Ten years ago our electric motor business was in real trouble. Low labor rates allowed the Eastern Bloc countries to sell standard motors at prices we were unable to match. We had become the high-cost producer in the industry. Consequently, we decided to change our strategy and become a specialty motor producer. Once we adopted our new strategy, we discovered that while our existing cost system was adequate for costing standard motors, it was giving us inaccurate information when we used it to cost specialty motors.
Mr. Karl-Heinz Lottes—Director of Business Operations, EMW
Headquartered in Munich, Siemens AG, a producer of electrical and electronic products, was one of the world’s largest corporations. Revenues totaled 51 billion deutschmarks (DM) in 1987, with roughly half this amount representing sales outside of the Federal Republic of Germany. The Siemens organization was split into seven major groups and five corporate divisions. The largest group, Energy and Automation, accounted for 24 percent of total revenues. Low wattage alternating current (A/C) motors were produced at the Electric Motor Works (EMW), which was part of the Manufacturing Industries Division of the Energy and Automation Group. High wattage motors were produced at another facility.
THE ELECTRIC MOTOR WORKS
Located in the small town of Bad Neustadt, the original Siemens EMW plant was built in 1939 to manufacture refrigerator motors for “Volkskuhlschraenke” (people’s refrigerators). Less than a year later, Mr. Siemens decided to halt the production of refrigerator motors and began to produce electric motors for other applications. At the end of World War II, the Bad Neustadt plant was the only Siemens factory in West Germany capable of producing electric motors. All the other Siemens production facilities had been completely destroyed or seized by Eastern Bloc countries. After an aggressive rebuilding program, Bad Neudstadt emerged as the firm’s primary producer of electric motors.
Through the 1970s, WMW produced about 200 different types of standard motors, at a total annual volume of about 230,000 motors. Standard motors accounted for 80 percent of sales volume—the remaining 20 percent were customized motors. The production process was characterized by relatively long runs of a single type of motor. Because identical motors were used by a wide range of customers, standard motors were inventoried and shipped as orders were received. Production of standard A/C motors was extremely competitive. The key to success was to reduce costs so that the firm could price aggressively while making a profit. Despite a major expansion and automation program begun in 1974, by the early 1980s it had become obvious that the lower labor rates of the Eastern Bloc competitors gave them an insurmountable cost advantage.
CHANGE IN STRATEGY
An extensive study of EMW’s production capabilities and the market for electric motors indicated that EMW was in a position to become a profitable producer of low-volume, customized A/C motors. To help implement this strategy, the Bad Neustadt plant was enlarged and dedicated to the manufacture of A/C motors with power ratings ranging from 0.06 to 18.5 kilowatts. These motors supported a number of applications including automation engineering, machine tools, plastic processing, and paper and printing machines. For the new strategy to succeed, EMW needed to be able to manufacture efficiently a large variety of motors in small production runs. Between 1985 and 1988, EMW spent DM50 million a year to replace almost every machine on the shop floor and thereby create a production environment that could support its new strategy.
By 1987, the production process was highly automated with numerically controlled machines, flexible machining centers, and robotically fed production processes used throughout the factory. Large-volume common components were manufactured using the...
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