This is the dawn of a new intensity for the company whereby we put very simple and direct measures in place in terms of material-cost productivity. The way we win is by being a cost-effective and low total-cost provider. We compete on service and we compete on speed.
What’s a specific example of how you’re applying that intensity?
For example, we don’t want our heavy-industry Cequent business to be a high-growth business — it’s too capital intensive. But we do want to be high growth in the aerospace fastener applications. So we’ve deployed capital accordingly.
Describe your focus on material-cost productivity.
Material-cost productivity involves designing materials and changing how they are utilized. For example, you may have metal medical applications that could be plastic. Or you have plastic that could be metal. It’s about finding the most cost-effective way to use that actual product itself.
We manage our business on other metrics than material margins, of course. But it’s one of the things we keep in front of everyone so they can see that productivity over time as the material margin climbs.
Are your line managers, operations people, and sales force compensated for meeting certain productivity targets?
In terms of the incentives, we have five major metrics: sales and operating, inventory turnover, cash flow, new product introduction, and personal objectives. The personal objectives are tied to the strategic plan, which has specific productivity targets; that’s an annual discussion. We know where they are every quarter. The [production] line leader has a subset of those responsibilities. A line leader is not necessarily going to care about sales and operating income, but will be very interested in inventory turnover and new product introduction.
How is the change from a holding-company to an operating-company mentality working out, especially during the recession?
I hate to say it this way, but maybe the recession has actually been a good thing. It’s not a good thing in terms of the people and the families that have been affected. The point is that it’s given us the impetus for rapid change. So when you think about operating-company versus holding-company management, we’re not managing each individual unit as things unto themselves, but requiring them to share information across the organization.
We started with a strategic plan whereby we picked how we wanted the businesses to play. It’s OK to be a cash cow. It’s OK as long as we’re declaring that you’re a cash cow and we’re measuring you accordingly and we’re compensating you well in that environment. And it’s OK to be a star. But the measure of the success is different.
How do you look at a cash cow versus how you look at a star?
It goes back to the vision of the corporation. We want to be an engineered, applied-technology business. For example, the Cequent business is more of an old smokestack industry kind of business. It’s fairly capital intensive, and that’s not who we are. It competes on brands, not necessarily just technology. The vision of the company has been to deploy cash differently. We can get higher capital returns in an aerospace business than we can in a smokestack business.