7 lessons from a recovering business: a veteran industry consultant spent the last four years reviving a failing metalcasting company. Following is a first-hand account of what he took away from the experience.
Now, with these commitments fulfilled, several lessons can be distilled from this extraordinary experience.
(Editor's Note: The name of the company and other details in this story have been concealed for reasons of client confidentiality.)
Lesson 1: The Financial Turnaround Is the Easy Part
Turnaround managers must essentially make something out of nothing, and do so quickly, often against significant opposition. But surprisingly, the turnaround was the easier part of the past four years' journey, mainly because most of the staff was enthusiastic about doing business in a new way.
Change and results came fast, so much so that key managers spoke of a feeling of "running downhill" during the early period. We first changed the product mix, which quickly led to huge improvements on the shop floor. Overtime hours, for example, were quickly cut to fewer than 300 per month from peaks of more than 3,000. Quality improved markedly too, as jobs that clearly did not fit the facility's capabilities were eliminated. Prices and surcharges also were corrected, and the most egregious of the money losing jobs and customers were asked to leave. The hourly and administrative payrolls were downsized, too.
On the financial side, the results were as expected. Within six months of the turnaround's beginning, we had achieved a sevenfold increase in return on sales, and by the end of the turnaround year, the returns had nearly doubled again. These results were accompanied by a consistent top line, a reduced production workload, unprecedented profit sharing and dividend payouts, and commensurate improvements in balance sheet strength.
In addition to important structural changes, the more difficult process of behavioral change (a process that never ended) was begun early in the turnaround year. Some of that change was fun and easy, as when I told the shipping supervisor (who had spent a lifetime being told to ship everything that wasn't nailed down) to stop shipping when we had hit our monthly target. The look on his face was priceless and the impact dramatic. But for the most part, the process of behavioral change--essential to any organization's ultimate success--was predictably slow and painful.
Lesson 2: More than Ever, It's All About Improvement
The chief executive officer's first job is to control the business--to install effective management systems and instill essential management discipline so the company's finances, operations, marketing, quality and human resources come under control. But what then? Simply put, the answer to that question is improvement. Improvement represents the key to any organization's ultimate success and to effectively addressing today's customer and competitive realities. Improvement must therefore be each CEO's central and enduring imperative.
From the CEO's perspective, improvement should be of two primary types: people building and process improvement. We used both, extensively, during the past four years. People building involves improving the caliber, competence and cohesiveness of the management team and, through them, the workforce as a whole. We catalyzed this process by providing clarity of purpose, increased autonomy, and a professional development system rooted in high expectations, top quartile pay, transparency about roles and responsibilities, biannual formal performance appraisals, targeted education and training, and intensive, ongoing, one-on-one mentoring and development.
We used an array of tools to drive process improvement, including those which underpin the familiar advanced manufacturing and quality management systems (e.g. Lean, ISO/TS, SPC, Six Sigma and others). But our most important tool was business process reengineering. Through this approach, we analyzed work flows, redefined roles to eliminate functional specialists and create generalists, and both eliminated and combined jobs. As a result, we reduced the administrative staff by an additional 25% beyond the year-one payroll reductions, while creating several new positions, increasing overall effectiveness and improving customer satisfaction.
Lesson 3: 20th Century Management Is a Competitive Liability
The 2009 recession reminded us once again that all businesses need to dramatically reduce costs, including over head. And they need to do so permanently. While it's easy to slash the payroll and expect the remaining employees to work harder, this approach is not sustainable. As normalcy returns, such futile "do more with less" campaigns must inevitability give way to new hiring, thus negating anything resembling sustained improvement. Given today's economic realities, we can't afford to fall back on those old habits.
As some of us have long known, when it comes to building an effective staff, the management practices of the past are incompatible both with present day business requirements and today's employees. We put this knowledge to work with great effect over the past four years by replacing a traditional system of financial rewards and punishments with a contemporary one rooted in autonomy and positive employee development. This created an environment where our staff actually wanted to be highly productive and had the tools, training and freedom to do so.
Lesson 4: Communication Is Critical
Early in a turnaround, the focus must be on actions rather than words. However, after the first several months and once some measure of control is achieved, communication becomes a top priority. This is necessary for the turnaround to be sustainable and because communication problems are at the root of almost everything that goes wrong in the normal course of business. A large part of the CEO's job is to communicate and teach and thereby create a climate for improvement and one in which internal mistakes and customer dissatisfaction is minimized.
My first communication priority was to make sure everyone understood the management systems I was putting in place. This began with the business strategy and financial management system and continued for the systems used to manage and improve each key functional area--operations, marketing, quality and human resources. Communication of this sort never stopped. I explained over and over again verbally and in writing what goals we needed to achieve and how each staff member needed to work in order for that to happen.
Specifically, I met with nearly every member of the salaried staff at least twice per month, and as many as four times per month, to provide clarity and direction. Daily email correspondence and informal conversations nearly always included tie-backs to key messages the staff needed to internalize. Furthermore, monthly company meetings were held, which were attended by every employee, on every shift, and from the office as well as each of the shops.
But there's more to driving improvement and eliminating mistakes through effective communication than what the CEO alone can do. For example, we needed to create accurate work instructions and educate our workers so they could use them effectively. We also created a cross-functional team to ensure strong internal and external communication during the critical contract review and production design processes. All employees also had the opportunity to participate on improvement teams so communication from the shop floor up could be just as vibrant as that from the CEO's office down.
This investment in effective communication enabled the organization to achieve major productivity and performance gains and sustain and improve on them over time. It also was important for minimizing day-to-day confusion, preventing mistakes, avoiding rework, driving costs down and improving customer satisfaction.
Lesson 5: Pricing Remains the Most Difficult Job
I've often said that metalcasting is the most complex of all manufacturing processes, and nothing I experienced over the past four years has changed my mind about that. From the CEO's perspective, pricing remains the most complex and difficult part of the management task. In fact, pricing is by far every metalcaster's most important marketing challenge, and as such, it requires earnest CEO involvement.
Pricing has long been a problem for the metalcasting industry, and major pricing mistakes are at the root of many turnarounds. Current market conditions have made matters worse, as normal pricing rules change with the shifting relationship between supply and demand. This is an unavoidable fact of life in a deep recession, but it must not be anything other than temporary.
To prepare for the time when this economy rights itself and we return to normal business conditions and pricing rules, CEOs should arm themselves with the strategies, tactics and data required to install advanced pricing systems and practices. Key elements of the approach to pricing we installed over the past four years included:
* an enhanced surcharge, which included energy, chemicals, and other key cost elements, including casting yield, in addition to basic metals and alloys;
* simple systems to determine and routinely report each job's cost at the gross margin level, including each job's quality costs (applied as a scrap percentage);
* no tolerance whatsoever for the worst losers (low priced, high scrap parts);
* a sophisticated market pricing system which was based on the systematic collection of actual prices over time; these data were used to price "like parts" and set manufacturing cost improvement targets; experience suggests that such a system is the only way to come close to consistently identifying the optimal part price;
* selective price increases as either cost or market price considerations warranted;
* selective price decreases as margin or market price considerations prescribed;
* resistance to calls for price decreases in favor of cost reductions driven by tooling and/or manufacturing process redesigns.
Lesson 6: No Magic Bullet for Growing Sales
As my mentor often tells me, much of what constitutes good management is indirect in nature. That is especially true for growth. In other words (with present recessionary conditions aside), defining business success in terms of growth and/or defining the marketing task in terms of sales growth is virtually always a mistake. In fact, much of my turnaround work has been rooted in the need to rescue metalcasting businesses from too much work, as was the case four years ago. Instead, the CEO's resolute focus needs to be on improving people and processes. If that can be achieved, profitable growth naturally will follow.
The past four years reminded me yet again that existing customers remain the best source for sales growth. Our longstanding customers responded quickly to improvements in capabilities, delivery, quality and cost by awarding us new work and also by being less price sensitive on both existing and new jobs. Moreover, as customer satisfaction increased, they shifted work from our competitors to us.
When it comes to new customers, my relentless message to the staff was that, among the nearly limitless opportunities that exist, the key is to separate the opportunities that should be pursued from the ones that could be pursued. On that basis, we pursued only those opportunities that promised to be distinctly profitable and sustainable. Using this approach, each new job we brought in was characterized by one or more of the following profit-enhancing characteristics:
* The part fit perfectly with our manufacturing capabilities and, as a result, would flow smoothly through the metalcasting facility and machine shop with no scrap.
* The part required a capability, certification, service or other tangible or intangible attribute and/or combination of attributes that was unique (or nearly so) to our organization.
* The part had been getting the customer into trouble because of a recurring supplier quality and/or delivery failure for which we were able to provide a unique and/ or comprehensive solution.
* The part required extensive design engineering input, such as a conversion from a fabrication.
* The demand for the part exceeded its supply.
This final point deserves more attention, as until recently, there was only one way to grow in our mature industry--by wresting business away from a competitor. However, and for the first time in ages, there is today another path available to many metalcasters--grabbing a share of legitimate new market growth. The most prominent new market, one where casting demand does exceed supply, is wind energy.
And more new growth is coming, so much so that some are predicting a North American manufacturing renaissance driven by a "green revolution." While much of that remains to be seen, recognizing the opportunities inherent in wind power, solar power, rebuilding the electric power grid, retrofitting commercial and industrial building HVAC systems, modernizing municipal water systems and so on is an important new lesson to be learned about growing sales.
Lesson 7: Regulatory Compliance Is an Opportunity in Disguise
Evolving state and federal environmental regulations remain a threat to our industry's future. This threat involves increasingly stringent air permits, storm water pollution prevention, landfill management, indoor air quality requirements and worker safety rules. But it's also true that in our increasingly green world, few issues provide a greater opportunity for improvement, competitive advantage, sales growth and distinctive profitability.
First and foremost, we learned early on that the CEO needed to be fully engaged in regulatory matters to ensure risks were being appropriately mitigated. That involvement in turn helped us discover opportunities (including improving our position with existing customers, enticing them to transfer work from competitors, putting us at the top of preferred supplier lists, etc.) and provided a vehicle for ensuring they were being acted upon.
Second, as a means of keeping the company ahead of the regulators, we learned to appreciate programs like the ISO 14001 Environmental Management System framework which, if used properly, can be an important learning experience. In fact, with the right top management involvement and leadership, such a learning experience can in turn become a powerful springboard for improvement and an excellent way to get the regulators' attention--in a good way. However, without that leadership, such a system can easily devolve into an all but worthless manual writing exercise.
Third, we learned that environmental responsibility is important to our industry's sophisticated and increasingly green customer base, and that a genuine commitment to exceeding today's compliance standards can create a competitive advantage and an avenue for distinctive profitability. Fourth, we learned that substantial investments are required to excel in the regulatory arena, but like investments in quality, many ultimately provide benefits that exceed their cost.
For example, on the staffing side, we put a full-time compliance coordinator on the payroll and invested in her training and development. Also, we employed the services of a group of outside legal and technical experts. On the facilities side, significant investments were made in a variety of cost-saving improvement projects, as well as for controls and equipment ranging from carbon monoxide monitoring devices to ductwork, baghouses and more.
While many investments were necessary to keep the regulators happy, tending to these matters also had far-reaching indirect benefits too. All customers applauded our efforts, and some moved business our way because of them. Important internal benefits also accrued. For example, the significant facility cleanup effort that went along with improving indoor air quality dovetailed with our Lean-inspired 5-S program and helped catalyze a chain of events that led to improved product quality, fewer accidents and injuries, lower workers compensation costs, lower quality costs, lower turnover and training costs, and improved customer satisfaction. Moreover, improving the facility environment inside and out boosted worker morale, enabled the company to attract and retain a higher caliber workforce and enhanced management's relationship with labor.
The lessons learned during the past four years highlight the primacy of improvement to business success and underscore the need for CEOs to improve. Depending on economic and competitive circumstances, the CEO's job is sometimes about structural change and profitability and at other times about behavioral change and sustained improvement. Understanding that reality and learning from the seven lessons can help metalcasters and their CEOs to thrive in the challenging years ahead.
About the Author
Dan Marcus is the owner and principal consultant in the firm TDC Consulting Inc., Amherst, Wis., which specializes in management consulting, turnaround management and executive development for the metalcasting industry.
Daniel Marcus, TDC Consulting Inc., Amherst, Wisconsin
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|Article Type:||Company overview|
|Date:||Mar 1, 2010|
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