America's Elite Factories These plants have taken many paths to quality and efficiency, from special pay incentives to kaizen sessions that grind out steady improvement.
By Julie Creswell

(FORTUNE Magazine) – STEEL DYNAMICS A MINI-MILL WITH MAXI-PROFITS

On a sunny day in July amid the cornfields of northeast Indiana, a lightning storm is gathering--indoors. At Steel Dynamics' highly efficient plant in Butler, a mammoth crane drops a load of scrap metal into the mouth of a 190-ton electric arc furnace. The cover swings on, and three carbon electrodes are lowered. Then the fireworks begin. With a roar and crackle, 100 megawatts of electricity--enough to light up a small city--shoot through the furnace. As the temperature of the electrodes climbs to 7,000[degrees]F., workers shuffle around the furnace, covered from head to toe and wearing aluminized Kevlar jackets. The blinding light and searing heat can be felt from the air-conditioned pulpit where Bob Soden, Steel Dynamics' manager of engineering and services, and hot-mill manager Barry Schneider stand unflinching as sparks and pieces of molten hot steel shoot through the air. "Yup, every three months or so we have to replace the window," says Soden, pointing at black pieces of steel embedded in the glass.

This is steelmaking, mini-mill style. Steel Dynamics is essentially a recycler, turning scrap into 2.2 million tons a year of flat-rolled steel used in buildings, autos, and other manufactured items. The steel business has been tough in recent years as imports have surged, causing prices to tumble. Since 1998, 19 steel producers, representing 25% of U.S. capacity, have filed for Chapter 11. Some are mini-mills, whose costs are lower than those of integrated steelmakers, which produce virgin metal from iron ore. Many mini-mills sprouted in the 1990s, hoping to outdo the success achieved by the mini-mill leader, Nucor, with its revolutionary continuous thin-slab casting technology. Steel Dynamics may be the only mini-mill that can claim to have pulled it off. It uses the same technology, but its operating profit per ton is $55, vs. $43 at Nucor, according to analysts at Morgan Stanley Dean Witter. In 2000, Steel Dynamics' profits rose 36% from the prior year, to $54 million, while its sales climbed 12%, to $693 million. Though earnings have slumped this year, the company's stock is up 20%.

Steel Dynamics has stayed profitable by keeping its costs down and its nonunion work force hustling. The company was founded in 1993 by a trio of former Nucor executives: Keith Busse, Richard Teets, and Mark Millett. They had been instrumental in building the world's first thin-slab mini-mill for Nucor in the late 1980s in Crawfordsville, Ind. This process, which was developed by German equipment builder SMS, turns freshly melted steel into a continuous ribbon about two inches thick. It can be rolled into sheet steel faster and with far less machinery than the typical ten-inch-thick slabs cast in integrated steelmakers' plants.

Investors were eager to help the trio start a mini-mill of their own. Their plan was to improve upon what they had learned at Nucor. "We had an acute and intimate knowledge of what worked and what the shortcomings were," says Millett, a quick-witted Brit with gray streaking his hair. Many of the new mini-mill entrants were going after the commercial hot-rolled steel business, providing thick coils of steel to manufacturers. But Steel Dynamics wanted to chase higher-margin business, which demands thinner gauges and higher quality. "We are in the business to make money. We're not in the business to make steel," says Millett. "We wanted to make automotive-quality steel and be the lowest-cost producer."

Steel Dynamics got its mini-mill built and running in a span of 14 months for an initial capital cost of $275 million--record lows for this type of facility, analysts say. Even more impressive, the plant became profitable by July 1996, only six months later. It achieved such high quality that by its sixth week of production it was supplying some of the steel for the A-frame suspension arm in Ford's F-150 pickup truck. Today about 33% of the plant's production goes to automotive manufacturers for chassis, frames, and inside-door panels. (Steel for cars' skins still comes from integrated mills.)

The trick in profitable steelmaking these days is to keep a lid on three costs: raw materials, electricity, and labor. Locating the plant in close proximity to supplies of automotive and other steel scrap was critical. Scrap accounts for about 51% of Steel Dynamics' total cost of production, and scrap costs have varied in recent years from $95 a gross ton (2,240 pounds) to $185 a gross ton. Steel Dynamics signed a long-term purchase agreement with OmniSource, a scrap merchant that was one of the mill's original investors, thus ensuring a steady supply.

Steel Dynamics also worked out a good deal on electricity. It buys from American Electric Power for 2.8 cents per kilowatt-hour--on the low end of the price range paid by mini-mills. But if you ask Soden why his company is profitable when so many of its peers are in trouble, he'll tell you it's all about giving the 525 workers in the plant the right incentives. Steel Dynamics uses 0.37 manhours of labor per ton of steel, and its revenue per employee is $1.3 million, one of the highest among mini-mills.

Soden is a die-hard steel man. Before joining Nucor, he worked at U.S. Steel, the No. 1 integrated producer. He was the fourth person to leave Nucor and join the steel startup. (Eventually about 50 Nucor employees defected to Steel Dynamics.) Standing 6-foot-1, grimy from the smoke and soot in the factory, Soden speaks with a gravelly voice as he whips around the plant floor and catwalks, occasionally taking a drag on a cigarette. "You'll rarely see people standing around doing nothing," he says. "Everyone is motivated by the pay systems to get in there and lend a hand when something breaks." Adds analyst Waldo Best of Morgan Stanley Dean Witter: "Steel Dynamics has a unique work force that really busts its rump."

It's easy to see why. Hourly workers can receive a hefty weekly bonus of $10 an hour, atop the base pay of $10, if production levels are met. This isn't that unusual among mini-mills. But Steel Dynamics also has a monthly payout called a conversion bonus, awarded if input costs are kept to a minimum during production. "Everyone looks at cost and tries to find ways to keep it down," explains Schneider. "For instance, the guy who sticks the probe into the furnace to take its temperature knows each probe costs about $10. He's going to want to do that only once, not four times. If somebody sees oil dripping from something, they're not going to let it drip forever, because that's coming out of their pay." If conversion bonus levels are met, a worker making $10 an hour can get another $2 an hour added to his paycheck.

The company also gives annual profit-sharing awards, which averaged $6,700 in 2000. It matches employee 401(k) contributions based on the company's return on assets, and all employees, from office assistants to workers running furnaces, get stock options twice a year. As a result employees pay rapt attention to quarterly conference calls and earnings reports, says Schneider. In 2000 the average compensation for Steel Dynamics' employees, excluding officers, was $64,700.

It takes about two hours for Steel Dynamics to turn scrap into steel. About 55 minutes after a batch of scrap goes into one of four furnaces, the molten orange-red steel, which has hit 3,000[degrees], is transported in a ladle by an overhead crane to the metallurgical adjustment area, where technicians race to test, refine, and add alloys.

From there the liquid steel is moved to the casting deck, where amid many sparks and crashes it is emptied into a reservoir. The reservoir controls the flow into the water-cooled, copper-lined mold of a continuous caster. As it flows through the mold, jets of cold water and rollers cool the outside of the steel. When it exits the mold, it has a solid outside and liquid inside and a temperature of 1,800[degrees]. This is the stage where a costly "breakout," or puncture in the cooled surface, can occur, sending molten steel all around the mold and rollers. "It takes about an hour and a half to change a caster, and costs $10,000 every time the caster is shut off and turned on," says Soden. Earlier this July morning, a breakout did occur. Everyone on the crew was running up and down the stairs, yelling over radios to one another, and hustling to replace the mold and get the caster running again.

As the continuous ribbon of steel falls through the mold, it gradually takes a 90-degree turn from vertical to horizontal. The slabs are lifted slightly, sheared into 150- to 175-foot lengths, and moved directly into a tunnel furnace, which keeps them heated at a constant 2,100[degrees]. After black surface scale is removed, the slab, still red-orange, is transported to the first stand of the rolling mill.

The steel accelerates to 38 miles an hour as it shoots through seven rolling stands that progressively flatten it down to as little as 0.039 inches. At the end, it is wound into 20-ton bands, or coils, that look like, well, toilet paper. These bands are either shipped to end users or sent to Steel Dynamics' cold mill, where they are further reduced in thickness, to as little as 0.011 inches, and given various finishes or textures. Steel from the cold mill is a premium product, typically priced at $100 to $150 per ton more than hot-rolled steel. The differences in technology and processes between the hot-band plant and the cold-roll facility have led to good-natured rivalry between the two work forces. "The hot mill is big and massive and fire and brimstone. The cold roll is so shiny and new," Soden says somewhat derisively as he brings another cigarette to his lips. "I could never be happy there."

DELPHI AUTOMOTIVE SYSTEMS HUMMING WITH STATE-OF-THE-ART MACHINES

The first thing you might notice about Delphi Automotive Systems' newly renovated injection-molding plant in Cortland, Ohio, is that the parking lot is nearly empty. Tucked behind a flag-lined main street in a small town about ten miles west of the Pennsylvania border, the plant has spaces for 550 vehicles but only 40 or so are filled. Step inside the climate-controlled, 160,000-square-foot facility, and you won't see many workers scurrying around either.

That's surprising, given the fact that the plant has 120 presses churning out a billion plastic housings a year for electrical connectors used in motor vehicles and telecom equipment. "The advantages in this plant are invisible," says sandy-haired John Stefanko, the superintendent. "You'll see lights blinking, and you'll see automatic guided vehicles moving around, but what you don't see is just as important as what you do see."

What makes the Cortland plant hum is an e-manufacturing network that monitors individual molding machines, tools, finished parts, and shipping orders. Over the past two years Delphi has spent $14 million to renovate the building, previously used to assemble wiring harnesses for cars, and another $30 million for production equipment, computers and software, and an Ethernet linking the factory floor with suppliers and customers.

From his PC at home, Stefanko can see in real time what part a machine is currently making, whether it's taking 15, 18, or 20 seconds to do so, and how many parts it has made in the last 15 minutes. From such data, Stefanko can forecast production several months out. The system also alerts operators when something is wrong with a machine--before it starts spitting out defective parts or shuts down completely. It tells suppliers when to restock the plant's inventory and lets customers know exactly when their orders will arrive. "This plant is absolutely amazing. It's a step beyond state of the art," says Ron Bishop, president of Bishop & Associates in St. Charles, Ill., a market-research firm that specializes in electrical components.

Delphi hopes the Cortland plant and the technology running it will allow it to break into new markets for components and damp the effect of auto industry cycles. Most of the company's revenue comes from the auto industry, and this year's downturn has cut deep. In the first six months of 2001, sales slid 13%, to $13.5 billion, and Delphi earned $139 million, vs. $746 million in the same period last year.

To see how big a technology leap the Cortland plant took, all one has to do is drive about eight miles south to Plant 3, an older Delphi facility that makes similar parts. Inside a ramshackle building with broken windows, 240 injection-molding machines, many 30 years old, wearily pump out plastic housings for connectors. Parts are spit out of machines into large boxes on the floor that workers must bend to pick up. Defects run as high as 1,000 pieces per million.

A couple of years ago, after Delphi was spun out of General Motors, its executives saw an opportunity to break into new markets for electric connectors, including telecom and consumer appliances. But customers in these industries demand much lower defect rates and significantly faster response times to orders and new designs.

Delphi needed to update its factory. The challenge fell to a group of infotech specialists, including Jeff Ziegler, the company's global infrastructure manager; chief information officer Peter Leonard; and Frank Ventura, manager of U.S. manufacturing information systems. They worked with Cortland's managers and operators to design hardware and software. The plant uses Microsoft Windows NT for its operations and communications framework, and Oracle's databases. Software from GE Fanuc sends commands from production servers made by Compaq to the logic controls that run each machine.

The group faced a host of problems putting in the system. In May 2000, about a month after the network had been installed and with the plant operating at about 20% of capacity, an unexpected power surge fried the production servers. "I thought, My God! We're only 20% into this, and we've overloaded the system and fried it," recalls Stefanko.

With the kinks out of the network, the payoff of the IT system is clearly visible. The Cortland facility uses fewer employees, about 150 in all. One operator controls 15 machines, compared with ten machines at Plant 3. Cortland's defect rate for components used internally--those shipped to another Delphi plant, where other parts are added--has plummeted to around 14 parts per million. For parts sent to other companies, the plant boasts a zero defect rate. Delphi is the fourth-largest manufacturer of connectors in a $33-billion-a-year market that analysts expect to grow about 7.5% annually over the next five years. "This plant makes Delphi the low-cost manufacturer of automotive connectors," says market researcher Bishop.

Cortland's e-manufacturing efforts start at the beginning: raw-materials handling. The plant's annual supply of ten million pounds of yellow, gray, and black Nylon 6/6 pellets arrives just in time from another Delphi facility. The Nylon 6/6 pellets used to come in so-called Gaylords, large cardboard boxes that weigh 1,500 pounds, cost $37 apiece, and can be used only once, to avoid contamination. When the Gaylords arrived, workers shoved a suction tube into the box to transfer the material into round three-foot-tall cardboard bins that were rolled onto the plant floor and placed next to a molding machine. There another tube would draw the material into the machine and operators would tilt the container this way and that, trying to get at the last 15 or 20 pounds of pellets at the bottom.

Today material arrives in sealed and reusable metal bins. An operator scans a bar code on the bin, and a computer determines where and when, say, the yellow housing for circuit connectors in automobile airbag systems will be made. The bin is pushed under a vacuum that sucks the material into 2.5-inch aluminum pipes that run overhead in the factory and deposit it directly into the machines. The result is fewer defects caused by workers handling the materials.

Every part has a "golden recipe" for the various machine settings needed to make it. These recipes are all stored in the IT network. By touching the appropriate icons on a flat-panel computer screen, an operator can download a recipe into the molding machine. Previously operators entered a number of settings by hand. That increased the chance of an entry error, causing the settings to drift from the original recipe.

Once the machine matches the material with the recipe and the die that will mold it, it begins to drop plastic pellets into a barrel-and-screw mechanism, which acts like a big meat grinder. It pulverizes and heats the material to a liquid state at 550[degrees]. The molten plastic is then squirted into the mold, which is cooled by water to cure, or harden, it. Each cycle takes mere seconds and produces two to 32 plastic parts, depending on the die. The part cools as it moves up a conveyor belt and with a soft clink drops into a box.

All the while, a computer keeps track of how many parts are in the box, how long it takes for that box to fill, and how many pieces have been rejected. If a machine detects that it has made a bad part, it drops the parts made in that particular cycle into a separate conveyor, and they fall into a bucket. If the machine has three consecutive faulty runs, it alerts the operator. When a box is finished, the operator is notified. After grabbing a handful of parts and doing a quick quality inspection, the operator hits a button right by the machine. That tells a mainframe computer 500 miles away in Charlotte, N.C., to print out a label, and adds the box to the day's production count.

A conveyor moves the filled box to the side and replaces it with an empty box so production can continue. Simultaneously, a fleet of automatic guided vehicles, or AGVs, begins a quiet, synchronized dance across the factory. Also called frogs, after their manufacturer, Frog Navigation Systems of the Netherlands, the AGVs are directed by 4,000 magnets embedded in the plant floor. Zipping around at about 13 miles an hour, the frogs stop and utter polite little beeps if you are in the way. A frog pulls up to a window at one end of the factory and picks up an empty container. It then delivers it to the machine with the finished bin, which it takes to the shipping department.

One of the most critical functions the IT network serves is maintaining equipment. It monitors the number of cycles in which a particular die has been used, and schedules it for maintenance. But not everything in the Cortland plant is geared toward e-manufacturing. "We were going down the road of spending $1.5 million for a system to ship finished goods. But when we looked at the ten-year cost savings, it didn't make sense," Stefanko says. Still, the IT group is eyeing more ways to automate. "Technology costs are coming down," says Leonard. "We've put a good IT system in, but we're not resting on our laurels."

BAXTER HEALTHCARE SHAVING COSTS WITHOUT HURTING PATIENTS

Baxter Healthcare's plant in Mountain Home, Ark., constantly struggles to reduce costs without sacrificing quality. Nothing unusual about that, except that in this case more is at stake. When a chip in a computer is defective, it may not start. But an inferior intravenous tube or dialysis bag made at Mountain Home can be hazardous to a patient's health.

At the sprawling plant, situated between two lakes in the heart of the Ozarks, 1,600 employees make IV bags, tubing, and bags for dialysis equipment. Some of the output goes to other Baxter facilities for further processing, while the rest is shipped directly to hospitals, dialysis clinics, and the Red Cross, which uses it to collect and test blood. The quality of the product is of the utmost importance to the end-user. "In the mid-1980s, we started zero-defects day, where we brought in patients who talked about how the product is used and what it means to them to have it working right," says Bill Bramlett, a quality section manager. "Sometimes these patients are people who work here or family members of people who work here. There's not a lot of dry eyes on those days."

But controlling costs is equally important at Mountain Home. Since the mid-1980s the plant has embraced a number of lean-manufacturing techniques and just-in-time inventory controls. And a couple of years ago it was introduced to kaizen, the Japanese process of continuous improvement. Overall, the plant has chopped manufacturing time by 84% and improved on-time delivery to more than 99%. This year it won the prestigious Shingo Prize for Excellence in Manufacturing. The award, given by Utah State University, is named for the late Dr. Shigeo Shingo, an engineer who helped design the renowned Toyota production system.

Strolling through the corridors of the Mountain Home plant, you might feel you're in a hospital ward. The smell of disinfectant lingers in the air, and employees shuffle past wearing hair nets, white coats, and safety glasses. Because its products are used in the health-care system, Mountain Home is a so-called clean facility. Products designated for Japan, which make up about 5% of the plant's output, go through an even more rigorous process. They're manufactured in separate rooms by workers covered head to toe. This is because the Japanese are particularly fastidious about cleanliness and product presentation, explains Vick Crawley, manager of the Mountain Home facility. Because of the extra steps, Baxter can charge a premium for many of these products.

But for the majority of Baxter's lines, it's tough to raise prices. The company saw its margins come under fire in the mid-1980s when Congress began limiting how much government programs could reimburse hospitals and other health-care facilities for treatments and costs. About half of the plant's output is for Baxter's renal division, which accounted for about a quarter of the $6.9 billion in sales and of the $915 million in profits last year at Baxter International, its parent company. The factory makes disposable products for two types of dialysis: continuous ambulatory peritoneal dialysis, in which patients can move around after they drain the solution into their bodies, and hemodialysis, in which patients must be hooked up to a machine for several hours. The plant also makes blood collection and cell separator equipment for Baxter's bioscience division, which accounts for more than one-third of Baxter International's sales and earnings.

Sales of both units are growing at double-digit rates, but margins keep getting squeezed. "We joke that in the '70s we were selling IVs for a buck and that we're still selling IVs for a buck today, but the price of raw materials and labor have gone up big-time," says Crawley, a lanky man with a slow drawl. "If you're going to grow your margins and you can't raise prices, you've got to cut costs and come up with new, innovative products."

So for the past 15 years, Mountain Home has been on a ceaseless cost-cutting crusade. Through various lean-manufacturing techniques, Crawley says, the plant cut 4% annually from its production costs over a period of ten years. Then, two years ago, some factory executives attended a conference in Chicago on kaizen. In 1999 the plant had its first kaizen event, in which production workers and others meet to rethink manufacturing processes, and it was immediately hooked. Today it's running about two kaizen events a month and figures that 35 events in the last year and a half have saved it more than $3.6 million annually, on top of other lean-manufacturing improvements.

It hasn't always been easy getting long-time employees to embrace kaizen. "We had people who didn't think the process could be improved," says Carla Campbell, a kaizen coordinator at Mountain Home. A soft-spoken woman whose face is framed with short, curly hair, Campbell started at the plant 18 years ago. Today she is part of a two-person team that holds the kaizen events in a specially designed room stocked with munchies and soda. To get the work force to sign on, Baxter promised that employees who found ways to eliminate their jobs wouldn't lose them. Instead they would be moved to another line in the plant.

Kaizen's essence, along with improving quality, is to reduce waste. Mountain Home's first kaizen event took on one of its oldest production lines. In July 1999, ten people gathered on a Monday morning to talk about the problems in the cell-separating division, which makes an assembly out of IV bags, plastic tubing, and plastic components. The line, which hadn't been altered in about ten years, consisted of 24 employees sitting in an oval formation (think of a lazy Susan) adding a piece to the assembly, placing it on a tray on a track, and forwarding it to the next employee. Workers in the middle of the oval supplied parts and subassemblies to those on the outside.

The participants first spent a couple of hours getting oriented to the notion of kaizen. Then they determined the product's so-called takt time--how long it takes to make it--and compared it with how often a customer buys it. They figured that a customer buys a cell separator every 40.4 seconds. Then each individual step on the line was timed with a stopwatch. "People were surprised to find that some people had 30 seconds of work to do for each part, while others had only 20 seconds," recalls Campbell.

Late on Tuesday, the group marched into the room and began shifting equipment around to improve the flow. They moved some employees out of the middle of the lazy Susan and to the side. They also moved tables of equipment and tools closer to the employees. Various steps in the process were reallocated so that each employee was doing close to 40.4 seconds of work for each cell-separator assembly. The brainstorming showed that only 19 operators were needed on the line. Productivity climbed 19%, saving Baxter $296,000 annually.

Another kaizen event focused on the plant's critical injection-molding machine area. On 30 machines, Mountain Home makes more than 125 different plastic parts, each requiring a different die, for use in-house as well as for other plants. But changeovers were taking much too long. The kaizen team spent a day monitoring them and was stunned at what it discovered. "We counted 53 different actions completed by the technician," says Campbell. The group then created a spaghetti diagram, showing how many times the worker criss-crossed the workspace to change the tool. It also followed him around and found that he was walking about 1.2 miles.

Setting up a formal changeover procedure and hanging up tools so that they were easily accessible cut changeover time in half, to two hours. The number of steps was reduced to 24 from 53, and the operator now travels only half a mile. Uptime on the machines was increased by 1,362 hours a year, for a total savings of $213,000. But with kaizen, you never sit back. The plant is now considering doing another event to reduce the changeover time even further.

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