This was initially written to try to get myself into one of the web magazines as a writer, but that never happened - I guess they didn't like it. I still think the thoughts are good though.



A Pox on Your Contract House!

Contract employment is nothing new. For decades, American automobile manufacturers have filled cyclical gaps in their human resources structures with contract employees.

While this practice gives companies flexibility, it is the author’s belief that the trend has grown into a liability.

Contract employment of engineers and designers is no longer used to smooth out the peaks and valleys in the human resources cycle related to vehicle development. It has become the modus operandi for daily operations at GM, Ford and DaimlerChrysler.

The trend has grown to the point that ENTIRE COMPANIES are now contracted to complete vehicle development activities. Companies such as EDAG are contracted to develop and package entire vehicle bodies for General Motors.

Wait a minute here… Entire vehicle bodies?

If anything in the world needs to be considered a core competency for an automobile manufacturer, you would think it would be the vehicle body, wouldn’t you? The application is vehicle specific. Economies of scale are far harder to realize than those for powertrain or chassis components (powertrain development can be applied across any number of platforms – think of the number of vehicles that utilize the ubiquitous GM 3800 V-6).

Furthermore, vehicle bodies contain a large number of components that are going to be produced in-house by the vehicle manufacturer, meaning that some knowledge of the infrastructure and manufacturing issues the company faces will be central to the design process. How is a contract shop, coming into a vehicle development program from the outside, going to be familiar with these issues at the outset?

The simple answer is, they aren’t.

The immediate implications of that fact are the contract shop is either going to have to learn these constraints quickly to design the components in an optimal fashion, or is going to make really expensive mistakes along the learning curve.

That’s the first “devil” in the details of contract engineering – the initial learning curve. When, at the close of a program, and all of the costs are totaled up, this writer is willing to bet that the mistakes associated with having to climb the learning curve never figure into the analysis. They are merely treated as “the cost of doing business”.

And then, to top it all off, at the beginning of the next program, the vehicle body development goes out for quote and the incumbent contract employment supplier doesn’t necessarily win the next contract. If the incumbent supplier doesn’t win the contract, then the vehicle manufacturer gets to pay ANOTHER COMPANY to climb the learning curve of mistakes in the vehicle body development process. More mistakes are made, and more money is wasted.

In all of this, can it be said that the contract suppliers are doing a better or worse job than the vehicle manufacturer would? On the first program, there is no way to tell if the vehicle manufacturer would have produced the same result for less investment. The inclination in the analysis would be to look at the labor savings alone, as that is the easiest cost to identify. No one has a formula to assess the cost of mistakes that never happened on the second program.

On the second program, EVERY repeated mistake is wasted money. Instead of using internal expertise to avoid the problems that occurred the first time around, the vehicle manufacturer is paying to train the new contract shop how to develop the new vehicle.

The core of the problem is that somewhere along the line, somebody came to the erroneous conclusion that product engineering and design are commodities.

Accounting is a commodity. Janitorial services are a commodity. Staffing for human resources is a commodity. PRODUCT ENGINEERING AND DESIGN ARE NOT COMMODITIES.

The immediate question that those who disagree will come up with is: If the other disciplines are commodities, how is product engineering any different?

Really, this one is simple… In accounting, there are very few changes in procedures and practices that cause completely different core competencies to have to be acquired by the employee. I imagine that the shift to accounting by computer caused some, and generated a great deal of friction as the new technology was brought into place. But that revolution is over. Computers are now a fundamental part of accounting, and large-scale shifts in the required competencies for accountants are no longer required.

In product engineering and design, technology drives constant shifts into the core competencies of the employees. If you were doing exterior body panel engineering 10 years ago, chances were that you were intimately familiar with stamping sheet metal. Polymeric and fiberglass technology was out there, but sheet metal would be nearly impossible to displace on a cost basis alone.

All of that has changed in the last ten years. Now the product engineer has to have familiarity with stamping steel, stamping aluminum, injection molding, welding, vacuum forming, SMC…. etc… so that optimal engineering decisions can be made. In the next two to three years, even more technologies will enter the industry for body panels, and they will all have to be learned also.
This is not simply a passing familiarity either. If the product engineer and designers are not completely familiar with the manufacturing processes involved for each type of panel, costly mistakes are going to be made. If a company pays an outside shop to learn all of this technology and apply it, then there is a very high probability that all of that expertise is going to be lost when the program ends. Then the company gets to pay someone else to learn it all over again on the next program…. and make all of the mistakes all over again.

The follow-up question would then be: If the company is paying for all of this training during the development process, then what advantage is training an existing employee instead of using a contract shop?

This one is simple also…. The existing employee already understands the assembly processes used to put the parts together at the manufacturing facility, the design and quality procedures used to create the part, and all of the other associated requirements for durability, validation and quality engineering. Therefore, he/she has an innate advantage relative to the new employee.

The new employee’s learning curve not only involves the utilization of the technology in question, but also the background information required to complete the design.

Furthermore, any of the lessons learned in the validation of the previous components is lost. Written tools such as DFMEA’s (Design Failure Mode and Effect Analyses) and PFMEA’s (Process Failure Mode and Effect Analyses) are a poor replacement for having lived through the validation of a previous component.
Which then brings us to the second “devil” in the details of perennial contract employment…

The positions may remain constant, but the individuals in the positions move around constantly.

In a word, retention of employees in automotive design and engineering is miserable. The positions at the core of the process, the design release engineer and the designer, are traditionally young people that are being underpaid relative to what they can very easily make if they were to start looking for another job. The positions themselves are complete non-entities in the corporate structure. Contract employees are generally treated as “second-class” citizens within the vehicle manufacturers themselves – take a quick look at the differences in the badges worn by a contract employee and a direct employee at GM some time.

The best career move any of these folks can make involves leaving the contract shop for direct employment at a Tier 1 or Tier 2 supplier. They will immediately get a substantial raise, and will no longer be considered part of the “untouchable” caste. Heaven knows, and the young employees learn very quickly, that direct employment with the vehicle manufacturer is a remote possibility at best.

What fool would pass up a big raise and a chance to start themselves on a potentially successful career path to remain a second-class citizen with a tenuous career path at best?
Every time a young engineer with potential is lost, the vehicle manufacturer loses out. I imagine someone could, with a focused effort, identify the costs of one of these losses, but to the immediate cost analysis (the labor cost for the contract engineer) the cost is transparent.

The only difference is that the vehicle manufacturer gets to pay for the learning curve again and again and again… and all the mistakes associated with it…

My father spent over 35 years with General Motors in seat systems, he started as a detailer (the lowest rung in the old drafting progression), went through layout, designer, senior designer and then was hopped on over to senior project engineer, followed by engineering group manager.

He, to this day, knows seats as well as any human being alive. A number of the innovations in seats that we take for granted were his (power recliners, all-belts-to-seat systems). He retired a while back, and while losing expertise to retirement is unavoidable on an individual basis, losing it because of what may be a horribly short-sighted business practice is not.

The Big 3 don't build 35 year experts any more. They simply don't exist, or they are so rare that I hardly ever run into them. People jump from shop to shop, project to project.

Hire the best and the brightest.
Give them responsibility.
Expect flawless performance and reward the employee when it is achieved.
Give them a career path.
Retain them.

 

Here's my perspective (not that I disagree w/ you).

One of the bigger problems of the domestic manufacturers lies in the way they handle vehicle life cycles.

Asian manufacturers tend to not change their cars much. Sure, they restyle them every 4 years, but they start from the previous generation, steadily improving it (even at the component level), using what they have learned along the way in the new design. If you look at a Civic or Accord or Camry - how much have they really changed in the last decade or so? Quality issues are sure to be designed out of the new parts. The same suppliers that sold the old parts are likely to sell the new parts. It's a very conservative approach, yes... but look at the differences in quality.

Domestic manufacturers, on the otherhand tend to let their cars languish in the market for 8-12 years. Quality or customer satisfaction issues that can't be cheaply or easily fixed persist for years until the next redesign. When it finally happens, there is nothing worth keeping so they essentially start from scratch. This creates unnecessary risk. Every part, every component is being designed and assembled for the first time. This is complicated by the fact that many of the components are designed by a different supplier than the old one. Odds that there will be a part failure or quality issues are far higher. In addition, the design time is longer and more expensive.

The end result seems to be out of date, stale products with lower quality and reliability than the competition. If you look at the domestic auto industry, this seems to be true more often than not.

 

Well, the first thing keeping this from getting published is the accuracy and technical content - both are much too high for a mainstream publication Nice work!

You hit on a substantial part of the problem. I think that the outsourcing of nearly the entire Dakota/Durango chassis to Dana is when people should have taken a step back and examined the situation. I mean, if you can't even design and build the chassis, what the hell are you doing? Handing off the interior is one thing; giving the chassis or drivetrain away to a supplier is something altogether different. As it stands right now, you've got a lot of guys in Detroit who think that the customer only cares about the name on the engine, and will buy the rest of the car regardless of where it comes from.

Your comments on DREs (release engineers) are dead-on. You'll get a guy who's relatively fresh, spend a lot of time and effort educating him on the design and manufacturing processes, and then he's usually promoted upon achieving some level of technical expertise. Now, this isn't always the case, but it seems much too common. When we work with our Asian and European customers, it's not uncommon to find a guy who's been working with a particular type of component for 10+ years (one of our DREs at Honda has worked in his area for the last 6 generations of Accords). Obviously, when someone comes to the table with that sort of experience, you can expect that he'll do what he can to ensure that his employeer receives the right part for the right price, and he's able to teach the supplier a thing or two, also.

WERM's comments about evolution vs. revolution are also spot-on. If you do the job right the first time and refresh it on a regular basis, you can really spend the time on fleshing out the details - the last 10% of the job that seemingly takes 90% of your time. On the other hand, if you need to re-invent the wheel every time out because the current product is too far behind the competition to save, then you're going to spend your time taking care of the big problems that pop up, and you pretty much kill any chance of re-using tooled components from the previous product. The end result is a product that costs a significant amount of money to tool-up, and so then it sticks around for way too long again, perpetuating the cycle.

 

It's hard to believe it's gotten this bad.

But there's really no other explanation for the stupid mistakes, overpriced cars, and inability to compete. The automakers want to be like Nike and HP--marketing boutiques that conceptualize product and create fancy ways of selling it, without ever getting their hands dirty with actual PRODUCTION. Oh, no. That's so China.

Problem is, Nike and HP sell commodities that are relatively simple to replace, cheap to own, and available from many more manufacturers.

Is this idiocy a remnant of the brand management days, when the sunglass mavens and cereal queens decided that all you needed was a brand to sell cars?

I mean, come on. Contract people not only have no history or depth of experience with the workings of the company, they have no engagement. They have no incentive.

Get the best people, keep them in-house, and INCENTIVIZE them to do well. This model worked for the most successful company that I ever worked for to date. They were at $10M in revenue with 9 employees and 21% net profit after taxes. $30K/year techs were making $175k/year with incentives. AND THEY WERE A MANUFACTURING COMPANY.

Get the best people, keep them in-house, and INCENTIVIZE them. That's how my company has avoided the typical 70-80% layoffs in our industry. This, despite the fact that the common wisdom in 1999-2000 was that you wanted NO in-house employees except sales and management.

It never works in any industry. It won't work here.

BL, are you listening?

Get the best people, keep them in-house, and INCENTIVIZE them. It works.

 

Interesting thread.

I understand the concept & why it's being done (as a way of cutting the cost of payroll & benefits... the contracted company handles those issues), but I think the tradeoff is too great (loosing "35 year experts" who specialized in one area familiar and feels he or she has a stake in the company).

 

Yes, but that payroll and benefits package still has a cost, and that cost gets passed right on to the OEM - but with a non-insubstantial markup. They pay a premium for their inability to properly control their human resource pool.

 

Alot of businesses started hiring "temps" to fill their ranks about a decade ago to save on labor costs, even though these temps ended up there for a long time in some instances. The big advantage I remember was that they had the flexibility to lay off workers when demand weakened (without any type of severence pay), and saved a bundle in health care costs & benefits.

Do you think there's the same idea behind this as well?

 

It's definitely the idea, although anyone that realizes that money doesn't grow on trees understands that someone has to pay unemployment benefits, etc. to those temp workers - and if the temp agency is making money, then that leaves only one source...

 

Anyone with employees has to pay unemployment insurance. However, temps aren't paid severence or given any money when they aren't working beyond unemployment checks.

If this is the case in this instance within the industry, then they are getting off pretty free on this.

 

Great comments guys.

One thing that I'd like to point out is that this practice is cyclical. It rises and falls as the climate (specifically the regulatory climate) changes.

We're in a long cycle of contract employment right now, and have been since I entered the industry (1992). While I have pointed towards things that are hurting the OEM's, the federal government has a hand in this by basically making it financially easier for the OEM's to do this. In effect, the federal government is funding what I view as an erosion of technical engineering skill by our manufacturing firms.

At the same time (and as pointed out), the OEM's are suffering from a "commodity" mentality. Accounting is a commodity. Security guards are a commodity.

Engineers are not commodities.

The OEM's need to get that through their heads, and do it fast.

BTW - this isn't sour grapes on my part from an employment standpoint. I'm a direct employee with a fairly large Tier 1 supplier.

 

You said it! When it comes down to it, engineering is the heart and soul of any car company - and with increasing amounts of technology, I don't understand what this wouldn't be immediately obvious to anyone in the industry.

Pacer, I don't know where you're based, but I'm sure that we could have some interesting conversation if our paths ever cross. I like your mindset

 

Eric,

I live in Clarkston, Michigan (right by Pine ****).

Where are you located?

 

Pacer,

I'm on the other side of the state, west of Grand Rapids.