that the downturn in Porsche’s fortunes could not simply be put down to the overall state of the economy, and something big had to be done if Porsche was going to survive. It is incredible then, that today the same company is valued at $27 billion and makes greater profits on each car it produces than any other vehicle manufacturer.

Porsche’s incredible success story centres on lean manufacturing. Taking charge of Porsche in October 1992 at the tender age of 41, Wendelin Wiedeking was the youngest of a new generation of German auto manufacturing executives, and thankfully he was familiar with the power of lean. He knew that it would take ruthless restructuring and a complete transformation of the company’s production system to save one of the greatest symbols of the German sports car world. And he knew where to find a guide on the road to success.

On taking the reins, Wiedeking is quoted to have said “We needed a complete culture shock, because that is the only way to achieve a revolution in a traditional firm like Porsche.” His conviction was that the only people qualified to deliver the requisite shake up were Porsche’s main competitors: the Japanese. He asked for help from precisely the people that Porsche had to beat in order to survive, and he did this because he knew they were the best.

For 30 years, lean consultants Mr Iwata and Mr Nakao had been part of Taiichi Ohno’s inner circle, privy to every detail of the development of the fabled Toyota Production System. Mr Iwata in particular had spent years heading up of Toyota’s Kaizen or continuous improvement programme. In the mid-1980s, when Taiichi Ohno retired, Mr Iwata left Toyota to establish a consultancy firm called Shin-Gijutsu with Mr Nakao, and it was this firm that Wiedeking was determined to enlist.

There was a problem with this plan. Mr. Iwata and Mr. Nakao had helped to spread Lean methodologies throughout the manufacturing world, using their prodigious talents and knowledge to improve the manufacture of products ranging from biscuits to aeroplane engines. The one thing they vowed, however, was that they would never work for a foreign (non-Japanese) vehicle manufacturer. In their eyes, this would be disloyal – and besides they had had enough of making cars. The consultants’ resolve was well documented and they had already turned down several high-profile offers from international auto companies.

Mr Wiedeking was unconvinced. The fate of Porsche hung in the balance, and he knew he needed the help of Shin-Gijutsu and he found a way to get the gentlemen on board.

Mr Nakao explained how the consultants ended up retracting their vow and working with Porsche in the simple statement “Perhaps Mr. Wiedeking was aware of the Japanese custom that when a top manager asks for something three times, you cannot refuse… so we are here.”

Despite the firm’s sterling reputation, no one can say that bringing in Shin-Gijutsu was not a courageous decision. While in the US and UK it had been widely accepted for many years that the Japanese bested any other car makers in terms of the quality and efficiency of their production systems and the vehicles these gave rise to, the Germans remained to be convinced. For them it was a matter of pride that they were known as the greatest engineers in the world. It was almost heretical then for Wiedeking to turn to this rival nation and unequivocally ask for their aid – not once, but three times.

Wiedeking stuck to his guns despite the fact that the idea of bringing in Japanese consultants (whose services cost a fortune) was not well received by everyone at Porsche. His secret was that he had every faith in the superiority of German engineering, but in order to pull his beloved company back from the brink of bankruptcy and avoid corporate take-over he knew there were other skills that they needed to learn from the Japanese masters. As he put it “The Japanese are kings in three areas: first, production; second, production; and third, production.”

For Iwata and Nakao, the problems inherent in Porsche’s production system were all too obvious; Mr Iwata was unimpressed on entering the manufacturing plant, noting that “Everybody here talks of what they have achieved, but I only believe what I see. And most of that is the way we did things in Japan 30 years ago.” Mr Nakao was equally appalled by the Porsche plant, stating of his initial impression “’Where is the car factory, I asked myself. It looks like a mover’s warehouse. And there were no workers, just apes clambering up and down shelves.”

It was in this warehouse full of apes – otherwise known as the engine assembly room – that one of the first and most dramatic transformations was to take place. Mr Nakao paints a vivid picture of the scene that met him, saying “You could not see what people were making. There was only a dark tunnel, with shelves two and a half metres high on either side, stacked with parts. The workers spent half their time climbing up and down looking for bits and pieces.”

The initial response of the Shin-Gijutsu consultants was to force Porsche to reduce the height of their brand new, state-of-the-art, steel component shelving. The shelves were brought down from a staggering 2.5m to half this height, allowing engineers to reach the parts they required without having to climb around like ‘apes.’ This was merely an intermediate step. Soon after, the shelves were removed altogether.

The large shelving units had housed a multitude of parts, enough for 28 days’ production. In contrast, at the modern minimalist Porsche plant parts enough to complete only 30 minutes of work hang on purpose-built trolleys that are continuously recycled up and down from the parts ‘supermarket’ located in the basement. Required supplies are delivered regularly from outside suppliers in response to a Kanban (visual ordering) system. In this way, Porsche’s shop floor production has been transformed into an efficient, lean, Just-in-Time system.

This may seem like an insignificant step on first inspection, but in fact inventory is one of the most destructive types of waste or ‘Muda’ that it is possible to have. In the simplest sense, having 28 days’ worth of parts sitting uselessly on shelves equates to having thousands of dollars in cash sitting on those shelves instead of in a bank account earning interest for the company. Beyond this, inventory of this magnitude takes up a great deal of space, and this requires leasing of land, heating and lighting of storage areas, and hiring of security to prevent theft. These expenses are eliminated by maintaining only a minimal inventory. Lastly, reducing the inventory leads to a more efficient process on the shop floor. Engineers have to hand exactly the parts they require to complete the tasks they are working on; there is no need to spend time searching for items, climbing shelves or tripping over excess stock.

Developing a ‘Just in Time’ delivery system involves suppliers agreeing to deliver parts no earlier than 24 hours before they are needed in manufacturing processes. On top of this, it is necessary to ensure that parts are not delivered to a workstation along the production line until they are required by the engineer. This is where a Kanban system comes into play, which provides visible signals to indicate when parts need to be replenished after being ‘consumed’ by a process. Kanban cards are attached to materials and removed when those materials are used in a process. The Kanban cards then make their way back to supplier processes to indicate that more of that part is needed. Controlling the amount of Kanban cards on the production line and restricting the release of inventory unless a card has been received to signal replenishment is needed, the amount of inventory can be effectively managed and minimized.

This begs the questions “what if suppliers experience a delay and a part is not available when it is needed?” While the validity of the question cannot be doubted, the simple truth of the matter is that the costs associated with warehousing excess inventory are significantly greater than the costs of rare delays caused by missing parts.

Developing a Just in Time production system was at the heart of the changes wrought within Porsche by the Japanese consultants, though a great deal of restructuring and re-educating took place to create a lean culture. The results have been nothing short of breath-taking. Only one year into the program, production time of the Porsche Carrera had been reduced by a third, the percentage of vehicles requiring expensive defect rectification at the end of the production line had been halved, and inventory had been reduced by 44%… And the improvements by no means stopped there.

Today Porsche is the most successful and profitable vehicle manufacturers in the world. Its impressive production systems gives Porsche the flexibility to create 480 vehicles per day in any mix, productivity increases on average 6% per annum, and the reach of stock is less than one day. Porsche operates a truly lean system and has reaped the rewards associated with this. Perhaps then, the company can be forgiven then for tending to give the impression that it was founded in August 1991, the start of the business year that saw Wiedeking take his place at the helm.