"We implemented lean, but our inventory turnover is less than 3." - John Welker, Dec 2004
At the recommendation of John Musat, who was on the Numatics Board of Directors, John Welker called me in late 2004. Mr. Welker, who had a strong German heritage, immediately got to the point with the succinct statement at the top of this page. He then asked, very poignantly, can you help? Of course, us consultants always say, yes, up front.
So a few days later, I visited Numatics and found their part/product/market was extremely high mix/low volume. Their 2.9 inventory turnover was comparable to a General Motors turnover of, say, six to eight turns. Just to suggest a contrast, GM is a low mix, high volume operation.
Mr. Welker said to me, “it is embarrassing to have to tell friends and associates that Numatics turns are less than three.” Being a Detroit based company, his numbers sounded much worse than his associates. Of course, it was not an apples-to-apples comparison. Most low mix/high volume companies turn their inventory over ten times a year, regardless of the level of organizational effectiveness.
After a month or so in early 2005, we developed a monthly SOP process. SOP means Sales and Operations Planning. It is the responsibility of top executives to conduct SOP. So, it amounted to a monthly meeting. John Welker organized it perfectly with two members from marketing, operations, and finance. So, there were eight of us that met every month.
Due to the high mix/low volume business model, we had to use the macro input/output model in dollars. For example, the four primary inputs into inventory are material, subcontract, labor, and manufacturing overhead. So, through the SOP, we set out to "control" inputs and accurately project “outputs.” Outputs are too numerous to discuss here, but the big one is sales.
The process was interrupted in 2005 due to the sale of Numatics to Emerson Electric. We resumed the process in 2006 shortly after Emerson concluded its acquisition of Numatics. Upon resumption, inventory turnover was slightly above 3. Mr. Welker set a goal of five inventory turns. Although five turns does not sound like much, it is the equivalent of GM turning inventory around fifteen to seventeen times based on volume/mix differences.
During 2006 and 2007, Numatics inventory turns gradually improved. Numatics learned to find balance on the trade-offs between three major conflicting objectives; customer service, operating income, and inventory turnover.
Tom Maynard, one of the financial representatives on the SOP team, developed a method where we could assess consequences of inventory turnover improvement to profit impact on a real time basis during the one and a half hour long SOP meetings. There were several instances, where the team sacrificed operating income for inventory turnover improvement. Not too many organizations know how to do that. Those that do, can minimize and in some cases mitigate financial stress to their organizations.
In January 2008, Mr. Welker announced his retirement, effective September 2008. At the time of that announcement, we were just above four inventory turns. Since Mr. Welker set the goal of five turns, we had to shift from a strategy of "continuous improvement" to a "project type of management." That meant a goal of five turns was no longer just a goal. It became an objective. That is, inventory turns must equal or exceed five by September 2008, before Mr. Welker’s retirement.
During the course of the SOP process that began three years earlier, Mr. Welker expressed tremendous leadership. SOP Team membership changed significantly, as the organization was changing quite a bit after the acquisition. During the four year period, Mr. Welker never missed one single meeting. Not even yours truly made all of the meetings and us consultants seldom do that because not doing so means we do not get paid. During the sessions he maintained focus on objectives and directed members to do the same. He never wavered on objectives, while at the same time allowed rational discussions regarding their level of difficulty.
Although some readers may not be impressed with this story, we achieved five inventory turns in August 2008; one month before Mr. Welker's retirement. Cash savings, less divesting expense, amounted to around $4-million during this three year period. Inventory reduced by over $3-million from 2004 through 2007. That is not too shabby of a cash savings for the $70-million division this process involved.
From the SOP process, many systemic issues were identified and corrected. In some instances, Mr. Welker suspended the meeting with directives to "fix" confrontational issues before resuming the meeting two or three hours later.
What drove Mr. Welker to this sort of leadership? Some will argue that leaders are simply born. Although not qualified to professionally argue that case, there is one tidbit of information Mr. Welker shared with me that may shed light on outstanding leadership. Before sharing, one must start at the beginning of Numatics.
Numatics was founded by Bill Carls in 1945. He was a German immigrant who landed in the U.S. at the age of 21 in 1924. Mr. Carls developed a spool and sleeve that could cycle one billion times by using a film of air one-millionths of an inch thick to suspend the spool inside the sleeve contained in the valve. His creation was eventually used in the manufacturing of products of commercial appeal, such as automobiles, textiles, packaging, zippers, etc.
Mr. Carls sold Numatics to John Welker in the 1990’s. Mr. Carls could have made more money by selling to others, but he was loyal to his employees. This sell was so impressive the Harvard Business School wrote a case study describing it. Of course, Harvard used fictional names, but the numbers and events were accurately described.
During my monthly visits, I would visit John in his office. He was always there in the early morning hours. I really enjoyed those visits, as he always had a joke or two to tell. Over the years, he educated me thoroughly on the purposes of Numatics products. On one particular bright spring morning in Highland, Michigan, John told me what Mr. Carls had told him shortly after selling Numatics to John. He said, “John, please take good care of it.” Mr. Carls passed way a few months after that.
John honored Mr. Carls’ request. As earlier stated John had many offers for Numatics, but he took the one that did not yield him the greatest wealth. He took the one that offered to greatest chance to honor Mr. Carls’ request.
During John’s "lame duck" year of 2008, he did not change. He was still the first to get to work and the last to leave. Distractions grew during 2008, but he held the SOP process in place and ensured the delivery of the goal he set four years earlier. Working for people, such as John Welker and John Musat have been significant source of pleasure of my professional career. One learns of the deeper meanings of what makes business work and the prosperity it brings.
Emerson Electric is an outstanding Fortune 500 company that maintains focus on strategic direction. Their holdings are very well managed. One can see that by Emerson’s long history of out-performing the S&P500 Index. By selling to Emerson, John “took care of Numatics” and put that importance far above himself.
In March 2008, John Welker requested that I standardize two other divisions to what we had done at the other one. Again, he was not resting with only six months before his retirement. During the next six months, those two other divisions reduced their inventory by over $2.5-million. One of those divisions doubled their inventory turnover in only six months. Those two combined divisions' revenues were less than $40-million. That is a significant cash contribution for that level of revenue and in a declining economy. These reductions did not unfavorably impact profit.
Passion about one's business can be learned by the ten commandments for the ambitious. John Welker and John Musat both remain ambitious even in their golden years of employment and even in retirement.
July 5, 2009