Polaris is one of those big companies in the Twin Cities that is closely identified with a set of management practices called lean, a newer term for ideas about process improvement, efficiency and quality that go back to Toyota Motor in post-World War II Japan.
That makes Polaris the kind of company where a top executive might say that a clever marketing plan or brilliant strategy won’t matter as much as operational excellence, just day in and day out doing the work consistently better than anybody else.
But if operational excellence is a big part of the Polaris story, it really needs to stop recalling its products for potential safety problems.
Even the best manufacturers know perfection seems to stay just out of reach, which is why they carry product liability insurance and book some expense for a reasonable amount of warranty claims. But they don’t necessarily plan for a string of product recall announcements like what Medina-based Polaris has issued.
Polaris initiated a series of big recalls beginning three years ago on some of its popular models of off-road vehicles that had potentially dangerous problems with overheating and shielding heat from the engine exhaust. Then the recalls kept coming. Just before Christmas there was another notice that said vehicles already recalled by Polaris still may have a potential fire problem.
Earlier this month the company announced a settlement with the U.S. Consumer Product Safety Commission (CPSC). It was a big settlement, $27.25 million, but it was a big problem, too.
According to the settlement, Polaris was late in reporting to the commission what it knew of these problems that had cropped up. In one case, there were about 150 reports of fires before the commission first learned of the problem.
The settlement also announced another recall, this time of 107,000 units of RZR off-road vehicles that extended all the way into the 2018 model year.
This is a curious problem for Polaris, a company that continues to perform well financially. Last week the CPSC homepage at first glance looked a little like a Polaris webpage, except the words “recall” and “fire hazard” appeared next to the picture of four Polaris RZR sport off-road machines that popped up.
These problems have shown up in the financial statements primarily in warranty expense, which almost tripled in 2016, from 2 percent of sales to 6 percent. The expense of adding to the warranty reserve declined a bit from 2016, although what the company paid out to fix problems increased again.
Paying a dealer to fix a Polaris machine that has been recalled is one of seven classic forms of waste in lean manufacturing. Lean remains an important idea at Polaris, as lean enterprise was one of four “performance priorities” outlined by CEO Scott Wine to investors earlier this year.
Lean is often thought of as management’s way of applying high-minded rhetoric to cost-cutting. But done right, getting rid of waste is the consequence you are after — any work or process that adds nothing the customer will pay for. Of course, one consequence of less waste is a wider profit margin.
Polaris might be more committed to that idea than ever. When Wine updated investors and analysts a couple of months ago, he mentioned a subtle tweak to the company’s strategy statement, the addition of the term “highly efficient growth company.”
The context for this change is the realization that growth in sales seems harder to come by than it has been in the recent past. Earnings are going to grow faster than sales, though, from initiatives like taking at least $200 million of cost out of the nearly $2 billion of materials Polaris buys every year.
Another big difference from last year’s strategy falls under safety and quality. That’s now a “top priority,” and listed as a competitive advantage for the company. The same slide in last year’s investor presentation listed “lean enterprise” in that spot.
Wine framed safety and quality as a problem of waste. It was a top corporate priority to reduce warranty expenses and warranty claims, and product recalls, too.
Polaris did not make an executive available for a conversation, so it’s difficult to know where the problems were. What led to this set of off-road vehicle recalls over a fire hazard seems have started as engineering problem, not a defect in the manufacturing process. The process that certainly seems to have broken down, though, was in detecting and then moving quickly to fix the problem.
Polaris spokeswoman Jess Rogers did provide details on steps Polaris has taken, including a new design process and the creation of a post-sales surveillance team to spot product problems that may be occurring in the field.
It’s true that the recall earlier this month reflected a completely different situation than what happened in 2016. What triggered the latest one was 30 instances of a crack in the exhaust silencer, leading to three reported fires.
At the time of the April 2016 recall, according to the CPSC settlement, Polaris already knew of at least 160 reports of fire.
Lower product warranty expenses are a big part of the company’s explanation for why the profit margin should get a little wider in 2018. In his response to a question from an investor in January about the next five years, Polaris Chief Financial Officer Mike Speetzen suggested warranty expense would keep declining as the company kept getting better at producing machines that don’t have problems.
As anybody schooled in practices that come from Toyota would know, that means Polaris will be achieving one of the most important lean management goals — leaving the business operating just a little better at the end of every day of work.