Turning your foundry around.

Your foundry doesn't have to be nearing Chapter 11 to follow the lead of successful turnaround managers.

Your foundry is doing pretty well--sales are stable, productivity is up and bankruptcy is the furthest thing from your mind. But resting on your laurels won't assure the future. Can your foundry ever be too productive or too profitable? Can your situation ever be secure enough? Acting as your own turnaround manager (TM) now just may save you from needing one later.

While it is common practice for creditors to bring turnaround experts into faltering companies, many foundries far from Chapter 11 status would like to improve their operations and profitability. Why not follow the methods used by TMs? Any foundry can be re-energized and its profitability boosted by following the same general pattern that turnaround managers use to salvage faltering companies.

But that pattern should be the pattern of the right TM--the strategic thinker. Unlike quick-fix turnaround experts, the strategist doesn't simply salvage assets for the major creditors, without consideration for the future. Instead, he is interested in the firm's long-term viability and plans accordingly.

An Uphill Battle 

Between 1980 and 1983, sales of an iron foundry in eastern Pennsylvania had plummeted from $8 million to $3 million and the foundry was working at 15% capacity. The work force had also dropped from 150 people to 60. In addition to monthly carrying charges for utilities and insurance, the pension plan was underfunded by $1.2 million. Customers were nervous, and the major creditor (a bank) called in a TM.

At the time, the foundry consisted of a large crumbling facility filled with out-of-date equipment. The TM also faced six other disquieting elements:

* a potential strike loomed over union demands;

* the year 1983 might not even be close to the bottom of the recession for heavy machinery;

* nobody knew what EPA standards the former management had let slide and would have to be corrected by the TM;

* critical suppliers might demand COD, since the foundry was now a questionable credit entity;

* the pricing structure had bred losses and had to be revamped;

* perks drowned the payroll.

Suppliers

The TM canvassed suppliers to make sure they'd work with him on credit. If he had to devote working capital to raw materials and supplies, "that would have been curtains for us," he said. A local bank had extended him a line of secured credit and the major creditor had allotted him working capital to function under a stand-still agreement.

"Our suppliers could see I had some reserve borrowing power," the TM said. "I asked them to work with me and told them I'd be able to pay sooner or later."

Being creditworthy, the TM now took to the road, converting many on-the-fence orders into dollars and creating additional borrowing power to continue operating.

At the same time, he began chopping executive perks and shaving personnel costs--starting with the staff functions. Through those steps, significant short-time savings were achieved and he was able to turn a modest bookkeeping profit by the end of the second month.

The Work Force Next

Almost simultaneously, the TM began to influence the work force by establishing his own credibility while letting the workers know the state of the foundry. The TM called in an auxiliary, outside expert--a personnel consultant experienced in turnaround work.

The consultant would help the TM start building a companywide team by tapping the employees' wealth of product and technical knowledge to identify and help solve problems. This was done through an employee participation program, the aim of which was to make the entire work force part of a team motivated to save the company.

"First-line supervisors or their employees are closer to the work than anyone else," the TM said. "They often have insight as to what the problems are."

At the personnel consultant's suggestion, the TM kicked off the employee participation program by making a speech to the entire work force. "I don't care what you used to do or how you did it," he said. "It didn't work, and we are in deep trouble. As of today, we must do things differently.

"I am having an outside expert meet with you and listen to your suggestions of ways we can stop breaking cores, save sand and reduce our energy costs. Please speak freely and honestly to him. He will report only what you say--not who says it. We want your ideas to help us turn this company around."

Employees responded because they quickly realized the participation program was not a subterfuge aimed at reducing payroll costs or a device to prepare the union for concessions.

Middle Manager Retreat

With an idea similar to the employee program, the foundry's middle managers gathered at a weekend retreat. They were asked what the foundry did best and what it did worst--a sound approach when a TM wants to return a foundry to its basic, profitable product lines and eliminate castings that are loss leaders.

The TM asked the outside personnel consultant to chair the meetings, while the TM observed from the sidelines. The insights gained were valuable in assessing the ability of individual managers to function as continuing members of the team.

Dealing with the Union

With a union foundry full of high-seniority workers in single-function jobs and with special bonuses taxing the payroll, the TM had to find a way to deal with the union. The TM had the personnel consultant use the information gleaned from the employee interview program to develop contract proposals for the coming union negotiations.

According to the proposals, no base wages were to be cut, but a highly complex and unworkable individual incentive plan was to be scrapped. A gainsharing plan was to be installed to reward all employees for achieving a reduction in man-hours worked per ton of good castings. Job classifications--also the cause of many inefficiencies--were to be cut from 17 to four.

The union regarded these ideas as union busting and threatened a strike. On the advice of the personnel consultant, the TM made an impassioned speech to the work force.

"I do not think employees want five and a half weeks of vacation when they are laid off and can't use them," he said. "My priority is to get everyone back to work, provide stable employment and reward improved performance so people can start making house payments again."

When the union leaders did not back away, the personnel consultant persuaded the work force to vote overwhelmingly to decertify the union.

The gainsharing program worked beautifully. The TM's goal had been better use of labor. Because the gainsharing program was based on increased productivity, the TM saw to it that wages in this company were higher than at other foundries, while its labor costs per ton of castings were significantly lower. In addition, five hourly workers were chosen every month to accompany the TM on visits to customers to see the results of their labor. Employee facilities such as the cafeteria and locker room were renovated, while the rest of the complex was generally spruced up. "Foundries don't have to be dirty," the TM said. The critical coremaking, melt shop and pouring operations were scheduled at 80% capacity. Beyond that, the TM refused to stir. "Dependable, short-term delivery is the prime aspect of quality our customers require," he said. "I am meeting that requirement."

True to the TM's word, the company maintained a 20% cushion specifically to offer customers short lead times. On that basis, the TM pruned out one-shot customers in favor of a few mutually committed ones. Impressed by the TM's commitment, several large-order customers granted the foundry sole-supplier status.

Pricing

The TM didn't overlook pricing. For his purposes, he considered a variable cost as anything that would have been avoided had the product not been made, such as labor and materials. Everything else--maintenance, supervision, materials handling, roof repairs, depreciation--was a fixed cost.

"Before," the TM said, "the company was going after metal intensive work it got the least profit from, and it didn't think it could be competitive on the labor intensive work it should have been doing."

He persuaded his sales representatives to go after markets that required highly trained workers to make complex, thin-wall castings. Where job quoting traditionally is considered a clerical function, he forged a crack team of metallurgists and technicians dedicated to the task.

"What castings would go through our shop well?" the TM asked. "Do we have the skills to do them? We redefined fixed and variable costs according to the new system and ran them through again to find out whether there was a margin in them. If there wasn't, we dropped them."

Results

By 1991, three statistics bore out the soundness of the TM's methods:

* man-hours per ton of output were cut nearly in half;

* sales per employee, a dismal $45,000 in 1983, had soared to $70,000;

* 15 of the company's 38 salaried workers had been cut, leaving a hard core staff dedicated to the foundry's survival.

After two more years, the TM and personnel consultant were thanked by the bank for an A-1 performance and let out. Not all turnaround situations work out as well as this one. In some cases, liquidation of the company may be the only action possible. But competent TMs and personnel consultants try all sorts of resuscitation programs before concluding the situation is hopeless. It rarely is.

The moral of this tale is that a foundry does not have to near Chapter 11 to make efforts to reorganize its operations. A chief executive can try to cast a critical eye upon his organization, perhaps add an experienced consultant to provide an employee participation program and then endeavor to steer a new course. There is no reason why, with vigor and intelligence, a chief executive could not duplicate the experience of this foundry. It is certainly worth trying.

Turnaround Steps

* Cut expenses and stem the cash drain.

* Identify the underlying problems that cause a company decline and ask for employee cooperation on improvements.

* Start an employee participation program to tap the wealth of knowledge in the supervisors and hourly employees. Pick the brains of the middle managers at a retreat.

* Examine the company's marketing efforts: are you in the right niche? Using the right pricing?

* Start making changes in line with what you have learned.