Efficiency comparisons can be misleading; the bottom line is, are youmaking money?

The so-called experts continually compare the efficiency of the U.S. Big Three automakers vs. each other or the American car companies vs. the Japanese. Maybe years ago these ratios worked fine, but today they can be very misleading. When I first started in the business -- a long time ago -- a common measuring stick was the ratio of direct people (people involved directly in building the product, or the production workers) to indirect labor (people required to support the skilled trades. maintenance, et.al.). A 4:1 ratio was considered good. Along came automation and everything changed. Before, you might have had eight production people and two maintenance men running a typical line. By automating the line, you could probably reduce the production people down to three, with two maintenance men. The ratio, of course, showed a very inefficient operation, and my industrial engineer was horrified until I pointed out that five people was less than 10.

As obvious as this may be, efficiency is still deten-nined by people who do not understand: Changes throughout today's system make the old measuring sticks not only outmoded, but misleading.

Nowadays automakers, to varying degrees, outsource manufacturing, design, development and services. If you compare efficiency using a very narrow measuring stick, such as manpower, you could arrive at some very wrong conclusions. The unfortunate thing is that these studies are taken as gospel and can have a big impact on stock prices, public opinion, sales and union negotiations.

Things change from year to year that affect each company differently and complicate efficiency comparisons. Simple ratios can be easily manipulated to give people who do not understand the total operation a completely wrong impression.

Let's say you were going to be judged by how efficiently you prepare food in your kitchen based on the amount of gas, electricity and water you use. You could be very smart and order all of the food delivered by a caterer and then serve it on paper plates. Your utility costs (gas and electricity) would go way down because all you would have to do is warm up the food. Also, you wouldn't have to wash plates (no water costs) because you used paper. The true cost comparison, of course, would be your total cost to prepare the food versus the cost of having it delivered by a caterer. It could be higher or lower.

If you really want to make a true cost comparison, you have to break the car down into major elements such as the total door, the complete engine, transmission, or the instrument panel and so forth. Then take each of those major groups and determine the cost of all the parts within each group (i.e. the cost of each part that makes up a door or engine).

These numbers should include design costs, equipment costs (prorated over the entire production run), overhead and the like. This is something that most auto companies do or should be doing. The information is essential in making year-to-year cost evaluations and determining the effectiveness of such things as investments in capital equipment, new technology and new designs.

It might be slightly more difficult to make competitive comparisons using this approach, but it can be done with a reasonable degree of accuracy. To begin with, engineering is continuously breaking down competitive products to make design and cost comparisons. In addition, manufacturing engineering can obtain from equipment manufacturers exactly which new processes the competition will be buying. Also, equipment manufacturers can easily arrange visits to competitor plants so that each company can see the other's processes.

Remember, it wasn't that long ago that the Japanese were trooping through our plants studying our processes. They learned our processes and the cost to produce our parts. They not only improved on these processes, but later they reduced their costs by initiating new processes of their own, utilizing state-of-the-art technology.

If you are not interested in getting into all this detail, you can make a farly good efficiency comparison between companies just by dealing with total numbers that are readily available.

Of course, the bottom-line evaluation to the stockholder is whether the company is making any money and what's the return on his/her investment.