When Don Washkewicz took over as CEO of Parker Hannifin Corp. in 2001, there was no pending crisis, no immediate emergency and no reason to really change much of anything.
Despite a stalling economy, the massive multibillion dollar manufacturer of motion control technologies and systems was doing fine. There wasn’t an urgent need for change.
“I probably could have sat up here as CEO and not changed a whole lot because Parker Hannifin had a pretty good track record going back a number of years,” says Washkewicz. “A lot of what we had been doing was working very well. There was really no need to change a lot because we could probably do reasonably well going forward.
“But what I wanted to do was to try to take the company to a higher level of performance. So the idea was to identify what are those things we can do differently that we could rally the entire work force around that could move the performance of the entire company to a higher level.”
Washkewicz did an analysis of his peer companies to find out why some were doing better than others and what the driving factors were behind this increased performance that leads to higher price-to-earnings ratio on their stock price.
“It became evident that the prime predictor of (price-to-earnings ratio) is basically a couple of things: The first is growth, and that’s key, and the second is return on invested capital,” says Washkewicz. “Those companies that have a higher return on invested capital have higher rates of (price-to-earnings ratio). Parker was typically in the middle lanes as far as return on invested capital. What would it take to move to the higher end?
“It started with a sheet of paper. When I come up with a strategy for what we are going to do differently, it’s going to have to sit on one sheet of paper, because I have to get everyone to identify with it quickly, and it has to be easy to understand so everyone can rally around it.”
The paper that would contain what would eventually become known as the Win Strategy was initially blank, but he had the main elements in mind.
His vision was straightforward: Be the No. 1 motion control company everywhere in the world. Globally, this represented about a $50 billion market. At the time, Parker was a $6 billion company, so there was room to grow in its existing space without changing the focus of the company.
“There was work to be done to grow our marketshare from 14 percent to something larger, and we were really targeting to try to get above a 20 percent share,” says Washkewicz. “I had three goals: premier customer service, financial performance and profitable growth.”
By creating a plan with clear goals, communicating it to the work force and giving employees the tools they needed to implement it, Washkewicz was able to turn a $6 billion company into an $8 billion company.
The search for answers
Washkewicz had three broad goals, but he knew he needed to put details under each of them.
“The plan actually sat on my desk for about a year as I filled it in,” he says. “What is the best way to deliver the best customer service? What’s the best way to drive financial performance and grow profitability? Those were unanswered questions.”
There had to be strategies listed in his plan for the employees to understand how they were going to achieve those broad goals.
“As I was trying to fill in the Win Strategy, I knew I had to put something under (the goals) to help drive our financial performance,” says Washkewicz.
While Parker was still doing well, its margins had dropped because it lost 20 percent of its volume after 9/11. The company still managed to grow 3 to 4 percent thanks to acquisitions, but there were a lot of underutilized manufacturing facilities around the world.
In his first 18 months, he spent time visiting about 200 of Parker’s 250 global facilities to learn more about the parts of the company he hadn’t worked in himself and to see if he could find answers that would help fill out the rest of the Win Strategy.
Parker is composed of 115 operating divisions that form eight groups. Each division is its own business unit with a general manager, staff, product line and manufacturing facilities. The company is decentralized and each division and group has a lot of latitude in what it can do.
“What’s nice about being decentralized is you have the entrepreneurial spirit,” says Washkewicz. “You have 115 general managers that hopefully are very entrepreneurial. They are closer to the customer and able to serve the customer better than if they were one part of a big organization and someone at the top was trying to call the shots. It makes us more reactive to the customers, we can deliver better service and monitor performance better if we carve this up into 115 logical pieces.
“As I was going around, the interesting thing was there were pockets of brilliance out there. For instance, I went to our aerospace facility in Utah and saw what they had done with lean manufacturing. I had heard the word before, but didn’t know that much about it being applied in a business application. When I saw what they were able to do out there – they drove inventory down, productivity was up, assets were reduced, operating returns improved and customer service levels went up. It was phenomenal. I couldn’t believe what I was seeing. The problem was, when I went to the other 199 plants, I wasn’t seeing the same thing. I said, ‘Wouldn’t that be interesting if I could figure out how to get all 250 plants doing lean?'”
Lean manufacturing initiatives were put in place to carry the success of the one facility to others. The lean initiatives improved customer service because it focused the factories on completing orders that had come in today rather than running large quantities of inventory for which there was no current demand.
Washkewicz also realized that even if he didn’t have the answers he needed for his plan, someone else in the organization probably did. It was just a matter of assembling the best ideas from individual plants, divisions and groups and applying them across the organization.
“At one of the facilities, they were doing a really nice job of purchasing,” he says. “When you are decentralized, it’s hard to leverage what you spend. We spend $3 billion a year on materials and services. The key is, how do you leverage what you spend when you are buying from 250 places from all over the globe and no one is adding all that up and trying to place one order with someone? I’m not going to try to do that from corporate. I don’t know what they are buying out there, but everyone is buying something.”
Now Parker has a strategic purchasing program that focuses on establishing competitive, long-term contracts with a reduced number of suppliers, and collaborates more closely with them on product development to save money. Technology is being employed to help divisions and groups work together to obtain better deals from suppliers.
“We had purchasing, and we had lean, but there was still something missing,” says Washkewicz.
It was pricing. In the past, Parker essentially added a margin to its manufacturing cost for a product to establish a price. But if the company drives down its manufacturing costs and then simply adds a margin to that, it is giving away all the gains.
For example, a product that was selling for $1.30 might have cost Parker $1 to make. If Parker drives its costs down to 75 cents and adds in the same margin, it is now selling it for essentially 98 cents. The company would have given away all its gains under the old pricing structure.
“If the customer is willing to pay $1.30 yesterday and $1.30 worth of value in the product, then you should charge them $1.30 tomorrow and take the difference to the bottom line and hopefully raise the performance of the company,” says Washkewicz. “What we really had to do is really re-engineer the whole back end of this process, which is the pricing part. We have to get much better and smarter on how we price. We can’t price them just off the cost. We have to price them off of the value to the customer and competitive levels on the marketplace.”
Washkewicz studied how Parker was pricing all of its products and made an interesting discovery.
“If you look at our portfolio of products, probably 66 percent of the products are considered high-volume runners that are price- competitive with a lot of elasticity in demand,” he says. “If you raise the price too much, the demand goes down. But there’s another one-third where just the opposite occurs. When we did an analysis of this space, there were a lot of opportunities here. We were pricing these the same way we were pricing the high movers with the same kind of margins. We were not value pricing one-third of our products. …We don’t want to be the highest price, but we certainly don’t want to be 30 percent underpriced, either.
“If you want to optimize the margins on your current business, you have to do three things fundamentally perfect: You better buy at the best value, and that doesn’t always have to be at the lowest price, but the best value; you better manufacture at the best cost; and you better price to market. Purchasing, pricing and lean is I think the magic combination that drives you to improving the operating leverage in the company.”
Implementing the plan
Washkewicz had found the specific strategies necessary to achieve the goals he set for Parker Hannifin. He had the details of his Win Strategy in place, he just needed everyone to implement it, whether they wanted to or not.
“If we make this optional, then what typically happens because we are decentralized, maybe 10 percent will do it and the other 90 percent won’t,” says Washkewicz. “Because everyone is doing good things and working hard, if it’s optional, they’ve got so many other things to do, they can’t be bothered to do this. So early on, I said this has to be mandatory.”
As with any change, there was resistance to the new ideas. Washkewicz eventually compiled a list of 50 excuses as to why the plan wouldn’t work, but he wouldn’t have any of it. He created an audit team to go out to the facilities to make sure it was being implemented. A Win scorecard was created to measure progress. Some general managers required more encouragement than others, but he explained that the plan would help them be more effective in purchasing, pricing and manufacturing – three things they were directly responsible for.
“All I’m asking you to do is your job,” he told them. “We’re going to show you how to do it better than you’ve ever done it before.
“Some were asking when we would be done with this and moving on to something else. I tell them, these will never end as long as I’m in charge. These three things will never end. We will be the best at these three and doing them forever.”
Besides the audit team, Washkewicz also created “champions” for lean, pricing and procurement at the corporate level to keep the initiatives moving forward.
“If we did not have a champion at corporate, I guarantee we would not get this job done,” he says. “There are too many other things going on day in and day out at these different locations around the world.
“When we got feedback that things weren’t working well, we sent people out to help them. If they didn’t get it, we’d move them into other jobs. Some people left because they didn’t like the new scrutiny going on. We had to do that. If you only have 10 percent of the people working this, then you only get 10 percent of the results. I need 100 percent of the results, so I had to have 100 percent of the talent of the corporation trying to move this to the higher level.”
An annual symposium for the general managers was created. Early on, it was educating them about what was expected, but now it’s a means of holding everyone accountable.
“This first meeting, I told them what they needed to get done, and at the next meeting, they needed to tell me what they were able to get accomplished,” says Washkewicz. “Early on, it was tough, but it builds momentum. As you have success stories and communicate them, it gets easier. Once they see inventory coming down and service levels going up, they see that things are really getting better.”
About a year-and-a-half into the plan, an executive vice president went to Washkewicz and told him his plan was missing something: the employees.
“I’ve got to empower the employees to get the job done,” he says. “All this is great and I can pontificate from up here, but I have to empower them. How can I tie all this together and drive it down to the individual?”
The answer was to link every individual’s pay to objectives in the Win Strategy. Each person gets a personal performance plan that has objectives laid out in it that tie into the overall corporate goals. If the goals are met, the employee will get more money. Each level of management gets a multiple of the base bonus, giving everyone an incentive to get the level below them to meet their goals.
“We have 50,000 employees, and they’re all dedicated and want to do a good job,” says Washkewicz. “They need the tools, and what we’re doing is giving them the tools to get the job done.”
Rethinking the norm
Washkewicz knew that improving the methodology of what was already in place was one thing, but growth was the key to success.
“If all you do as a business is optimize margins, you are really just treading water,” he says. “You can tread water with the best $8 billion company, but in the long-term, you’re just dying a slow death. They’ll be coming at you and picking you off. You have to grow. What we say at Parker is we want to grow at 10 percent a year.”
Half of the growth is acquisitions financed from free cash flow, while the other half is internal growth fueled by innovation.
“You better have the best product, because in our business, like any business, the best product always wins in the marketplace,” says Washkewicz.
With talented engineers in all 115 divisions, there were a lot of ideas for new products being generated on a daily basis, but the problem was how to sort through them all.
“You have to boil them down to the meaningful few,” he says. “We never had a way to do this before, but our new VP of innovation has introduced a software program and methodology to do this. It will align those ideas with our customers, where we will know that once an idea is finalized, there will be a market for it and we can identify the size of the market.”
The system allows Parker to focus its efforts on the ideas that show the most potential, and again, a champion at the corporate level is moving it forward across the entire organization.
He also had to rethink how Parker was structured. In the past, Parker was known for making parts, but the market had changed.
“Our customers today want to outsource more,” says Washkewicz. “They want to buy fewer products from fewer suppliers, and they want to outsource their engineering.”
Customers want to go to Parker, tell the company what they need, and have a solution engineered for them.
“We are going from a parts manufacturer to a subsystem manufacturer to a total machine system manufacturer,” he says. “What the customer was saying was they didn’t want, at the beginning of the morning, to have eight Parker guys in the lobby – one from the Connector Division and one from the Pneumatic Division and whatever. We don’t want your eight guys plus eight of your distributors sitting out there, too. We’re not going to tolerate that anymore. We want one order, one invoice and one ship-from location.”
To solve this, Washkewicz created a new division with its own resources that is able to draw whatever it needs from across the Parker spectrum to solve customer problems while still giving that customer the one point of contact it requires.
“If you listen to the customer and do what the customer wants, you’ll never go wrong,” says Washkewicz. “Don’t do what’s best for Parker, do what’s best for the customer. There’s a big difference. Oftentimes, we get snarled up in our own shorts so to speak thinking about how I like having my own sales force (at the division level), and I don’t want to lose it. The customer is saying he doesn’t want that anymore. He wants one guy around all this product. You have to organize around the customer and not around what you want because you don’t buy anything from you.”
The Win Strategy has been in place since 2001, and it’s shown results. Capital expenditures that were 4 percent to 5 percent of sales are now down to 2 percent. Gross profit margin has increased 2.4 percent since 2002. Cash flow has increased to record levels, allowing the company to increase dividends by 5 percent in April and 15 percent in August.
The company has moved from the middle of the pack to the top tier in its peer group in return on invested capital, one Washkewicz’s keys to a better stock price.
“I laid out the plan and said this is how we’ll grow and be successful,” says Washkewicz. “It will drive us to levels we’ve never seen before and drive our stock price where it’s never been before. We haven’t gotten to the point were we see the price-earning multiple on the stock. We’ve got some work to do yet, but I’m confident we’ll get there.
“This plan is really working because of 50,000 people. When you cut right through it, I could not accomplish much of anything without the entire organization understanding this effort and being educated. It’s not easy. It’s change, and any time you try to execute, change there’s resistance. Things were nice here, but now you have all this stuff going on. It’s tough, but it becomes easier, then change becomes the norm and once that happens, you start seeing the results you are looking for. The people start getting more comfortable with what you are asking them to do.
“We don’t see any loose ends. The incentives, the strategy deployment, it’s all linked to the Win Strategy. We have a scorecard that measures the important metrics. I think it’s a total integrated master plan for running this company. We’ve never done it at this level before and it’s taken a lot of people to get here. It’s been a real team effort.”
How to reach: Parker Hannifin, www.parker.com
