07/04/2011 - 00:00

When in doubt ... make it yourself

07/04/2011 - 00:00

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Carmaker Hyundai is turning an accepted form of process management on its head in a major attack on costs and quality control.

RISING costs, such as those that have clobbered the National Broadband Network and Western Australia’s iron ore industry, are not unique to Australia, which is why it will be interesting to see if we adopt the South Korean cost-control strategy of sacking suppliers and making materials in-house.

Radical as it sounds for the Australian economy with its deeply entrenched contracting culture, the Korean experiment will be watched closely by management consultants.

Leading the charge to retake control of key elements of its manufacturing process is Hyundai Motor Company, which has returned to the business of making its own steel rather than buying it from outside suppliers.

In terms of management theory this is a classic back-to-the-future experiment. All that’s needed is for Hyundai to recreate the DeLorean car as used in the movies built around the concept of time travel.

What’s happened in South Korea is that Hyundai has become disillusioned with both the cost and quality of the steel it was buying from mills in its own country, and speciality steels imported from Japan and China.

The solution? Hyundai has spent close to $5 billion building a series of blast furnaces near Seoul to make eight million tonnes of premium-quality motor vehicle steel a year.

This grand experiment in returning a car-making business to its past, when everything used in a car was made by the carmaker rather than delivered just-in-time by outside suppliers, has been so successful that Hyundai is planning to add another 4 million tonnes of steel to its annual output.

What the carmaker gets is a combination of greater cost control and an ability to produce steel that meets its specifications, especially in terms of quality and unique steel products that can strengthen a car without adding weight.

An example cited by Hyundai is the use of a ‘stamped’ centre post, which is an essential part of a car frame. Rather than welding bits of steel together, Hyundai produces a single, rigid structure from heated steel that is compressed into the correct shape, much like a blacksmith of a century earlier.

Precisely what Hyundai does with its steel is not the important aspect of what’s happening in South Korea. The important development is that an accepted form of process management is being turned on its head in a major attack on costs and quality control.

Australian miners routinely go through similar periods of looking at whether they should use outside contractors or do it themselves. Often, a turning point in that navel-gazing exercise is when costs are spiralling out of control – like now.

Bringing in-house parts of a process, whether it is mining or manufacturing, is a big step for any organisation but the appeal of eliminating a middle-man contractor can be compelling for a company working to a tight budget, or in a highly competitive business such as car making.

There is little doubt that the senior management at NBN Co will be looking closely at drilling its own subterranean cable lines, and constructing other parts of its infrastructure if it cannot get contractor bids down to a manageable level.

Big miners rolling out a series of project expansions, including port and rail work, will be doing the same as they tackle an explosion in costs.

Spotlight on Libor

THE winds of change are blowing through more than the car and contracting industries; banking, too, could be in for a shake-up as British financial market regulators probe what could be the fix of the century, if not millennium.

Under the microscope is Libor, the acronym for the London Interbank Offered Rate, perhaps the world’s ultimate commercial interest rate. It is the one against which trillions of dollars in loans are pegged each year.

Few commercial loans are made anywhere in the world without a reference to Libor, the interest rate banks in London quote to each other on a daily basis. No-one actually gets the Libor rate on a loan (and there are 150 variations of Libor) – they get Libor-plus anything from 1 per cent to 5 per cent, depending on the risk attached by a bank.

But what happens if such a critical part of the money-pricing process is called into question? What if the banks behind the Libor process are accused of rigging the system, which is what has happened in London.

Currently, Libor is struck via a 25-year-old process of banks quoting a theoretical rate they might charge on transactions and then the British Bankers’ Association averaging those rates, first by eliminating the highest and lowest to ‘fix’ the Libor rate, which the world then uses.

The process of gentlemen bankers swapping hypothetical interest rates is now the subject of a high-powered, legally-empowered inquiry, with subpoenas served on some of the world’s biggest banks to extract from them the truth behind how they strike their rate, which is then sent to the BBA.

Libor isn’t about to disappear, but the murky way in which banks communicate certainly is.

Get out of debt

GOLD bugs will be rubbing their hands with glee after a stunning attack on the US government’s blasé approach to its multi-trillion dollar deficits by one of that country’s highest-profile money managers.

Bill Gross, managing director of Pacific Investment Management Company (PIMCO), wrote last week about “the stench of US default”, and went through a series of ways in which the US could escape repaying its debts.

The four possible debt-dodging tricks were: outright abrogation (unthinkable, said Gross); sneakily via higher inflation (likely); deceptively via a declining dollar (happening now); and stealthily via low Treasury yields.

Whatever the chosen route, the fact that people as powerful as Gross can smell a rat in US policy that is largely aimed at repaying debts with depreciated dollars is music to the ears of anyone owning gold, a universal currency.

Make your own

ON the issue of the US and gold, the state of Utah is considering a proposal to allow its citizens to mint their own gold coins, which would be recognised as legal tender. Precisely how this would work is an interesting question – but not nearly as interesting as the idea of people being able to make their own money.

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“The first myth of management is that it exists. The second myth of management is that success equals skill.”

Robert Heller

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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