(FORTUNE Magazine) – It's very low-tech stuff at a very high-tech company. On the wall of a meeting room off the mezzanine of Rockwell Collins' factory in Coralville, Iowa, Cindy Mingo and a half-dozen fellow workers are sticking up a row of yellow Post-its, each bearing cryptic handwritten notations. The slips form a crude representation of an assembly line for an avionics device used by British fighter-jet pilots to distinguish friend from foe. The group easily spots places on the line that need attention. The line takes more than 60 hours to build the device. The yellow slips show that actual working time is 111 minutes.

Posting Post-its is hardly glamorous work in a company that delivers systems for managing the radio chatter on a battlefield and builds "head-up" displays that enable the pilot of a descending 737 to eye the runway, not the instrument panel. But this is how things get built better and earnings get notched up. In a company infected with acronymophilia, projects like Mingo's are called RPIs, for radical process improvement. In typical continuous-improvement style, her team will bust some bottlenecks now and let another RPI do more later.

The results are one reason why Rockwell Collins, based in Cedar Rapids, Iowa, has performed so well that it has been talked of as a possible takeover target. Over five years it lifted revenues some 88% and more than doubled profits, despite a roller-coaster ride in orders for some of its lines and a catalog of products thick enough to drive a manufacturing manager back to the three-martini lunch.

In its fiscal year ended Sept. 30, Rockwell Collins garnered most of its $2.8 billion in revenues selling radios and other pieces of electronic equipment for airplanes, those that haul passengers and those that deliver smart bombs from carrier decks to Afghanistan caves. More than 60% of its sales were to airlines or to builders of airliners and corporate jets, especially Boeing and Bombardier. Most of the rest of the revenues came from the U.S. military directly, or indirectly via the likes of Lockheed, Sikorsky, and the defense side of Boeing. While the company has a score of competitors, notably Honeywell and Raytheon, few firms of any type have its huge mix of products.

"We don't build a lot of anything, but we build a lot of things," says Herm Reininga, 61, Rockwell Collins' senior vice president of operations. He counts 750 different types of products, manufactured in an average of 30 different versions in one or more of the company's ten principal plants. Rockwell Collins manages this diverse output profitably because of what CEO Clayton Jones, 53, calls an "enormous sea change in a very long legacy business." The company became an independent NYSE company last summer after its parent bifurcated. The other part is now Rockwell Automation. But the big changes got under way earlier. Since 1996, says Jones, "there's a shorter list of what we didn't change than what we did change around here." Among them:

--What has happened to the product lines is near-revolutionary. Military and commercial avionics used to be separate businesses, which caused waste and duplication. Today equipment built for the airlines is installed in Air Force cockpits. Products developed for the military show up in your company's jet.

--Using techniques it lumps under the rubric "virtual factory," Rockwell Collins no longer dedicates manufacturing facilities to specific product lines. Orders are shifted back and forth between plants that have too much to do and those that need work. One benefit: Until last fall, the company didn't need to hire and fire workers because of hills and valleys in orders.

--The company has adopted and adapted the tools of lean manufacturing, including strategic sourcing, production cells that build a complete order for a product, and continuous-improvement groups like Mingo's. The company calculates that "lean electronics" is saving it more than $100 million in costs annually.

Right now Rockwell Collins is struggling with an unwelcome change, a sharp drop in sales that is likely to bring fiscal 2002 revenues down $320 million, to $2.5 billion. The explanation is Sept. 11 and the subsequent nosedive by commercial aviation. Military sales haven't declined, but so far they haven't increased much either. That has led to the first layoffs in years. Yet no plants have closed, which could pay off when more military orders roll in and the airlines regain some altitude. Investors are optimistic. The stock dropped nearly 50% after Sept. 11, to $12.95 a share, but recovered this spring to around $24.

Rockwell Collins' pre-Sept. 11 achievements couldn't have happened without two key events that weren't precipitated in Cedar Rapids. One was a shift in how the U.S. government buys things. The other was a 1996 decision by then-parent Rockwell International to sell its defense and aerospace business to Boeing for $3.1 billion. Kept out of the deal was the military communications and avionics business. Too small to stand on its own, it was joined to the Collins commercial lines, putting the company back the way it had been 25 years earlier when Rockwell bought it.

The Collins company history has a familiar plot. Arthur Collins, an amateur radio wizard, dropped out of college after one year. In 1931, at age 21, he started building shortwave transmitters for other enthusiasts in the basement of his Cedar Rapids home. By 1937, Braniff had Collins radios in all of its DC-3 airliners. During World War II the company built communications equipment for planes, PT boats, and ground troops. Recalls Clay Jones: "For 40 years, Collins Radio was a technology leader, an innovator. It was ruled by engineers who did incredible things as the radio and avionics industry was developing. Unfortunately, along the way they forgot to hone their financial skills."

In 1971 the company fell into the arms of what was then North American Rockwell. A few months later Art Collins was out, and Rockwell executives were in. Not long after, the product lines were divvied up. The military side was combined with Rockwell's defense-electronics business in Anaheim, Calif., the commercial operations were left in Cedar Rapids, and the twain did not meet again until 1996.

Despite the sophistication of Rockwell Collins' products, manufacturing them looks relatively simple at first glance. Innovative technology is largely buried in ASICs, application-specific integrated circuits, designed in-house and made by Intel and others. Those chips are mounted on printed circuitboards built in one of Rockwell Collins' plants. Final assembly can be no more than hand-soldering and screwdriver work. But these aren't toaster ovens. If a device is used to help slide a Learjet down the glide path into Wichita or coordinate a flight of F-15Es lining up targets that shoot back, it had better not fail. As much as 30% of labor costs are consumed during and after assembly when highly trained technicians tune and test.

The need for absolute reliability combined with short production runs elevates price tags. Stand on the mezzanine outside that Coralville meeting room, and you can watch a half-dozen workers down below carrying out what is for Rockwell Collins high-speed production of a low-cost item. They're assembling Pluggers, a verbalization of an acronym containing an acronym, PLGR, for Precision Lightweight GPS Receiver. GPS, of course, stands for global positioning satellite technology.

Pluggers are used not in the air but on the ground by GIs to precisely locate themselves and occasionally, according to reports from Afghanistan, to hammer in a tent peg. The cell assembles 65 a day, which are sold to the military for about $2,000 each. Elsewhere in the company, ten a day of something at $30,000 apiece would be more typical. In a Cedar Rapids plant, 140 workers build Joint Tactical Information Distribution Systems at a rate of ten a month. A JTIDS, which sells for $1 million a copy, is a device that manages battlefield communications from a circling plane.

In design, function, and need for reliability, there's little difference between civilian and military avionics equipment. Until the mid-1990s, the principal one was that government said there was. Military buyers specified everything down to where to buy screws and how to install them. Short runs and special requirements meant that the government always paid more.

Early in the Clinton Administration, widely publicized examples of how "MilSpec" buying drove up prices of even homely items like coffee pots led to a major change in government purchasing practices. These days, explains Bob Chiusano, an executive VP who heads Rockwell Collins' government business, "they've gone to performance-based contracts that basically say, 'I want an instrument-panel display, and I want it to operate in this environment, and I want it to be able to do the following things. You tell me how you can cost-effectively do that.'"

Commercial avionics has always benefited from military R&D; GPS technology, for one, has revolutionized civilian navigation. Now costs are reduced for everybody by combining manufacturing. Bombardier's regional jets fly with a high-frequency radio developed for military helicopters. A commercial weather-radar set that serves an American Airlines 777 sees the same storms from the nose of an Air Force C-130. The ideal is to build one "black box" for everybody with, at worst, an extra or a modified circuitboard to meet some special need such as encryption.

A good example of mixing government and civilian products is a Rockwell Collins contract to upgrade the Air Force's fleet of more than 500 KC-135s, the aging big tankers used for midair refueling. KC-135s now fly with the same type of cockpit display system and ground proximity equipment that the company sells to airlines. Other devices, such as weather radar and systems for traffic and collision avoidance, are commercial versions with slight modifications. One change compensates for the fact that some close-by planes are not on a collision course but are approaching or leaving their gas station in the sky.

With the Collins businesses remarried and government purchasing altered, the logic of combining production of items that are the same or use the same technology was clear to all. However, the International Brotherhood of Electrical Workers, which represents production and maintenance people in Cedar Rapids and Coralville, worried that it would result in a shift of work to the company's non-union plants such as Melbourne, Fla., where wages average about half what they do in Cedar Rapids. In time, product movements to as well as from union plants assuaged that concern. However, when 160 workers were laid off in Cedar Rapids after wave-soldering of circuitboards was centralized in Coralville, the union still bitched. To placate it, the company said there would be no more layoffs for at least one year, and kept that commitment more than four years, until last fall.

A good avionics market helped. But Reininga, who's been around for 38 years, gives the most credit to the "virtual factory" concept. Rockwell Collins' orders can ratchet up and down. Last summer the Army was taking more than 200 Pluggers a day, not 65. That required three production cells, not one. "It's been a cycle," Reininga says. "Up and down. Up and down. We were always hiring and firing in some locations. The heart of the virtual factory is very simple. You move work. You don't hire and fire people."

Referring to a machine that places components on a printed circuit card, Reininga says, "That chip shooter out on the floor doesn't know whether it's running a military product or a commercial product, because it really doesn't care. Neither do the assembly operators, other than the ladies who have sons in Saudi and Afghanistan. They are very quick to tell others 'the real reason you're going to make good solder joints.'"

If orders are to move from plant to plant and back again, standardization is critical. The company once had almost as many computer systems for manufacturing control or enterprise resource planning as it had plants. It now has one. It also has either standardized plant equipment or has made sure it's compatible so there's no need to change a process when production moves to a different location. In addition, the 560 quality standards and testing requirements set by various U.S. and foreign military services, by the Federal Aviation Authority, and by airlines and aircraft builders have been whittled down to 60.

A particular challenge has been transferring "tribal knowledge." On highly specialized equipment, some manufacturing steps--for example, how to tune a communications device--might be mastered by only one or two workers. To capture that expertise, the company videotapes the people who have it as they explain how they do what they do. That session is put on a compact disk, along with text-block reminders of what's important as well as short true-or-false quizzes. Some CDs are simple. The one on how to use a particular type of solder pot is over in three minutes. How to tune just one part of a military electronics circuit takes 13.

More than 500 separate operations have been put on CDs. When a product moves, the CDs also travel, cutting the amount of time it takes to train an individual by a third to a half. After Coralville went out on a brief strike in 1998, production of the circuit card for the JTIDS communications device was temporarily shifted to another plant, which got up to full production in three weeks. In the past that ramp-up, says Reininga, could have taken a year.

The virtual factory has had an unexpected effect on productivity. When a product arrives from another plant, it gets a fresh look. Besides a natural attitude of "anything they can do, we can do better," there's no existing team to be upset if positions are eliminated. In 1999, production of a radio control device used in business jets was shifted from Melbourne, where the line had 49 people, to Decorah, Iowa, which cut the number to 36 and later to 31. Last year the device went back to Melbourne. It reduced the cell to 26 people.

Sometime in 1998, Reininga and Clay Jones, then running the segment of the company selling to airlines and airliner builders, began talking about lean manufacturing and how it might be applied in their business. That ultimately led to lean electronics and what the company says has been a decline in manufacturing labor and overhead from 27% to 18% of the cost of goods.

Last year some of the best results from lean electronics were gained in Coralville, a plant that Mark Correll, the plant's director of operations, admits was "on the ropes" at the beginning of 2001. Among the problems: "We didn't have the union on board." But he also concedes, "Senior leadership was not in the facility enough." He and the other managers decided to "stay home, make a case for change, get the union on board, and do a lean transformation of the plant."

Cindy Mingo, the lady with the Post-its, is one example of how much has been accomplished. She serves full-time as an enthusiastic RPI leader but makes sure you know that she used to do assembly and remains a staunch member of IBEW Local 1634. Thanks to leaning down, production time on the Plugger line, for one, has declined from 35 to seven days. Overall, Coralville's productivity in sales dollars per hour of work has gone up 60% in less than a year.

Looking back, Jones says that what he'd do differently is do it faster. "I was overly tolerant of the existing Rockwell culture that resisted change in many areas. All I did in some cases was delay the pain and the agony." The recent downturn has inflicted a different kind of pain. But an important acquisition has kept it from being more severe and will enhance revenue growth for years to come.

In December 2000 the company serendipitously spent $302 million to buy Kaiser Aerospace & Electronics, a California avionics supplier with a strong position in cockpit displays for tactical fighter aircraft. Thanks partly to Kaiser, Rockwell Collins figures that it will sell $700,000 in equipment for each of the 3,000 Joint Strike Fighters that Lockheed expects to build over the next 40 years. Beyond that, says Jones with a grin, "the timing was impeccable." Contending that "luck counts," he asks rhetorically, "Isn't it great to have $200-million-plus more defense business a year at this time?"

Without Kaiser, Rockwell Collins' sales for fiscal 2001 would have been nearly flat. This year they would have plummeted. After Sept. 11, Boeing and Airbus slowed. The airlines parked planes. Corporate buyers of jets turned cautious. Sales in the first half of fiscal 2002 were down 8% from the prior-year period, and after-tax profit declined 11%.

Given the sales decline, the company's commitment to "no layoffs" has evaporated. Within weeks after Sept. 11, it euphemistically announced a "reduction in force" from 17,200 people to 14,400. By early spring 2002, over 80% of the 2,800 were gone, about a third through attrition or contract termination, the rest through job elimination.

By this fall, military orders now in the Department of Defense pipelines ought to be gushing out. By early next year, there's a fair chance the airlines will be doing better even if they still aren't buying new planes. Longer term, technology is moving in Rockwell Collins' favor. The same needs are driving advances in military and commercial avionics equipment. Avionics is becoming more and more integrated; one system takes care of everything from communications to collision avoidance.

The cockpit is also becoming uncluttered, converted to flat-panel displays instead of dials and cathode ray tubes. A need to relieve congestion in the air and at airports is accelerating the move to "free flight," satellite-based technology that allows more flexibility in flight planning and routing. If the company can keep costs down and technology up by producing for all markets on the same assembly lines, it could have an edge.

The next couple of years will certainly be interesting ones. Rockwell Collins is flying on its own for the second time in its history. More challenging, the command pilots are soloing. Less than a year ago, there was, Jones says, "a parent corporation that did a lot of things for us. Now we realize we have no one to lean back on. There's no one to run to when something doesn't work out. I don't have a boss to go to anymore and say, 'Guess what. That investment didn't work out--I hope the corporation can cover it.'" It might be a good idea to stock up on Post-its.

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