The Epitome of Waste

by BILL WADDELL

I was thumbing through the Chrysler bankruptcy filing and came across a few numbers that are worth sharing.  The great thing about Chrysler being in bankruptcy court is that they have to put a lot of details into the public domain.  The situation at Chrysler is very much like that which I encounter at many of my consulting clients.  With them I am typically bound by a confidentiality agreement, so I can't pour the numbers out in Evolving Excellence.  Chrysler, however,is fair game thanks to the United States Bankruptcy Court Southern District of New York.

According to the bankruptcy affidavit, Chrysler has 38,500 employees plus another 2,300 contract folks for a total of 40,800.  The affidavit also states that 27,600 of those employees are members of a union - the UAW for the most part.  I am going to make an assumption here ... just about every manufacturing company with which I have worked shoots for a Direct to Indirect Ratio of 4:1, but actually operates at closer to 3:1.  Let's give Chrysler some greatly undeserved benefit of a whole lot of doubt and say that they are a 4:1 outfit, so 80% of those union workers are direct labor - 22,000 people.

So if Chrysler has 40,800 people and only 22,000 of them actually make cars, while the rest are involved in mostly non-value adding other things, that is a problem.  But the really startling number in the filing is that Chrysler has 3,200 dealers which employee 140,000 people. 140,000 people working at dealerships and 22,000 people making cars???  It takes more than 6 people to sell and service a Chrysler for every 1 needed to build a Chrysler.  How bad is a Chrysler if it takes that many people to convince people to buy one, then to keep it running?

Chrysler sold about 1.5 million cars in the US last year through these 3,200 dealers.  The dealers are open 6 days a week, for the most part.  That works out to better than 40 people at the average dealer to sell and take care of 1.5 cars sold per day.  Plus another 3 or 4 people back at Chrysler to handle the paperwork.

By comparison, Toyota sold one and a half times as many cars in the USA as Chrysler last year through only 1,400 dealers.

As the lean community knows all too well - DIRECT LABOR IS NOT THE PROBLEM!

Far too many manufacturers fall into the Chrysler trap.  Money spent on marketing, selling and administration is viewed as necessary, while lesser amounts of money spent on labor to actually build the product is seen as a major problem.  Running off to China to gut the cost of direct labor, while leaving the enormous costs of selling and administration in place is a fool's errand.

Will Rogers said, "If advertisers spent the same amount of money on improving their products as they do on advertising, then they wouldn't have to advertise them".  As far as Chrysler is concerned, if they spent just a fraction of the money on building better cars, they wouldn't have to spend much on selling and servicing them. 

How about your company?

Comments

[david foster]

Don't many Chrysler dealers also sell other kinds of cars? What would happen to the 140,000 number if you allocated it to reflect the non-Chrysler vehicles sold & serviced through the dealer network?

Bill's comment: If half of the cars sold are other brands and used cars, there are still 3+ sellers/servicers for every value adder.

[John Serrano]

Although Chrysler might have claims in bankruptcy against the dealerships and the dealerships might have claims against Chrysler, Chrysler doesn't own the dealerships. Given this, why is the ratio of how many dealerships and dealership employees Chrysler has to Toyota relevant to Chrysler's bankruptcy?

[Bill Waddell]

John,

The ratio is not relevant to the bankruptcy - the bankruptcy filing was merely a treasure trove of information on the Chrysler cost structure. It is relevant to Chrysler's lack of a lean focus because the customer pays for the labor - all of it, whether it is labor working for the Chrysler Corp or some dealer. Lean goes from end to end throughout the entire value stream, and it does not end at the legal boundary between companies, especially when one company (Chrysler in this case) dominates the value stream.

Also, the line between the two is not as bright as many might think. Hundreds of those dealers are in buildings owned by Chrysler Realty, LLC. Chrsyler gets rent from the dealers, along with an outlet to forcibly dump excess inventory. They shoot themselves in the foot in the long term but having an excessive dealer network provides a vehicle for solving short term problems.

[Tom]

Can you really assume that only 80% of the Union workers are direct labor? Wouldn't they use all the union workers as direct labor and non-union for indirect? (At least in a best case scenario.)

Not that this makes any difference to your overall point. Even if you look at it that way you still have a 2:1 direct to indirect ratio for only internal Chrysler employees.

Bill's response: Tom, there are a number of indirect folks in the UAW, including maintenance people, material handlers, some of the supervisions, crane operators, a large portion of the clerical staff - basically everyone paid on an hourly basis, and even some of the salaried people.

I believe that the percentage of UAW members working in direct, value adding jobs is actually quite a bit lower than the 80% figure I used.

[Jeff Morrow]

On a related note, if you were Jim and wanted to bring more of the Toyota Way to Chrysler (accepting that you're gonna have to deal with Marchionne), what would you do to get things started? What would you have for a longer term game plan?