fedgazette

Improved cash flow, productivity gains

Drive to improve cash flow yields productivity gains; Trane redesigns manufacturing process

David S. Dahl - Regional Economist

Published April 1, 1995  |  April 1995 issue

In the 1980s, the Trane Co. of La Crosse, Wis., manufacturers of commercial cooling and heating equipment, had four large production plants in town. The company also rented a 180,000 square-foot building to receive and store parts and supplies for the four production plants.

Today, following a complete redesign of its manufacturing process that began in 1992, Trane no longer rents that building; rather, the company leases 110,000 square-feet in one of its plants, and plans to sell a 260,000 square-foot production facility—because it no longer needs the space.

This reduction in space requirements, though, isn't the result of decreased production. To the contrary, Trane's output has more than doubled in the last 18 months. Also, at a time when many large corporations are realizing productivity gains by downsizing, employment on Trane's production lines has increased by about 250 to meet the demand of the increased output.

The article below describes various factors that can improve productivity, such as the quantity and quality of labor and capital, as well as changes in management and workplace organization. For Trane, improvements in productivity—defined as output per hour worked—occurred mainly through redesign of the production process. And, while many companies measure increases in production on the right side of the decimal point, Trane has experienced productivity gains on the left side—in the double digits. Still, Trane's manufacturing engineering manager, Brad Gerdes, says: "This was not a project to improve productivity. That's a side benefit."

However, it was a big side benefit. For example, the productivity gains on its scroll compressors—used in small commercial air conditioning units—increased 25.9 percent from 1992 through last year. Over that same period, Trane's other primary product—CenTraVac, a new-generation, large water chiller—had productivity gains of 11.9 percent and its salaried staff increased productivity by 23 percent.

For Trane, good process flowequals good cash flow

When Trane instituted the changes that would lead to its increases in production, the company was mostly interested in improving its cash flow. The Trane company, with its humble beginnings in late-19th century La Crosse as a small plumbing shop, was purchased in 1984 by American Standard Inc., a multi-national manufacturer of air conditioning equipment, plumbing supplies and braking systems for large vehicles.

Following a leveraged buyout in 1988, American Standard became a private company owned by its employees and outside investors, with about $4.4 billion in annual sales. American Standard recently went public with a limited stock offering.

It was after the leveraged buyout that American Standard and Trane began to shift the company's focus to cash flow. One obvious way to improve cash flow is to shorten the total product cycle time, which reduces working capital. American Standard executive management began looking for a better way to run the business to accomplish those objectives, and they found it in design flow technology, or DFT, according to Gerdes, who has been with Trane for 14 years.

Design flow technology is a process that emphasizes speed, quality and reduced inventory costs. Traditional manufacturing processes involve large inventories, pre-assembly of parts that are stockpiled until needed and manufacturing schedules that fit the needs of the producer, not necessarily the customer.

The switch to DFT was a major culture change at Trane, Gerdes says, and included all employees, not just those on the production line. Trane management attended classes at the J-I-T Institute of Technology in Denver and trained all of its 1,200 employees in La Crosse. DFT was then implemented gradually on all product lines.

Whereas in a traditional manufacturing process a product moves through the shop in batches to various focused process areas, DFT establishes feeder lines that that perform multiple tasks before the product moves to the final assembly line. Each operator checks the previous work done on the product, performs his task, then verifies the job. Workers access data via computers throughout the plant to obtain on-line process information.

There was some skepticism when DFT was introduced at Trane, but Gerdes says employees have since responded well to the changes. With DFT, workers learn multiple tasks and are much more responsible for the overall quality of the product, he says. Also, individual measures of performance have largely been replaced by team measures.

To make DFT work, labor had to buy into the concept. In 1992 Trane's management team was reorganized and labor and management worked to gain acceptance of all DFT principles. This effort was successful, Gerdes says. Labor relations improved so well that an early labor contract was also obtained in November 1994.

DFT has also changed the way office personnel and engineers do their jobs. Paperwork has been minimalized: 14 levels of billing have been reduced to four, and engineers now design products to fit a particular production flow. Instead of creating a product and then handing it off for someone else to process for production, engineers now also consider the entire production process in their design—from paperwork to delivery.

In the end, where it took 32 days to complete a CenTraVac order in 1991, it now takes 12, absorption chiller orders are now produced in 32 days compared to 58, and scroll compressors are built in 30 hours compared to four days in 1991. Also, the paperwork for all orders now takes just one day, compared to 31 days for most jobs in 1991.

Spreading the word about DFT

For all its success in redeveloping its production process, Trane's efforts would have little chance of succeeding without the support of its suppliers. "The demands we've put on suppliers have also increased," Gerdes says. "When we tell suppliers we want high quality on a certain date, we now expect it."

The suppliers have risen to the expectation, according to Gerdes. When Trane sponsored a DFT training session conducted by the J-I-T Institute in La Crosse last November, 23 of its suppliers (all that were invited) attended. And when Trane held a more extensive training course in La Crosse in February, 13 of those suppliers sent teams to attend—and paid their own way.

"It's important to us that our suppliers are successful," Gerdes says. "There are benefits on both sides."

As Trane incorporates its design flow processes and as suppliers meet Trane's higher demands, Gerdes says the company will continue to generate high productivity growth in the near future—although not necessarily as high as the growth over the last three years. "There were a lot of gains to be had," Gerdes says, "but there is opportunity for much more."

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