Innovation limiting: Lean Factories Find It Hard to Cut Jobs Even in a Slump

WSJ

Lean Factories Find It Hard to Cut Jobs Even in a Slump

By TIMOTHY AEPPEL and JUSTIN LAHART

SPARTANBURG, S.C. -- At a factory here that churns out plastic parts for everything from spray cans to blasting caps, laying off just one worker can be more trouble than it's worth.

The plant, owned by Cleveland-based Parker Hannifin Corp., has become so lean over the past decade that many assembly lines run with only a handful of highly trained workers.

Fewer Workers on Factory Floors

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Andy McMillan for The Wall Street Journal

In Parker Hannifin's Spartanburg, S.C., factory, workers are safer than in many other industries because cutting a full-time employee has become quite costly.

So while mass layoffs have driven the U.S. unemployment rate to its highest in 26 years, Parker and other companies like it are responding to the slump in more surgical ways, mainly by cutting hours and shedding temporary workers.

"Because of productivity gains, every one of my people carries more dollars in sales today," says Donald Washkewicz, Parker's chief executive. In 2000, the average Parker worker represented about $125,000 a year in sales. Today, that figure tops $200,000. "If I need to cut back, I have to cut back fewer people to achieve the same goal."

Similar trims are taking place at each of Parker's nearly 300 factories. And to varying degrees, this is happening at thousands of other large and small factories across the U.S.

The selective cuts help explain a curiosity of this recession. The manufacturing sector is suffering a sharp contraction and has had to slash many jobs -- some 1.3 million, according to a Labor Department jobs report released Friday. But fewer positions have been eliminated than would be expected given the depth of the slump.

As of February, 14 months into this recession, manufacturers have cut payrolls about 9.4%. That's slightly less than the 9.5% cut 14 months after the start of the 2000 recession, when the economy was already recovering. The drop in production and orders, however, has so far been much worse this time around, indicating that companies have sought ways to cut back other than simply shedding workers. As of January, the latest figures available, U.S. manufacturers cut production 12.8% since the start of this recession, compared with just 2.6% at the same point after the last recession began.

The sheer speed of this downturn, and the fact that it hit many manufacturers after the economy as a whole was officially in recession, may have muted layoffs. A good chunk of the factory sector was still humming along until late last year, aided in part by strong exports. Manufacturers may also be trying to hold on to workers as long as possible, in the hope that business revives.

But deeper changes in manufacturing are also playing a role. A decade ago, most factories tended to do "batch" work, with large groups of employees churning out endless runs of the same pieces. Since many workers did identical tasks, it was easier for companies to cut people during downturns.

That kind of work, which employs more people and includes a larger share of less-skilled positions, has been steadily migrating to lower-cost locales overseas. In the U.S., companies now have new equipment and streamlined operations that require fewer, more highly trained people to make more goods. The sector lost 3.5 million workers -- one in five jobs -- between January 2000 and the start of this recession. Even as employment contracted, production in that same time period rose 10%.

"When you get down to where we are now, where manufacturing is less than 10% of the employed population, there just isn't that much more you can cut," says Kurt Karl, chief U.S. economist at Swiss Re. Mr. Karl says manufacturers are especially eager to hold on to workers who are trained to operate their increasingly sophisticated equipment.

At Parker's Spartanburg plant, five workers make the tiny plastic rings that become seals on aerosol cans. Each member of the group runs a different set of high-speed machines doing a distinct step, such as extruding long noodles of plastic, grinding them or cutting them into final product.

The group can curb production several ways short of layoffs. Two workers can complete the first two steps in one day, then the other three workers can finish those products the next day, essentially cutting everyone's hours by half. Or, all five can take whole days off together. But permanently pulling one or two of them out of the mix is far more difficult to accomplish, and could make it impossible for the line to operate efficiently.

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Andy McMillan for The Wall Street Journal

Wanda Hughes, at Parker Hannifin's slimmed-down Spartanburg plant.

Mr. Washkewicz, the Parker CEO, says the last thing he wants to do is lay off a worker he's spent money training: "You want to sustain those skills."

But cutting hours might not be a long-term solution. Mr. Washkewicz says during the recession that hit the U.S. in the early 1980s, he headed one of Parker's operations that cut back to four-day weeks in order to save jobs. It worked for a while. But after about three months, many people were struggling to pay bills on salaries that had been reduced by 20%. The company ultimately changed its approach, laying off workers and restoring those who remained to a fuller schedule.

Many of the current Parker workers whose hours have been cut say that they prefer it to losing their jobs entirely, but that they don't feel out of the woods yet. "I try not to worry about the economy," says Miriam Porter, one of the workers now taking two unpaid days off each month. However, she adds, "it is looking kind of bad."

The Spartanburg plant, which employs about 133 workers, is part of Parker's hydraulic-filter division, which has plants in several U.S. locations as well as overseas. In the 2000 recession, the division's sales fell about 7%, prompting layoffs of 22% of its work force. This time, sales are down substantially more -- the company declines to provide a specific percentage -- but only 5% of workers have lost jobs.

Last week, Parker announced a one-year salary freeze for its workers world-wide. When it comes to scaling back production, each part of the company is given broad leeway in how and whether to cut workers or their hours. As part of its announcement last week, Parker trimmed the hours and salaries of everyone at its Cleveland headquarters by 10% through the end of June. The pay cut for top executives, including Mr. Washkewicz, was even bigger, because it included reductions in incentive bonuses.

Parker isn't alone. The Labor Department reports that in February, manufacturing production workers spent an average of 39.6 hours a week on the job, down from 41.2 hours a week a year earlier. In a survey of chief financial officers conducted by Duke University and CFO Magazine last month, 55% of manufacturing firms said that they had reduced employee hours over the past month, compared with 30% for other firms. Over the next year, 58% of manufacturing firms said they planned to cut hours, compared with 32% for other firms.

Streamlined production and technological improvements also mean fewer jobs need to be cut in a downturn. In another section of Parker's Spartanburg plant, two long rows of machines churn out plastic tubes for blasting caps. The small explosive devices are used by construction and mining companies to clear debris. With demand down for blasting caps, Parker recently went from making them on two shifts to just one.

That move cost the jobs of two workers who ran those machines on a second shift. A decade ago, those same two blasting-cap lines required up to eight people to operate. Eliminating production on that second shift would have meant shedding four times as many workers. The labor-saving improvements included replacing nearly 400 mechanical rollers that required workers to painstakingly apply lubricant throughout the workday. Now the line has mechanisms that don't need oiling.

Another factor saving jobs thus far is smaller inventories. A decade ago, Parker, like many other companies, structured its factories so that workers were building large batches of goods at each stage of production. That often led to huge stockpiles and made it harder to adjust when a downturn hit. There might have been six months or more of goods on Parker's shelves before the signal finally came to reduce production.

Parker's plants today have been largely restructured to create smaller production clusters. Seals for aerosol cans, for example, are only made in numbers that match the flow of orders. Mr. Washkewicz says those big stockpiles of yesteryear used to mean he had to cut more people, much faster. "In the past, we were trying to adjust to past sins, as well as the current drop," he says.

Some companies say tighter inventories helped them notice a dropoff in orders more quickly than they might have in years past. "We saw the economy changing early last year and started cutting back," says Rick Olson, who oversees four of Toro Co.'s plants in the northern U.S.

Toro, based in Bloomington, Minn., makes lawn mowers and other equipment that traditionally sees lots of seasonal flux in sales. Rather than laying off workers in droves, the company curbed seasonal hiring and overtime and didn't replace workers who had left.

Some smaller companies have found ways to shrink head count since the last downturn. Germantown, Wis.-based Mahuta Tool Corp., which makes items such as 600-pound screws used in cranes, went from 23 to 12 workers in the last bruising manufacturing recession. This time, the company has only had to cut two workers, reducing its payroll to 17, in part because each worker now represents far more production than before.

"The highly skilled person, you're not going to lay them off," says CEO Lynn Mahuta. "You will find other work for them to do."

For workers who haven't been spared the ax, the future is an open question. Spurgeon Jackson, a 34-year-old machine operator who has spent 15 years at Parker's Spartanburg plant, was one of the two people laid off from the second shift making parts for blasting caps. He was recently called back to cover for a worker on medical leave, but he doesn't know how long it will last.

"The 2000 recession was bad," he says, stopping next to the clattering row of machines, "but not nearly as bad as things are right now."

Write to Timothy Aeppel at timothy.aeppel@wsj.com and Justin Lahart at justin.lahart@wsj.com

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JANUARY 30, 2009
Car-Industry Slump Imperils Role in Spurring Innovation

By TIMOTHY AEPPEL

From Toledo in the west to Warren in the east, the Ohio Turnpike is a testament to a little-recognized side benefit auto makers have long provided to industrial America: the spur they give suppliers to innovate.

Paul Springer of Cleveland started a firm called Springco Metal Coating Inc. 32 years ago to make parts corrosion-resistant. To please the auto makers, he expanded his technology, such as by creating a conveyor system to carry parts through a series of chemical baths and ovens to apply complex coatings. Now he markets this technology well beyond the auto market, for products ranging from water heaters to laser-guided bombs.

"This industry was being driven by automotive in the early 1970s ... They were really the first to start the battle to make metal parts last longer," Mr. Springer says. Doing work for the car companies "put me in the position to put these coatings on all kinds of parts."

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Associated Press

Automobile factories like this Chevy Cobalt plant in Lordstown, Ohio, nurture industrial innovation by suppliers all along the Ohio Turnpike.

How difficult it will be for the auto industry to continue this nurturing role without government help was underscored yesterday when Ford Motor Co. reported a $5.9 billion fourth-quarter loss, saying it would draw down a credit line and cut costs by another $4 billion this year. Washington has already provided $17.4 billion in emergency loans for General Motors Corp. and Chrysler LLC. Ford said Thursday it doesn't plan to seek similar federal aid, barring a "significant event."

The domestic auto makers, while roundly criticized over the years for resisting product innovations, have often sparked inventiveness in parts manufacturers, which must compete hard for the business. In this way, the car makers infuse both technical innovation and other new business ideas, such as for cost-control, in the wider economy.

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"What you see with the auto industry is that it's driving a lot of technologies in the background, like machine-tool makers, that enable a large part of the economy to advance," says Thomas Klier, a Federal Reserve Bank of Chicago economist. The auto makers' fading clout could erode that influence, he says.

Economists are of two minds on the importance to the economy of the car makers' nurturing role. "The auto industry is a driving force for innovation in a variety of industries -- materials, electronics," says Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. "I don't think you can have a true [major] economy without it."

Still, he says that function isn't vital enough, in itself, to justify bailing out the auto industry. Testifying to Congress last year, he warned that the government could end up supporting the auto sector indefinitely.

Nigel Gault, an economist at IHS Global Insight in Lexington, Mass., says one wouldn't "necessarily want to preserve an auto industry just because of its spillover benefits to the rest of the economy. If we don't use resources to build autos, but use them to build something else, maybe that something else would have just as much spillover benefits."

One reason auto makers have such a broad effect is their large scale, creating a steady flow of business. Once firms that supply them with goods and services get established, these businesses are positioned to diversify out into other niches, too.

The effects of the industrial diaspora are evident all along one of America's major industrial corridors, the Ohio Turnpike. Anchored toward the west by Toledo, the self-styled "Auto Parts Capital of the World," and on the east by a sprawling GM plant in Lordstown, the turnpike links businesses that sprang up from the auto industry and branched out beyond it.

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At the same time, most remain closely tied to the industry, whose slump is causing a wave of layoffs among companies far down the industrial food chain. U.S. manufacturing activity declined in December to its lowest level since June 1980, according to a recent report from the Institute for Supply Management.

Grand Aire Inc. in Swanton, Ohio, was started two decades ago by a Pakistani immigrant who recognized a growing need to rush auto parts from one place to another. Detroit auto makers were among the first U.S. manufacturers to embrace the "just-in-time" inventory policy, which demands fast delivery of materials.

This inventory practice then spread throughout the economy. Grand Aire, with offices situated just off the tarmac of the Toledo airport, began airlifting products not just for cars but for appliance factories, food processors and West Virginia poultry farmers, for whom Grand Aire has transported baby chicks.

One area of growth in the current lean times is flying surgical teams around as they harvest and deliver human organs.

"Businesses like [Grand Aire] never existed before, and they only came about because we had a healthy auto industry here to build it on," says Tina Nowak, a company spokeswoman.

But Grand Aire still depends for 80% of its revenue on the automotive industry. With that in a deep slump, Grand Aire has laid off its pilots and grounded its fleet of seven jets, switching to the cheaper alternative of contracting with other operators to fly parts for it.

Car makers also were among the first manufacturers to deploy computers on the factory floor, initially using them just to run individual machines. The next step was linking computers together, to give managers better oversight and control over whole production processes.

While doing so promised big productivity gains, it was very expensive. It took the U.S. car makers -- with their deep pockets and growing anxiety in the face of rising Asian competition -- to do that. The Detroit car makers are widely credited with bankrolling the development of factory controls that are now common across the U.S. economy.

"We really learned most of what we now know from those growth years in automotive," says J. Scott Healy, a Toledo-based salesman for Rockwell Automation Inc., a leading producer of factory-automation equipment and software that is based in Milwaukee.

Today, just 15% of Rockwell's revenue comes from the automotive industry, including tires. But Mr. Healy estimates that 60% of his work in northwestern Ohio can be traced to the Big Three or the so-called New Domestics, such as Toyota Motor Corp. and Honda Motor Co.

The remaining nonautomotive clients of Rockwell also are benefiting from technology that was created for car makers. Mr. Healy just finished a project for Marathon Oil Corp., which nearly doubled the capacity of the pipelines coming from a new Louisiana refinery by using automation that sped the flow of liquids through the pipes. Another recent project allowed an Ohio maker of beverage cans to churn out 40% more lids using the same number of machines.

Farther east and just south of the Ohio Turnpike, in Cuyahoga Falls, is Prospect Mold Inc., whose business is carving cavities in blocks of steel for making plastic parts. When melted plastic is squirted into the cavities with high-power injection-molding machines, the molds form the finished parts.

Prospect is best known for producing molds car makers use to form taillights. Sitting in one corner of its factory is a stack of 14 huge steel molds, representing a taillight assembly for a new model for GM. But Prospect recently was told the project was delayed.

Luckily for Prospect, over the years it has used its auto-industry base to diversify into making molds for other industries, as well as into machining finished metal parts. The pressure from auto makers for greater precision and complexity led Prospect to develop skills it now uses to supply other industries that demand precision.

One of them is aerospace. "I can't imagine someone opening up a shop and saying: 'I'm going to do aerospace,'" says Brandon Wenzlik, vice president of engineering. "All those years of developing our capabilities and acquiring technology -- that's what makes all this other stuff possible."

The ideal for companies like this is to keep a healthy mix of customers, to reduce reliance on auto orders and help weather cyclical downturns in various industries, on the theory that at least a few will be strong when others are weak. What's unusual today is the simultaneous slump across many different industries, from cars to appliances.

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Springco Metal Coating

Springco Metal Coating Inc. developed expertise for making car parts corrosion-resistant and did the same for appliances and guided missiles.

In Cleveland, Mr. Springer is rushing to snare new types of business for Springco. It started out in 1977 almost entirely focused on automotive work. As it developed its expertise in metal plating, Springco steadily took on more nonautomotive work, which now makes up close to half of its business. Mr. Springer says the auto makers, besides spurring him to develop new and better corrosion-resistance treatments, have steadily pressed him to become more efficient.

Akron, near the eastern part of the Ohio Turnpike, has long been a center of tire manufacturing. Particularly in earlier days, after World War II, workers ended the day with a lot of gunk on their hands.

One tire worker, Goldie Lippman, mentioned to her husband, Jerry, that the women she worked with didn't like cleaning their hands with the harsh chemicals they had to use. Mr. Lippman started a business, called Gojo Industries Inc., to sell heavy-duty soap to the tire makers.

Today, the top floor of Gojo's headquarters building in Akron holds a sink-filled laboratory where the company researches soaps and cleansers, trying to improve on products like its Purell hand sanitizer. Gojo dispensers now can be found in factories of all kinds, as well as in hospitals and restaurants.

"We got our start in automotive, but that just opened the way for us to get into these other markets," says Steven Pruett, a vice president at Gojo.

The auto industry has also pushed innovation to the larger manufacturing economy by shifting more research-and-development responsibility to suppliers. This is essentially what happened to Astro Manufacturing & Design. Astro opened an engineering shop in the 1980s in Warren, near Cleveland, to serve GM's auto-parts businesses, eventually spun off into the independent company Delphi Corp.

Delphi asked Astro to engineer and build complex automated equipment to make auto parts, and later to devise simpler machines for use in its Mexican and Chinese factories to take advantage of unskilled labor there. Using what it learned serving the auto industry, Astro now is working on a project for General Electric Co.'s lighting division, creating equipment to pick up glass globes for floodlights as they come off the assembly line and stack them on trays.