Profit And Loss
Inside a a 96,000-square-foot manufacturing plant nestled in the Blue Ridge Mountains of southwest Virginia, Hunter J. Arehart looks out the windows of his office, contemplating the drizzly Pulaski County view. Until today, Arehart had been vice-president and general manager -- the boss, for all intents and purposes -- of Xaloy Inc., a producer of glistening steel-and-alloy cylinders used to extrude plastics and other materials. Now Arehart is winding up his tenure, tying up loose ends, preparing for a departure that can't help but be awkward. His heir designate, chief financial officer Walter G. Cox, busies himself meanwhile with a reporter's questions and with the daily demands of the organization. But Cox, too, is visibly preoccupied with the events of the day. Speaking of his company's employees, he voices what must be on their minds as well as on his own: "They wish to hell," he says, "we'd get the power play over with."
There is no small irony in this transition. When Arehart joined the company in 1968, Xaloy (pronounced Exaloy) was operating out of a plant half the size of the current one; it had 65 employees and annual revenues of only $2.5 million. Arehart became manager in 1972, and by 1980 he had built it into a 255-employee, $11-million enterprise that controlled some 70% of the world market for bimetallic cylinders. A year later, six Chicago-based investors purchased the company in a $4.3-million leveraged buyout. Then times turned hard. Xaloy had always tried to avoid layoffs, even utilizing staggered workweeks in previous downturns, but it was so hard hit by the recession of the early 1980s that it cut 100 employees from the work force. Worse, foreign competitors, boosted by the growing strength of the dollar, were chipping away at its dominance in the marketplace. By the fiscal year ending June 30, 1983, revenues were down to $8.5 million, and the company was operating at a loss.
Xaloy fought back. It invested heavily in new equipment and technology, much of it manufactured in Japan. It experimented with innovative marketing approaches. Most significantly, it began to implement the top-to-bottom reform of manufacturing operations that goes under the name Just in Time. JIT, more than anything else, made the difference. Under its new system, Xaloy nearly doubled its sales while increasing its work force less than 10%, and moved from the red into the black.
But JIT also became a battleground, a source of tension between workers and managers, and a bone of contention between old management and new. As the new system was implemented -- and as output began to soar -- the excitement of getting the company moving again was perpetually tempered by uncertainty, and the enthusiasm by discontent. Factions appeared; lines of authority grew fuzzy. In the end, it was probably JIT that cost Hunter Arehart his job.
The story began almost a year and a half ago, in November 1983. Looking for ways to stimulate output, plant manager Kelley V. Nunley and then-production controller (now materials manager) Danny R. Porter went to a meeting in nearby Blacksburg, Va., sponsored by the American Production and Inventory Control Society. There they listened, enrapt, to an evangelistic sermon on the virtues of Just in Time preached by a professor-turned-consultant named Ed Heard.
Heard is a tall, genial man with an expansive manner and a waistline to match, the legacy of a life lived largely on the road. He has a doctorate in production management, and worked for Rockwell Manufacturing Co., in Statesboro, Ga., later becoming a full professor at the University of South Carolina. Learning about Just in Time while still in academia, he decided to turn his hand to consulting, and so far has had no cause to regret it. Today he is believed to be the only independent consultant in the country who focuses exclusively on JIT; he styles himself the "guru" of the movement. He wears expensive suits, smokes expensive cigars, and estimates that his income has quadrupled since he became a consultant.
Heard's message was, and is, simple enough. The best criterion for gauging the effectiveness of a manufacturing operation is inventory; if you have a lot of it sitting on the floor, you are probably not doing as good a job as you could be. "Inventory is simply the best indicator of manufacturing performance that we have," he says. "There is no problem, no screwup, that doesn't show up in the inventory number." Both raw materials and work in process are supposed to be where they are needed just in time -- not before, and not after.
The Xaloy delegation's reaction to this message was equally simple. "It sounded great to us," recalls Porter. A month after his Blacksburg address, Heard, who is based in Columbia, S.C., was asked to visit Xaloy and assess the possibilities for JIT.
The visit, Hard remembers, was an eye-opener. "The place scared me to death," he says. Giant logs of steel -- up to 30 feet long, and weighing up to five tons -- hung precariously from Wright cranes. "If one of those things fell, and someone was near it, it would just be goodbye," he grimaces. His other impressions: clutter, lack of organization, and an apparent history of growth by expediency. Huge piles of cylinders stacked among the boring machines and lathes suggested that Xaloy stood to gain a great deal from the implementation of JIT.
A few weeks later, Heard went on retainer and began visiting Xaloy twice a month, at a cost of well over $1,000 a day.
It wasn't long, however, before he realized that the company posed an unusual problem. "After our first meeting, Arehart and I never had a private conversation -- never," says Heard, "and it wasn't because I wasn't available." In a small company, he knew, the success of JIT depended largely on the commitment of the top man. But at Xaloy he was dealing mainly with Nunley and Porter, with Cox "serving as point man . . . to take the flak." The unequal involvement said much about the attitudes, backgrounds, and prospects of Arehart and Cox.
Like most of his employees, Arehart was "hill people," one of 13 children of a self-employed contractor and tenant farmer; he held a high-school diploma and had acquired his business expertise on the job. While running Xaloy he continued to farm 40 acres, and when the plant shut down each year for the last two weeks of November -- the annual deer-hunting season -- he headed for the woods. Cox was 20 years younger, a tall, bearlike man with a degree in business and economics from DePauw University, in Greencastle, Ind. He spent his spare time jogging, averaging 20 miles a week.
"As JIT came on," explains Cox, "and you could no longer do things the way you used to, it became harder for Arehart to understand how things worked out there, and that had always been his base -- his understanding of the shop. And, if you lose your base, you start to get defensive." The result, says Cox, was that employees got mixed signals at best, and frequently found themselves the victims of a management that was increasingly at odds with itself.
Arehart says that he was supportive of JIT, but concedes that, after 12 years of running Xaloy, he finally found himself held back by his background. "Everything had become so financial, and technical, and computerized," he observes, "and, of course, the new owners were financial people -- it took someone with a different background from my own to talk to these people, much less manage the company the way they wanted to see it managed."
"JIT crystallized the dichotomy in a big way," comments Heard.
Despite the uncertainty, Heard set about trying to impose order on Xaloy's manufacturing confusion, working closely with the people in the shop. Although the goal was clear -- to get raw steel in one end of the plant and finished product out the other, as quickly and as efficiently as possible -- the process of change had to move in a series of steps.
The cylinders Xaloy produced were deceptively plain affairs. Beginning as logs of steel sawed to the proper length, they were bored out, filled with a special metal alloy, then heated to 2,000 degrees F. to coat the interior with the molten alloy. After cooling, they were straightened, the interior ground smooth, and the exterior machined, with each process repeated several times. Finally, threads, ports, or fixtures were added so that the cylinders could be connected to an extrusion machine. Although the finished cylinders looked uncomplicated, each one took an average of 13 weeks to produce and was machined to tolerances as close as two mils. Sold to customers, they would be used to extrude plastics or even food products: Quaker Oats Co.'s Puffed Rice and Puffed Wheat, the cereals once advertised as "shot from guns," came blasting out of Xaloy barrels.
The problem at Xaloy was that nothing blasted through the plant: It lumbered. A Forte band saw at the back of the plant paced the entire operation; steel was brought in as fast as the saw could cut it. Unfortunately, the saw was the fastest machine in the place, and cylinders immediately began to back up. At one point, when Xaloy was producing some 200 units a month, there were more than 2,000 cylinders stacked on its floor. "When I was an expediter," recalls Porter, "my job was to run around and hunt for the unit that we were supposed to be working on." Sometimes, cylinders seemed to disappear entirely.
Heard and his JIT team's first step was to have workers cut steel only when it was needed, and to group some of the machines by product size to minimize the back-and-forth movement of cylinders. Right away the piles of cylinders began to shrink, and in their place patches of concrete appeared. "We actually had a floor out there," jokes Cox. Today, with Xaloy shipping 375 to 400 units a month, there are only 300 to 350 cylinders in the plant, and the distance a unit travels during the manufacturing process has been cut an estimated 50%. Some 25% of the floor space has been freed, and the time it takes to produce one cylinder has been slashed from 13 weeks to 6 1/2.
The reduction of work in process affected virtually every aspect of Xaloy's operation, from housekeeping (now you could see the trash on the floor) to transportation of materials (tow motors navigated more easily with wider aisles). It also affected people's ways of thinking. "Initially there was a bit of resistance," notes Cox. "Workers associated a lot of pieces on the floor with good times; the only time there wasn't a stack of work behind them was in bad times. They had to achieve a certain comfort level before they could really appreciate the improvements."
Just as employees began to get enthusiastic about JIT, Xaloy seemed to change its mind. One day, nearly 400,000 pounds of steel -- a five- or six-month supply -- arrived at the back door. It was the largest influx of raw-materials inventory that most of the workers had ever seen. "It was a helluva lot -- more than we had room for," smiles Porter. "I was shocked when it showed up."
The order had come right from the top. Approached by a salesman offering an attractive bulk discount, Arehart had reverted to pre-JIT ways: He had jumped at the bargain. In Heard's eyes he had thus inadvertently sabotaged much of the headway that had been made.
"It was a disaster," avows Heard."Here we are, trying to reduce inventory, and they get an opportunity for a quantity buy, and jump on it with both feet. The fixation was so strong that it didn't occur to them to think, 'If this buy is offering us this kind of deal, something must be changing in the marketplace -- maybe we can get an even better deal somewhere else, with the kind of delivery we'd like.'
"You have to be consistent," he adds."We're preaching, 'Inventory is evil. . . . We really want to reduce inventories.' And the employees turn around, and see all that steel, and think, 'What the hell is this?"
Other people weren't much happier. Cox, although he found it hard to dismiss the cost savings, concedes now that it was a "demoralizing" episode. The board of directors, on which the owners sat, was equally concerned. "I gather that they were upset that someone was operating against the flow . . . of a project that had obviously paid off very well," says Cox. If in the past there had been doubts about the smooth coordination of the management effort, the doubts now were gone. Management wasn't coordinated at all.
Despite the loss of momentum, the process didn't stop. Soon Heard and his team were finding new ways to improve operations. One of the biggest savings came when the group questioned the venerable cylinder-straightening process. "You hear it before you see it," Heard explains, recalling his first visit to the plant. "And then you see it -- two men beating on these beautiful things with eight-pound sledge-hammers. There are automatic straighteners, too, but they're little more than mechanized hammers." Like birth, the hammering was a brutal event that prepared the way for the cylinder's later refinement.Heard wondered aloud why there was any need to straighten the cylinders at all. "The steel came in straight, and was machined precisely. Who the heck was bending it?"
Studying the manufacturing cycle, the group finally zeroed in one the cooling process. After removal from the furnace, cylinders were set on two four-by-eights on the floor and covered with vermiculite, granular material that insulated the cylinders so that they cooled gradually, over a period of days. While buried there, the hot metal sagged. Because of this deflection, cylinders had to be straightened as many as three times, each time requiring anywhere from 15 minutes to three hours. "If you had a really bad one," notes Porter, "you could spend an entire shift on it." Working closely with manufacturing engineer Ivan Quesenberry and weld-shop foreman Ronald Surface, the JIT team concocted and built a new cooling setup -- an eight-foot pit divided into 12 compartments, where smaller cylinders could be hung vertically.
"The first time we used it, they came out straight," says Heard, "but the alloy cracked -- it was cooling too quickly." Insulating the inside of the pits solved the problem, and now all of Xaloy's smaller cylinders are cooled that way. As a result, they require less machining and only a single, relatively simple straightening. "With that one change, we took 20% of the labor content out of the product," boasts Heard.
"None of our competitors that we know of -- certainly none of our domestic competitors -- are doing anything like this," adds Cox. "It gives us a distinct advantage in the marketplace." Xaloy is now considering the possibility of constructing deeper pits for its longer cylinders. "It's got the potential," Cox says, "of cutting the labor cost by 50% on all of our product lines."
The new cooling arrangement was but one of a proliferating number of JIT innovations. To control work-in-process inventory better -- and to cut down on travel distance -- Heard suggested that cylinders be stacked on special tables rather than on the floor. The tables, built in the weld shop, hold a limited number of units, preventing indiscriminate piling; they also minimize lifting and lowering.In another case, a quality circle dealing with excessive changeover time on one boring mill -- "It took 2 hours and 45 minutes to set up for a 3-hour job," explains Heard -- completely redesigned the machine boring head, trimming an hour and 45 minutes from the task. Estimated savings: 262.5 hours a year.
JIT not only sparked ideas, it also required that workers become increasingly, sophisticated. "These were not people," emphasizes Heard, "who were used to analyzing operations in detail, putting numbers on things, justifying capital expenditures. . . ." Not surprisingly, some of the efforts failed: A clever attempt to speed up changeover on a VDF boring machine, for example, generated unacceptable vibrations, and wasn't implemented. Then, too, some of the workers were less than enthusiastic. Those who had enjoyed the anonymity of their jobs on the floor hesitated to rock the boat. Some, who understood that JIT had become a political battle-ground for Arehart and Cox, aligned themselves with one camp or the other. "He's an anti-," Cox remarked of one white-collar employee who had embraced JIT reluctantly.
Sometimes even Cox, who had to weigh political and financial considerations, seemed to waffle in his support of JIT. When workers came up with a new clamping system for five honing machines that would have cut setup by 50%, they found that the price tag for all five -- $40,000 -- was too high; they got permission to purchase the necessary tooling for just one. To them, it seemed that management's commitment was questionable. Cox, however, had another delicate issue on his mind."I found myself betten a rock and a hard place on that one," he recalls. "You want to be responsive when an idea like that comes in, but there are other matters to contend with." In this case, it was Xaloy's board. The purchase of five new clamping systems would require board approval; the purchase of one would not. "I decided to bring them in one at a time," says Cox.
"When you say that you're going to introduce equipment that's going to save time," he explains, "the board's reaction is, 'Give us the name of the person it's going to replace. Give us the name, and we'll authorize the expenditure." That was an effect Cox wanted to avoid. "You've got people here who are trying to make improvements," he continues. "How can they do that if they know that they're working themselves out of a job?
"The board is all for anything that's going to cut inventory costs, decrease our lead time, make us more efficient, or improve our market position. But when we get down to details like that, they revert to 1950s-1960s ways of thinking. Which means I've got to walk a tightrope."
This time, fortune smiled on Xaloy. Because of the dealy in obtaining the five clamping systems, Cox discovered that the manufacturer might be willing to trade the new tooling for some surplus equipment that Xaloy owned. "Now we may get all five," he says enthusiastically.
Slowly, cylinder by cylinder, project by project, JIT continued to make headway in this less-than-ideal environment. In one department, tools that had been scattered about the place, or that were locked up in operators' personal toolboxes, were organized in cabinets. More progress was made in reducing setup times. Xaloy began to restructure its relationships with vendors and customers in light of JIT (see "Just-in-Time Marketing, page 105 and "Supply-Side JIT," page 109).
And the approach began to pay off.
During fiscal 1984, Xaloy's sales were up 70%, while employment rose only slightly. Part of the increase in productivity was due to new computerized numerically controlled equipment, and to other innovations, but JIT had played a major, perhaps predominant, role. Work-in-process inventory had been cut by an estimated 75%; all inventories had dropped some 33%, at a time when, because of stepped-up production, they might more reasonably have been expected to increase. Overall inventory turnover had doubled from four to eight turns per year. "If the inventory turns had stayed constant, we'd now have $2.5 million tied up in inventory," notes Cox. The entire cost of implementing JIT programs, including Heard's fee, amounted to $75,000, according to Cox, while the actual savings totaled "at least $500,000 and possibly as much as $750,000." That, he points out, "is not a bad return on investment."
The increased productivity was reflected directly in Xaloy's market position and profitability. Despite an increasingly strong dollar, which worked to the company's disadvantage, the company was able to recover its market share, which now stands at about 60%. It also moved from a loss position to solidly profitable circumstances. "JIT enabled us to improve our margins without increasing prices," Cox says. Somewhat less readily, he admits that it facilitated price reductions in some of its product line. On the subject of Xaloy's profits, he will confirm only that they are now substantially in excess of 10% of sales.
"Now," he says, "we're able to put money back into the plant. We've got another $400,000 in state-of-the-art machine tools coming in, and our cash position is so strong that we can either pay cash or finance it at the very best rates."
Ironically, this very success of JIT created yet another source of tension. "The year before -- a loss year, the worst year in Xaloy's history, a year in which there'd been little, if any, improvement in productivity -- workers had received a 50?-anhour increase," explains Heard."This year -- one of the best years in the company's history, and the year of its greatest jump in productivity -- they got 35?." Management justified its decision by pointing out that labor costs as a percentage of sales had not decreased, implying that workers had not, in fact, become more productive. "They didn't tell them that the reason that was true was because the benefits had been passed along in terms of lower prices," indicates Heard.
In any case, the work force didn't buy the explanation. "At Xaloy," notes Heard, "the product is very visible -- big units and relatively small volume; they can literally count what goes out the back door." So the employees felt they were being lied to, even as they were being asked for JIT suggestions. "You're depending on them, and what's in it for them?" asks Heard.
Cox explains Xaloy's thinking: Its workers were already the second-highest paid in Pulaski County; it was worried about building in overhead that might work to its disadvantage in a downturn, possibly necessitating layoffs; and it was disturbed by the dollar's growing strength. He points out that workers received a $600 bonus -- the first in a number of years -- paid for by JIT savings. But regarding their bitter disappointment, he shakes his head with honest concern. "Basically, they're all correct," he says.
"Sometimes," Heard observes ruefully, "I think that the phrase 'enlightened management' is an oxymoron."
Evan as Cox took the heat for the wage decision, though, the managerial drama that began unfolding with the advent of Just in Time was entering its final act. To many of the men on the floor, it was management -- any management -- that was the chief obstacle; to Arehart, it was the "old hands" who found it difficult to change. But to Cox and Ed Heard, it was Arehart, and now the board was coming to agree. The mixed signals, the factions, the fact that the new system championed by Cox was so obviously paying off -- it was hard for the board to ignore the need for a change at the top. The owners sought out Arehart and offered him a generous retirement package if, at age 52, he would yield his job to Cox.
Late last year, the day finally came. Arehart came out of his office shortly after noon and, with little show and no formality, called together the men working on the floor. Neither angry nor apologietic, he said simply that he had taken the company as far as he could; now the time had come for a change, and he was stepping down, retiring, effective five o'clock that very afternoon. The "power play," as Cox had characterized it, was over.
With Arehart gone, the change at Xaloy continued. Heard met with his three quality circles and discussed new JIT projects. They were working on a new method to dispose of metal chips and waste oil, a simplified "go/no-go" gauging system for measuring counterbore dimensions, and a program for eliminating blueprint problems. They were also searching for a way to avoid nicks and dents on a cylinder's surface. "A little nibbling here, a little nibbling there," is the way that Heard describes it.
Depending on who you talk to, this ongoing transformation of the company's operations has engendered mixed feelings -- of relief, of regret, of enthusiasm for a future that will in all likelihood be quite different from the past. No one doubts that, in the competitive environment faced by American industries like Xaloy, change is necessary. But neither does anyone doubt that change -- particularly when it is a change as thorough as Just in Time -- has its costs.