Missing a Few Rungs on the Corporate Ladder

In order to come up with blog fodder, I have a number of news sources and web sites I cruise every morning to see what's up in the manufacturing world.  Increasingly I see and read things that give me cause for concern about what seems to be a growing rift between senior management and middle management.

There was a day - not long ago, in fact - when the only real conflict in manufacturers was between management and labor.  One offshoot of the current rampant strategy to outsource and send manufacturing to places with unpronounceable names is the abandonment of dedicated manufacturing managers.  As the senior folks redefine management more as the art and science of spinning off, merging, acquiring and other wise uprooting the lives of their employees in some sort of grand game of industrial Monopoly; instead of the hard work of actually making and selling products, middle managers are more and more finding common cause with production workers than executives.

A company I know well recently launched a lean initiative in one plant, drove, inspired and cajoled plant management to work long hours and commit to lean, then out of the blue, they came out of a board meeting one day and announced that the plant was closing and the work was being outsourced to an Asian company with whom a deal had been in the works for several months.  The hourly workers were out of luck, of course, but so was plant management.  They felt they had been duped by the execs because, in fact, they had been duped by the execs.  The senior managers expressed surprise that 100% of plant management took a scrawny severance package over offers to go to work for the same company in plants more than 1,000 miles away. 

The disregard for people is nothing short of amazing.  It seemed impossible for the senior folks to understand that these were real people, with lives and families and roots in their communities.   They were not about to give that up when they knew that management felt no commitment to them, the products or any of the plants.  Who would be crazy enough to uproot their family and move them 1,000 miles to a new community only to have the company decide to outsource that plant at the next board meeting?

Poll after poll of senior managers when asked why lean manufacturing failed to take hold at their company lays the bulk of the blame on "middle management resistance".  Of course there are folks in factory management who do not understand lean or are resistant to change.   Most, however, are enthusiastically for lean manufacturing.  In most companies, the middle managers in the plants are the ones that are pushing for it.  Then lean rolls out and senior management effectively tells the plants:

"Get people involved and committed to continuous improvement, but under no circumstances are you to let labor efficiency suffer.  If that means laying off the people as improvements take hold, then so be it."

"Reduce inventory and cut cycle times, but under no circumstances are you allowed to under absorb over head and miss budget goals."

"Reduce set up times and attain perfect quality, but you can only do it with machines that are justified by labor savings."

In short, senior management tells the plant that they are still to be measured by the old yardsticks and provided with resources based on old thinking - but get lean results.  The plant is expected to go out and pound hundreds of square pegs into hundreds of round holes.  Under such 'leadership' lean cannot possibly succeed, and when it inevitable fails, plant management is blamed for having a bad attitude.  The real problem is senior management who knows so little about manufacturing that they are unable to see the lunacy of such 'leadership'.

Manufacturing companies that are led by people with little or no knowledge of manufacturing are a very real problem.  Hourly people at least get overtime compensation when they are asked to go beyond the 40 hour call.  Plant production managers and materials managers, shipping managers and production supervisors, process engineers and quality managers are all expected to work as long and as hard as they have to in order to get the job done.  That is increasingly hard to justify.  Why on earth would someone in one of those positions at a GM plant, for instance, put in ten minutes more than they absolutely have to?

The answer is that they do it because they are professionals and they do it out of a sense of pride they take from doing their job well.  Less and less do they do it because they are proud of the company for which they work.  Even less than that do they do it out of respect and a desire to support the leaders of the company for which they work.

The manufacturing lobbyists are in Washington pushing for a big break in the Estate Tax so they can pass their companies on to the next generation.  I wonder if the people involved appreciate how little that is supported by the people who will end up working for an unqualified dim-witted son-in-law?  The big corporate lobbies are pushing for tariffs on products brought into the U.S. by foreign competitors, but tax breaks on the stuff they bring in from their own plants in Asia.  Does anyone think that the typical manufacturing manager supports blatant attacks like that on his or her job?

For many years, the senior managers have pushed Washington and Wall Street for regulations aimed at tilting matters away from the interests of hourly labor and toward their own.  Today, the issues that so concern the executives are more and more aimed at tilting matters away from the interests of the middle managers who run their companies for them.

Alfred Sloan once pompously wrote, "What then is General Motors?"  He answered his own question that it was not the 220,000 production employees.  Instead, it was the 10,000 people in management.  His bias toward the value of management and disregard for the people who actually added value and made cars was arrogant enough.  Today, however, the senior managers of many of these big companies would reject the notion that Sloan's 10,000 have much to do with it.  The heart, they seem to think, is the dozen or so strategy and finance wizards who sit around the boardroom.  And nothing else matters.

Comments

[Costikyan Jarvis]

I am a 5th generation member of my family to manage a 105 year old New England based manufacturing business. We have managed to overcome the Depression, 2 World Wars, and countless other challenges.

During this time we have employed thousands of people who have used their wages to buy homes, educate children and support their families. We have provided products that keep cars on the roads, planes in the air and water to homes.

We put our profits into the company. We need to constantly improve ourselves to make sure that we can compete with domestic and foreign competitors.

This is the crux of the problem. We are left with a valuable asset (the company), but it is almost impossible to accumulate the cash to pay the 50+% inheritance tax.

If we can not afford the inheritance tax, we will be forced to sell the company. Probably a competitor will buy us, consolidate the facility into one they already own and all the employees with be without work.

I buy my groceries at the same market my employees do. I have met the spouses and the children of our employees. I think that employees want someone with that sort of relationship making decisions about their future rather than someone located at a corporate office 1,000 miles away.

The employees are much better served if we have relief for the Estate Tax. That will ensure that the company can remain in the hands of people who have a vested interest in the company’s and the employee’s success.

To suggest that we could have overcome 105 years of challenges and continue to play a major role in the industrial production of this country and be managed by an "unqualified dim-witted son-in-law" is an injustice to all family businesses in America.

You should be ashamed of yourself.

[Thomas Sortino]

I do not work for a family-owned business, but I have to assume that if one has been running long enough and well enough to be passed-on, then it must have some value to the clients and customers it serves, and the individuals adding the value that the customers are buying. If it was to be passed on to an “unqualified dim-witted son-in-law” as Bill suggests, it should be up to the customers and the workers how that is handled, not the government. Granted, the scenario that Mr. Jarvis put forward, with the company being bought-out and then mishandled by a bigger company, is not much different from the workers’ view from a subsequent family member/owner mishandling it, but granting the government permission to get involved is a travesty. Let the workers and the market decide if the next generation understands people and business well enough to continue the line. Using the government to 'possibly' prevent mishandling by causing mishandling is a lose-lose. If we look at this from a systems point of view, who is the customer, who adds value, and where is the waste? Would the customer support jeopardizing the health of the company by a third party that is adding no value?

[Bill Waddell]

A couple of points, Thomas. The government is not getting involved in the business. The Estate Tax proposal that NAM and the family owned buiness folks are so vehemently against allows the family to keep the first $8 million of the estate. In most cases, the total estate is a lot more than just the business. If the business (which is valued at a discount rate - not the market value) constitutes more than 35% of the total estate, the heirs have 14 years to pay off the balance.

Essentially that means that the father has passed on to the son an $8 million downpayment and the rights to a 14 year loan to buy the family business. Note that the son has not necessarily done anything to deserve this, other than to fall out of the right family tree.

The point is that business ownership and the free enterprise system depends on everyone having roughly equal opportunity to get access to capital and to go into business for him or her self. It should be primarily dependent on how smart you are and how hard you work - not who you were born to.

The existing system already gives the son a huge advantage over others of his generation who may have worked much harder in school and on the job. The proposed elimination of the estate tax makes that advantage insurmountable.

Look at it this way, Thomas: If someone were to come to you and tell you that through nothing you have done - its just your lucky day - you are to be given an $8 million equity stake in a going manufacturing business and a low interest fouteen year loan to pay off the balance of what the business is conservatively worth, would you complain? Would you expect sympathy from me or anyone else if you griped that you were not just given the entire business free and clear?

How inept would you have to be to screw up that deal?

[Thomas Sortino]

Thank you, Bill, for the clarifying points; and a couple more questions for you:

“The government is not getting involved in the business.”: Isn’t cash-flow a major part of business? If someone decides they are entitled to a chunk of yours, isn’t that ‘getting involved’?

“the son has not necessarily done anything to deserve this”: But what if he has? And if the tax code tries to answer that question, isn’t it likely to slide down the slippery slope away from ‘clear and unambiguous’, a basic trait of Lean?

“huge advantage” “advantage (is) insurmountable”, and “expect sympathy from me or anyone else...”: Asking government to create ‘fairness’ is ill advised, (see ‘slippery slope’ above), and I don’t recall anyone saying that in business, or life, that ‘equal’ means the same thing as ‘fair’. Does the concept that fair=equal support the management and leadership style we need to support a Lean organization?

“How inept would you have to be to screw up that deal?”: I would bet that some have, but would rather let the market decide on its own. In my observation, it is harder to corrupt the Free Market than it is to corrupt government.

I did not start life with a silver spoon, but hold no contempt for those that do. They will lose it or maintain it on their own merits.

[Bill Waddell]

You are certainly entitled to that line of thought. In the future we can tell our kids that this is America - the land of opportunity - and they have the opportunity to be an employee of any company they want. Owning a business is not one of their options, however. That right became the franchise of those whose families owned businesses when the Tax Law that has fueled the free entrprise system pretty well for a century was repealed.

I hold no contempt for family business owners - quite the contrary. I just have little sympathy for crocodile tears from them when they say that the $8 million advantage their kids have over yours and mine, Thomas, is not enough and they want more.

There are precious few manufacturing start ups in the U.S. these days. It is just too capital intensive for most people. Let the Estate Tax be repealed and there will be none. I see that as a real problem, but that's just me.

[Costikyan Jarvis]

To summarize your points you believe that:

1) Upper management will be better if family businesses have to pay the Estate Tax.
2) There will be more manufacturing start-ups if family businesses have to pay the Estate Tax.

There are inept managers in all types of organizations. I believe that the organizations that have avoided, or at least reduced the number, of inept managers are those companies that spend considerable time and effort on developing managers. GE is well known for a constant analysis of their managers and the development of the most promising.

In the book Built to Last by Jim Collins and Jerry I. Porras the authors touch of the importance of developing manager and how few companies do it well. I believe they would have found many more examples of companies developing the next generation of leaders if they had looked at family businesses. It is in family businesses where there is the most at stake to develop the next generation. And it is in family businesses where the next generation is being developed at a very early age to be the type of leader which the company needs.

Regarding business start-ups, I believe that the number of start-ups if depended on who the competition is and what the market opportunities are. For example, no one is going to do a start-up to make heavy equipment and compete with Caterpillar and no one (unless they are supported by European governments) is going to do a start-up to build commercial jetliners and compete with Boeing. Where start-ups happen is where new markets are emerging. Case in point is that IBM controlled the computer market, but when the personal computer market emerged, Dell was able to do a start-up to exploit this new market. Would Dell have every prospered in the mainframe market? No, but that has nothing to do with family businesses paying the Estate Tax.

Finally, business is a zero sum game. There is a finite amount of revenue each year and that pie has to be split between employees, suppliers, benefit costs (medical insurance) and capital improvements. By forcing family business to pay the Estate Tax, even over 14 years, the government is forcing part of the pie to be diverted to the tax. Instead of that money being spent on new equipment, upgrading facilities or new sales initiatives, the money will go to the Federal Government. How are the employees of a family business or the overall economy better served by paying more taxes?