Harley Goes Lean to Build Hogs , Small -Business Lessons

Small-Business Lessons From Harley-Davidson's Turnaround
New York Times
Lean, or just-in-time, manufacturing is the Toyota production system, which started with W. Edwards Deming and his work with statistical quality control.

September 24, 2012, 4:00 pmComment

Small-Business Lessons From Harley-Davidson’s Turnaround

By JOSH PATRICK

Darren Hauck for The New York Times A Harley-Davidson Museum in Milwaukee

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This weekend, I read an article in the Wall Street Journal about how Harley-Davidson turned itself around using “lean” manufacturing strategies. Lean, or just-in-time, manufacturing is the Toyota production system, which started with W. Edwards Deming and his work with statistical quality control. Whenever I see this kind of article about a large company, I think about how the thoughts and principles can be applied to the smaller companies I work with.
As I read this one, three things occurred to me.
1. The idea behind lean is to create capacity — not to reduce employee headcount. In this case, Harley-Davidson reduced its headcount by more than 1,000 people using lean techniques. Harley-Davidson probably can do this just once. If it continues to use lean strategies to reduce headcount, it will see employee enthusiasm for the program wane.
People don’t want to see their jobs go, and they don’t want to see their friends’ jobs go either. If the layoffs are an economic necessity, they can work. But you can only have so many economic emergencies before people say enough is enough.
My favorite use of lean is to create capacity for more business with the same headcount. I find that employees get excited and stay excited when more business comes into the company. If using lean techniques to make the company better allows for more job security through efficiencies, employees are all for it. If you cut employees in for a piece of the action through bonus programs, so much the better.
2. Installing lean in large companies is much different than installing lean in small ones. Large companies have lots of resources, both economic and human, that they can throw at arrangements like this. Small companies do not.
Still, I’m a big believer in lean activities in small companies. I’ve seen successful implementations increase profits by 50 percent or more. While large companies can afford to do more than one lean project at a time, the small company successes I’ve seen take it one step at a time.
3. Often, we see these activities led by those who have been through M.B.A. programs. The problem I often see with M.B.A.’s in smaller companies is that their educational training is for making positive changes in large companies. But those changes don’t always work in smaller companies with fewer resources. And an understanding of the strategies that do work in small companies is often totally foreign to those with advanced business degrees.
I’ve got nothing against M.B.A.’s. I’ve just come to believe that those with advanced degrees often need to have a complete reset in their beliefs about how successful change is done in a smaller company. Thankfully, there are several programs in the country that concentrate on small businesses.
I found this article very provocative. What do you think?

Harley Goes Lean to Build Hogs

By JAMES R. HAGERTY

YORK, Pa.—If the global economy slips into a deep slump, American manufacturers including motorcycle maker Harley-Davidson Inc. HOG -1.70% that have embraced flexible production face less risk of veering into a ditch.

Harley-Davidson has fine-tuned its operations for smooth riding should the economy slip back into a slump. James Hagerty has details on The News Hub. Photo: Bloomberg.

Ready to Ride Out Rough Patches

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Miranda Harple for The Wall Street Journal

Motorcycles sat parked outside Harley-Davidson's Vehicle Operations building in York, Pa. The facility assembles Touring, Softail, CVO, and Trike models.

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Until recently, the company's sprawling factory here had a lack of automation that made it an industrial museum. Now, production that once was scattered among 41 buildings is consolidated into one brightly lighted facility where robots do more heavy lifting. The number of hourly workers, about 1,000, is half the level of three years ago and more than 100 of those workers are "casual" employees who come and go as needed.
This revamping has allowed Harley to quickly increase or cut production in response to shifting demand. "This is a big bang transformation," said Ed Magee, a Louisiana-born ex-Marine officer who runs the York plant, one of the Milwaukee-based company's three big U.S. production facilities.

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The efficiency gains mean Harley should be able to raise its operating profit margin for the motorcycle business [excluding financing operations] to nearly 16% this year from 12.5% in 2009, said Craig Kennison, an analyst at Robert W. Baird & Co. in Chicago. Harley no longer needs peak production levels to achieve strong profits, he said.
Overall, U.S. manufacturers generally are in better shape after slimming down and rethinking sloppy practices during the brutal 2008-09 recession. Total profits at domestic manufacturing companies, which were running at an annual rate of $363 billion in this year's first quarter, are up from $290 billion, five years ago, before the recession, according to government data.
Companies often say they learned the lessons of the past, only to get blindsided by some unexpected twist in the economic cycle. But companies generally are in much stronger financial shape than they were a few years ago. "There is a focus on performance and remaining profitable no matter what the business environment is," said Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, an economic research group in Arlington, Va.
Like Harley and others, Caterpillar Inc., CAT -0.93% a maker of construction machinery, now relies more on "flexible" workers, including part-timers and people working for outside contractors. Caterpillar generally doesn't have to pay severance costs when it lets such workers go during slow periods. Flexible workers accounted for about 16% of its global workforce as of June 30, up from 11% at the end of 2009, when many of those workers were cut because of slumping orders.
Harley got more serious about cutting costs when Keith Wandell became chief executive in 2009 amid a severe slump in motorcycle sales. On his first visit to the York plant, Mr. Magee recalled, Mr. Wandell declared the layout and working methods unsustainable. Harley began scouting sites for new plant to replace York and settled on Shelbyville, Ky. The company notified the International Association of Machinists and Aerospace Workers, or IAM, which represents York workers, that the plant would close and move to Kentucky unless they approved a new contract giving Harley more control over costs. Union members voted overwhelmingly to make concessions, and Harley stayed in York.
Instead of 62 job classifications, the plant now has five, meaning workers have a wider variety of skills and can go where needed. A 136-page labor contract has been replaced by a 58-page document.
Kim Avila, 49 years old, who has worked here for more than 17 years, said she saw the concessions as the only chance to preserve jobs. The pace of work is faster now, but she said managers and workers have more mutual respect and work together more smoothly. In the paint department, where she works, people used to do the same chore all day but now rotate through several tasks to avoid body strain and boredom. They are encouraged to fix some minor flaws in the finish themselves rather than kicking them to another department.
Some items formerly made in York, such as brackets and screws, come from outside suppliers. Production fluctuates depending on day-to-day sales, so the company doesn't have to stock up well ahead of the spring peak-selling period and guess which models and colors will be popular.
Similar changes are in the works at Harley plants in Kansas City, Mo., and near Milwaukee, Wis. In all, the restructuring will cut costs of doing business this year by at least $275 million, Harley estimates. "They've done a phenomenal job in reducing costs," said James Hardiman, an analyst at Longbow Research in Cleveland, who nonetheless has a neutral rating on the stock, due partly to uncertain demand.
The transformation has been trying at times. Harley's Mr. Magee likened it to having "open-heart surgery as we were running the marathon" in that Harley had to maintain production in York as it rebuilt the plant. New software installed recently to guide production temporarily left the plant "constipated," one manager confided.
Robots now do most of the welding and metal slicing. They slide flat sheets of steel into an 80-ton press that molds metal into fenders. A computer takes snapshots of each frame or gas tank moving along the line, relaying that information to the painting equipment so it can prepare needed hues.
Automation has its limits. People, some wearing biker garb such as muscle shirts or U.S. flag head scarfs, still do quality-control and assembly work. To check for leaks, workers plunge gas tanks into water basins and watch for bubbles. It's the same method used for a century at Harley. Mr. Magee shrugged. "It works," he said.
Write to James R. Hagerty at bob.hagerty@wsj.com

A version of this article appeared September 22, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Hog Maker Harley Gets Lean.

Josh Patrick is a founder and Principal at Stage 2 Planning Partners where he works with private business owners on wealth management issues.