Why Labor Unions Should Drive OEMs to Evolve Into Suppliers of Product-Services

July 1, 2003
by Ron Giuntini, Executive Director, OEM Product-Services Institute Manufacturing jobs are in decline in the USA. For low skill, labor-intensive consumer

by Ron Giuntini, Executive Director, OEM Product-Services Institute

Manufacturing jobs are in decline in the USA. For low skill, labor-intensive consumer products, the decline has been driven by US-based enterprises moving their production to lower cost direct labor countries. For capital goods, where the highest manufacturing labor skills reside, the decline has been driven by the "Product Productivity Paradox" (P3).

OEMs across all sectors are delivering products that provide solutions, which increase an operator's productivity at a faster rate than the operator's real revenue growth. And here lies the P3 rub; OEMs are in the process of decreasing the long-term demand for their new condition products, as operators of their new products can produce more and more with less and less. Note that 75% of the global investment in capital goods is concentrated in the US, EU and Japan, all of whom are in the mature lifecycle stage of their industrial development; the use of exports to Less Developed Countries (LDCs) can not make-up for the macro-trends of lower demand from the highly industrialized countries.

The OEM mergers and acquisitions (M&A) binge of the last 10 years has been a direct outgrowth of P3. Without changing their business model, OEMs have been able to obtain economies of scale that have enabled them to maintain their meager profitability (1992-2002 median PAT as a % of revenue of 5.1%). Today most capital good sectors have 3-4 global OEMs who control 70-80% of the new product market. Any further M&A activity begins to abut EU and US anti-trust laws. OEMs have been able to pushback the day of reckoning through M&A, but the day that they must question their basic business model is rapidly approaching. 2002 OEM EPS are currently at 1994 levels, while US productivity has increased over 15% since 1994. From 2000 to 2001 OEM EPS dropped by 70%, while US productivity rose by 1.5%. It is obvious that OEMs are not sharing in the benefits created by productivity improvements that they have fostered with their products.

The above leaves a major stakeholder in the success of an OEM battered; the hourly worker who is involved in the new product manufacturing process. For many OEMs, a union represents hourly employees. The union's approach is typically a rear guard action that makes it painful for the OEM to reduce its hourly workforce. OEMs have often found it easier to move manufacturing to right-to-work states, or offshore, rather than confront the difficulty of union/management negotiations.

If an OEM refocuses its business model to product-services, from that of the legacy build-and-sell model, it will be able to stem the loss of direct workers, as well as eliminate the profit boom-and-bust cycles that OEMs experience every 5-10 years.

Product-services are defined as "services that are crafted to supply solutions to operators for managing the productivity of a product." The product management processes of: acquire, control, remove, prepare, run, monitor, maintain configuration and modify configuration, expend significant resources. These processes, over the lifetime of a product, can often create requirements for up to an additional 50% more direct labor resources than that of the new product manufacturing process. The activities required to deliver product-services are: OEM-site remanufacturing/overhaul/rebuild/repair, service parts manufacturing, operator-site maintenance, modification kit manufacturing, consumable manufacturing, installation and others. Note that 80% of the installed base of a product is out-of-production. Today, OEMs and their direct labor workforce do not perform the vast majority of these product management processes.

Unions should be more aggressive in recognizing the opportunity that they have to stem their membership losses by aggressively pursuing OEMs to evolve into suppliers of product-services. Below are several actions that proactively address the retention of the hourly workforce.

1. Service parts manufacturing. Parts that have been manufactured in-house for new product assembly should continue to be manufactured in support of out-of-production product management demand. Most OEMs configure their managerial cost system to allocate the heavy new product manufacturing fixed cost burdens on service parts manufacturing. This results in either high prices (this is my cost, this is the profit I want to make, so this is the price I will charge technique), opening a window for competitors to reverse engineer the OEMs parts, or results in the outsourcing of manufacturing because of the high costs. In either case, OEM jobs are lost. Most OEMs assume that they have 100% market share for service parts, and that may be the case for some sectors where entry by competitors may be difficult due to regulatory requirements, but for most OEMs they have a minority of service parts market share--but they are in denial regarding that fact. Most OEMs haven't even ever done a service parts market share study! Most OEMs would experience a 10-15% increase in their manufacturing direct labor work hours as a result of taking back service parts manufacturing.

2. Remanufacturing/overhaul/rebuild. Rentals, like-kind exchanges, trade-ins and other services create the demand for labor to execute the process of maintaining and/or modifying the configuration of returned products. Most OEMs have a small market share for the execution of these processes, by design, or due to operators performing the tasks themselves and/or independent enterprises providing such services. Again, almost 100% of the activity in this area is for managing out-of-production products. Who better to disassemble and reassemble a product than the workers who originally assembled the new product! There are many complex strategic and tactical issues that must be addressed in this area, which is beyond the scope of this article. One point of interest is that the market dominance for these processes can also stem the import of lower cost service parts. If a service part can be designed to be easily maintained or modified, rather than being disposed of due to intensive disassembly and reassembly resource requirements, operators can be provided with the option of being offered a remanufactured/overhauled/rebuilt service part that is less expensive than a new condition import. OEMs could experience a 15-20% increase in their requirements for direct labor to support the above processes

3. Others. Retraining new product manufacturing direct labor workers to perform activities to support product-services could result in another 10-15% increase in their requirements for consumable manufacturing, operator-site maintenance, modification kit manufacturing/assembly and others.

In conclusion, there are many opportunities for OEMs and unions to work together to ensure their mutual long-term financial health. The OEMs who "get it" will end up having the most loyal workforce and the most profitable enterprises--and those who don't "get it" will DIE. Ron Giuntini is Executive Director, OEM Product-Services Institute www.oemservices.org