There are two things you can say about manufacturing: Since the industrial revolution, it has been the lifeblood of business in the United States. And it has also been one of the hardest hit industries in this latest recession.
We will always need to make things. But what things and how we make them are the issues manufacturers — especially large, traditional manufacturers — are grappling with. Businesses are always changing, but it seems manufacturers face a crucial crossroad that separates the ones willing to accept change from those that are not. And the stakes of this choice are high — their very existence.
The Lincoln Electric Co. is one business that has seen the writing on the wall. Since 1947, Lincoln has been a case study at Harvard Business School, where students analyze its lucrative employee incentive plan and guaranteed lifetime employment.
At a time when mass layoffs and plant closures are the norm, Lincoln continues to pay out significant profit sharing bonuses and maintain its staffing levels.
“We’ve not had a layoff here in over 60 years now,” says Roy Morrow, director of corporate relations. “We’ve given out an annual bonus ever since 1934.”
But the times are changing, even for Lincoln. In 1992, the company experienced its first operating loss, and throughout the past decade it has expanded its global presence and been forced to re-evaluate its traditional vertical integration and large inventory policies. Brought on by Y2K compliance concerns, Lincoln seized the opportunity to take advantage of the benefits of technology and revamped what had been successful manufacturing practices for more than a century.
Economist Joseph Schumpeter refers to the process of change as creative destruction: “Growth is a process of creative destruction in which major technological advances create new venues for enterprise and make other venues obsolete.”
Such is the case with Lincoln Electric.
Lincoln’s corporate headquarters on the east side of Cleveland includes 1.5 million square feet of loud metal presses that punch, bend, weld and varnish raw steel every day. The facility is so large that the main aisle that cuts through its middle is referred to as Lincoln Boulevard.
Away from the din of the manufacturing floor, Jim Appledorn walks anxiously into President of Lincoln Electric, North America, John Stropki’s plush office to hand him the company’s first online distributor order. The two study the paper as though it were a rare and valuable document, and in some ways, it is.
The order is the tangible result of the 107-year-old welding manufacturer’s transition from Old World to New Age.
Appledorn, who arrived at Lincoln as its information technology e-business manager, and Stropki shake hands and pat each other on the back. But as quickly as it began, the ceremony is over, and it’s back to business. Milestone or not, the company still has a long way to go, and e-commerce marks part of the beginning, not the end, of Lincoln’s complete business overhaul.
During the onslaught of bankruptcies, downsizing and plant closings in the manufacturing industry, Stropki and his team quietly invested millions of dollars in new equipment, process improvements and information technology. As other manufacturers held on to what made them successful, Lincoln executives understood that change — with a price tag of more than $75 million for new machinery, information technology, improved process capabilities and R&D upgrades over the past five years — was inevitable.
“Over the last four to five years, we spent approximately $16 million and built the most modern consumable laboratory, wet chemical lab where we do research and development,” says Bud Fletcher, a Lincoln spokesman.
It was a smart move by a major player in an industry known for moving slowly on technology investment. But Lincoln has always been known for its innovation.
For the last 90 years, the company has manufactured arc welding equipment. Arc welding is one of those things that affects our daily lives, yet the main industry players remain unknown to the general public.
Lincoln is the biggest of those players. Last year, its total sales reached approximately $1 billion. This year, it will exceed those numbers. And although it has a presence in 19 countries, the majority of its new product line is produced at its Cleveland headquarters.
Its long and innovative history reaches back to 1895, when John Lincoln founded the company to build an electric motor of his own design. His brother, James, joined the business in 1911, and their partnership eventually gave the world its first portable welding machine.
One thing that kept the company successful was the brothers’ penchant for unique business ideas. Lincoln was a testing ground for the first group life insurance policy, offered to employees in 1915. That was followed in 1934 by its legendary incentive performance system.
Of its early business practices, a guaranteed employment policy is still in place today, with shorter working hours and job rotation substituted for layoffs during slow economic times. Its long-standing policy has been to work employees long and hard, and pay them well for every part they make. It’s called the piecework-pay method, and it’s designed to encourage mass production.
Stropki, who is also president of the company’s North American operations, believes the company’s founders initially relied heavily on their workers to outperform the competition. But things have changed. Efficiency and quality are now often more important than quantity. In the not-so-recent past, the focus was on big batch runs and heavy inventories. Mass production was the edict.
But eventually, as a result of inflated inventories, employees filled the plant with the wrong parts. They were at the mercy of an 11-year-old mainframe system that dictated inventory levels. Lincoln’s entire production system was laden with inefficiencies.
“The common thinking was, if customers weren’t satisfied, we needed to build more inventory,” says Lee Seufer, director of manufacturing and engineering of the Machine Division.
The “build it and they will come” mentality remained entrenched at Lincoln until 1999. Then, as the order backlog rose, so did inventory levels. Customer dissatisfaction was rising, and change was imminent.
Lincoln’s order fill rate averaged 80 percent, meaning an order was shipped the same day it was received only 80 percent of the time. Employees hustled to improve the unacceptable statistic.
“They built almost 50 percent more inventory, but the fill rate went down to 75 percent,” Seufer says.
To understand why Lincoln had to change, it’s necessary to understand what has changed in the manufacturing industry as a whole. According to a white paper by the U.S. Department of Commerce on the manufacturing industry, “In recent decades, the intensification of global competition and epochal advances in information technology have begun to favor business organizations that are smaller, flatter and more flexible than their predecessors.”
Basically, fewer workers produce more products at a quicker rate than they have in the past. The Department of Commerce reports, “U.S. manufacturing industries’ employment share fell from roughly 25 percent to 15 percent … (but) the decline in manufacturing employment during the 1980s is not a consequence of deindustrialization. There is no parallel decline in the manufacturing share of total output.”
In Lincoln’s case, the inefficiencies of its plant operations were clear. A process flow analysis revealed that at times, it took a part eight-and-a-half weeks to travel more than one mile through the factory, going through 120 steps which often included storage time as a result of machinery breakdowns.
Idle machines were not unusual. A great deal of Lincoln’s equipment dates to the 1940s and ’50s. If a machine broke down, employees made the parts and did the repairs, tying up human capital, slowing the production line and incurring expensive downtime.
Another drawback to the old machinery was extensive set-up and switchover time. In some cases, it took up to six hours to change a press.
“If you spend half the day setting up the press … then you should run two days worth of parts … and that’s not good,” says Seufer.
And it was time-consuming to train new operators. That resulted in a workplace where everyone’s job was very specific. If someone was absent, the resource pool to replace him or her on that machine was limited.
“Almost 20 percent of the time, our assembly lines were shut down because they didn’t have the parts they needed when they needed them,” Seufer says.
For Lincoln’s continued survival, something had to change — and quickly.
“Traditionally, we’ve been a stock heavy company, with a heavy commitment to inventory,” Stropki says. “(But) if your goal is to get an order in an expedient, cost-effective way, you have to fulfill that order in an expedient, cost-effective way.”
While process and system improvements were always the goals of Lincoln management, they were long-term goals. But potential Y2K problems lit the proverbial fire under Lincoln management. Suddenly, long-term system improvements moved to the top of the to-do list and brought along with them plantwide improvements.
“That was the push,” says Morrow, “for Lincoln to say not only must we be Y2K compliant, but while we’re doing that, let’s get our house in order … and let’s make sure our systems are the best that we can have.”
Historically, many of Lincoln’s top management positions are filled from within. The IT department was the exception. Appledorn, recruited from Lincoln’s regional sales office in Houston, fit the typical employee profile. He arrived straight from college and planned to stay for retirement.
But he was partnered with George Slogik, an e-business systems development manager plucked from Ford Motor Co. Slogik was brought in because of his valuable experience in production systems, and after the two leaders were in place, the IT department grew from 15 to 94 system analysts with varied technical and business backgrounds.
“Our staff is relatively young compared to the rest of Lincoln Electric,” Slogik says. “On a day-to-day basis, we make decisions. It expedites things tremendously, having people that have been out in the sales force or other parts of our business and part of our e-biz team.”
In late 1999, Lincoln’s sales were increasing. But so were backlogs of inventory levels. Slogik decided his first step would be to implement SAP, an operations platform that integrates plant processes with technology.
The move worked. Fill rates that had been as low as 65 percent in the 1970s and 80 percent in the 1990s rose to 95 percent. Today, the fill rate exceeds even that.
It was then that Appledorn considered taking a swing at integrating e-commerce. First, he conducted face-to-face interviews with customers to find out what they wanted.
“(It) was an interesting process internally to do because there was a lot of excitement and you had to kind of bring it down to what’s reality,” Slogik says. “What can we do? What do our customers want?”
Although the presumption was that customers wanted to do all their business online, Appledorn and his team found they were more interested in having access to information such as the status of accounts, orders and shipping.
“What they really needed was information,” says Appledorn. “There’s a lot of cool things you can do out there with an extranet and online ordering … but unless the customer’s fundamentally interested in that, you’re not going to be successful.”
Stropki agrees.
“We knew we couldn’t have a great e-business platform and not have the functionality on the back end,” he says. “So we had to go through the entire organization and take a look.”
So simultaneously, Lincoln’s e-commerce initiative and company makeover were underway. Slogik, Appledorn and their team tackled technology, while the manufacturing engineering team worked in the plant to streamline operations and move the company and its work force from piecework to gang pay. Gang pay is a slang term used by employees that means no one gets paid until the completed part rolls off the line.
For Lincoln’s management, these changes were designed to promote teamwork and shared responsibility.
“The important thing isn’t how many holes did I punch today … it’s how many completed products got off the end of the line,” Seufer says.
Although it may not sound like a big change, it’s important to remember that Lincoln is a company where a high-end factory worker could earn $100,000 a year, and the average year-end bonus in 2000 was $17,579. But everyone realized that if production levels and efficiency weren’t there, Lincoln wasn’t going to make it.
“If you go back to the original Harvard business case study … the chairman of the board at the time … made a comment that Lincoln is not a sales company, it’s not a marketing company, it’s not an R & D company, it’s a manufacturing company, and our success was going to be embedded in how well we made product,” Stropki says.
In the past, manufacturing delays at Lincoln were commonplace, the result of frequent machinery breakdowns. Upgrading the equipment was an expensive option, and a move away from the long-held tradition of buying cheap and fixing often.
However, a significant upgrade served two purposes — it decreased downtime and allowed for fast, flexible operator training.
The factory floor was cut in two, and a separate area was dedicated to new equipment. In stark contrast to the older section, the new area has bright white lighting that reflects off the sealed concrete floor and includes fresh flow air filtration systems.
“They’re ergonomically hands down above anything else we’ve ever done,” says Seufer.
Two identical 75-ton presses, considered small in comparison to the older machines, stand side by side. The dies are interchangeable, as are the operators. In fact, one person can run both presses simultaneously.
In addition, 300-ton presses were installed in August 2001 and are equipped with quicker die changeovers for smaller runs and lower inventory levels. Now operators can move from press to press as needed. Seufer expects all the old presses to be replaced by summer 2003.
Seufer also re-engineered the plant floor to keep up with demand yet remain flexible. The first causality of his redesign was the high level of inventory.
“We went from a push to a pull (inventory),” he says, referring to a lean manufacturing concept that means controlling inventory, raw materials and work-in-process.
Before incorporating lean principles, Lincoln was buying steel in bulk to get the lowest price. At any given time, there was two years’ worth of raw steel inventory on hand.
After the lean conversion, steel suppliers with just-in-time delivery capabilities, rather than low prices, became preferred vendors. Instead of buying 150 types of steel, purchases were streamlined to only 12.
The new system provides Lincoln’s employees with tighter control of inventory levels and costs with a visual inventory system. Stacks of raw steel are kept in a central location, and each stack represents three to five days’ supply. Replenishments are ordered directly from the supplier and delivered the next day — all without a planner, scheduler, purchasing agent or buyer.
All of these moves came with a risk. Investing in a company during a down economy is almost unheard of, and many of the new philosophies contradict the old Lincoln model. But in some ways, they are right on track.
“I can remember when I was a sales trainee back in the early 1970s,” recalls Stropki. “The seasoned veteran salesperson came in and made a presentation to us. His philosophy was you need to work smarter, not harder. The more I thought about it, I thought, ‘There’s always going to be somebody who’s smarter than you … and there’s always somebody who’ll work harder. What if you couple the two together? If you can work smarter and harder combined, that’s a pretty tough combination for people to beat.'”
These days, the manufacturing industry contains numerous contradictions. On average, manufacturers are smaller than they were 10 years ago. However, according to the Department of Commerce, 91 percent of all private research and development spending in the United States was done by manufacturers.
Those numbers mean that if manufacturers want to stay in business and compete globally, they must spend the resources required to strengthen their businesses. Lincoln’s management knows this.
“I don’t know how many 107-year old companies are left in the U.S.,” Stropki says. “I can tell you they’re not in the welding business. But I mean 107 years in Cleveland, heavy industrial-based, basically the same ownership format … part of a relatively small independent company with public shareholders, it’s a very unusual position.”
Obviously, nothing is as easy as it sounds. Stropki and his staff acknowledge they have a long way to go.
“The hurdle rate gets continuously higher and farther apart,” says Stropki. “You can’t focus on a single element. I think you have to set a vision for what you want to accomplish. Then you just have to be committed that you’re going to accomplish that vision.
“In any size company, if the vision is correct, it’s going to take change within the organization to accomplish that vision.”
Lincoln Electric
