Pentair Fixes Its Own Mess When a new warehouse failed, the tools maker turned to a new team with a lot to repair.
(FORTUNE Magazine) – Now that the chaos has subsided, people can argue that there was nothing wrong with the concept. It was just lousy execution. Nevertheless, what sounded like a good way to cut costs in 1999 came close to destroying two of Pentair Corp.'s businesses the following year. Even now, some 32 months after things started going very wrong, the cleanup isn't over.
The idea was right out of Management 101: Boost productivity through consolidation. Since the early '80s, when they were acquired from Rockwell, Pentair Corp.'s woodworking and power-tool businesses operated independently, even though each sold to the same industrial and construction-trade distributors and to home-center retailers, including the leader, Home Depot. The Delta line of stationary tools was managed from Pittsburgh. Its table saws, drill presses, lathes, and other products were built in a factory in Tupelo, Miss., or imported from Asia, and distributed from a Memphis warehouse. The Porter-Cable line of power hand tools--circular saws, drills, routers, screwdrivers, and so forth--was the other business. Its offices, plant, and warehouse were in Jackson, Tenn., an hour and a half east of Memphis.
The 1999 plan was to cut costs: Close both the Pittsburgh office and the Memphis warehouse, consolidate Delta's management with that of Porter-Cable in Jackson, and build a distribution center for both lines adjoining the Jackson plant. The proposal had been put forward by the people in Jackson, then the favorites around Pentair's corporate office outside Minneapolis-St. Paul. At the time, Randall Hogan, now CEO and chairman of the $2.6-billion-a-year company, was head of one of its nontool businesses. He says that up to then, the Jackson executives "hadn't made any mistakes. Annual top-line gains of 12% to 15%. Margin expansion every year." Headquarters, he says, gave them "a lot of trust and not a lot of oversight."
Big mistake. As Pentair was to discover with dismay, not only would Jackson be overwhelmed by the consolidation and the warehouse construction project, but that failure would also reveal even more problems in the tools group. The warning flags were certainly flying. Porter-Cable had never built a modern distribution center, let alone a $28 million computer-driven 640,000-square-foot monster holding a stock of more than 30,000 products, parts, and pieces.
Relations between Jackson and Delta Pittsburgh were cool and got cooler. When the Pittsburgh office closed in late 1999, just seven of 100 Delta people were willing to move to Jackson. This wasn't urban sophistication snubbing bucolic Tennessee. It was, says a manager, a reaction to a hostile-takeover attitude. Riding a fortuitous upward sales curve, the Porter-Cable people in Jackson were arrogantly certain that they were masters of the tool business. Delta, with roughly $260 million in sales, was about two-thirds as big as Porter-Cable. The Jackson bosses were sure they didn't need anybody to tell them how to run it.
With practically no testing or trials, the Porter-Cable/Delta distribution center tried to ship its first products on Feb. 7, 2000. Nothing worked. The software failed. Once moved and set down at some spot, pallets of products no longer showed up on the computer. Conveyor systems stopped. Heavy boxes of Delta saws crushed small Porter-Cable tools. Cartons of collated nails for use in pneumatic hammers zipped down slides and exploded at the bottom. After a month the dollar value of orders that had not shipped was three times the value of those that had. Much of what did get out the door came back--the orders weren't right. Recalls Hogan with a pained look: "Our customers went nuts."
For months shipments were so late, so wrong, and so damaged that all but two freight companies, fed up with fending off claims, refused to carry any more Pentair shipments. Productivity in the adjoining factory dropped because workers were sent to the warehouse to help out. The factories didn't build tools that were supposedly already in inventory but couldn't be found in the warehouse. Meanwhile, they built products that were on hand but lost among returns. Says Hogan: "Our inventory went through the roof. We had something like a $160 million negative cash flow in the first quarter of 2000."
Two months before the warehouse opening, Hogan, now 47, had been elevated to president and chief operating officer of Pentair. (He became CEO in January 2001.) On a visit to Jackson late that February, he realized something wasn't right. But, he says, it took time for "the enormity of the failure to sink in." As it did, he realized that the warehouse woes were symptoms of a pervasive illness in Pentair's tool business. In short order, the entire tools management team was gone.
Late in 2000, Pentair hired Textron veteran Frank Feraco, now 55, to run the tools group. Today, of the 12 managers who report to him, only two were with Porter-Cable when the ill-fated warehouse opened. In 2001 his new team made big changes in supply, product development, production, and marketing. This year the business is probably better than it would have been if the distribution-center bomb hadn't gone off.
Having solid, old brand names definitely helped. Both Delta and Porter-Cable go back to the start of the 20th century. Among woodworking professionals, for example, Delta is the table saw. But after Rockwell bought the companies in the '60s, it relabeled the tools with its own name and did little with the lines. By the '80s it tired of the businesses just when Pentair was casting about for manufacturing acquisitions.
Founded in 1966 by five men planning to produce balloons for scientific and military uses--thus "penta" and "air"--the company unsuccessfully tried that before buying a series of small paper mills. In 1981, looking to diversify, it went to Rockwell and acquired what had been the Porter-Cable line for $16 million, promptly reviving the brand name. Two-and-a-half years later it went back to pick up Delta.
Today Pentair has three product groups: water technology, including swimming-pool equipment, which is doing well; enclosures--metal boxes and racks for electrical and electronic gear--which isn't; and tools. In addition to Delta and Porter-Cable, the tools group includes DeVilbiss Air Power Co., also in Jackson. DeVilbiss makes compressors, portable generators, and gasoline-powered pressure washers that squirt water at high pressure and are a hot item for consumers to use on the garage floor and elsewhere. With annual sales at the time of some $470 million, the company was acquired in 1999 for $467 million. When trouble broke out at Porter-Cable, Hogan quarantined DeVilbiss, telling its managers to go about their business. Since then, DeVilbiss has been a source of managers for the group.
Pentair doesn't break out numbers by brand, but it's obvious that DeVilbiss kept the tools group from sinking in 2000. It probably contributed upward of 40% of the group's $1.1 billion in 2000 sales and enough operating income to more than offset the Porter-Cable and Delta losses. In 2001 group sales were down a hair, to just over $1 billion. But operating income started to recover: $63 million, vs. $24 million in 2000. In the first half of this year, sales rose 9% over the same 2001 period; operating income surged 82%. For the whole of 2002, tool revenues ought to hit $1.2 billion, some 12% of the market.
Hogan has thinned Pentair's corporate staff to 52 people, mostly in finance and HR. Reporting from the three product groups is detailed and intense. "I focus on asking tough questions," Hogan says. "I don't believe a general manager is in control of his business if he can't tell me what his numbers are and why they are the way they are."
That's not how it used to be. Some years ago, corporate recommended that Porter-Cable look into lean manufacturing. In response, a manager was sent to a two-day seminar in Nashville. When he returned saying it might be worth trying, he was told to write a memo, send it to Minneapolis to get corporate off Porter-Cable's back, and go on doing what he had always done. A similar attitude prevailed when the warehouse project got underway. Software consultants were fired when they said the timetable was too tight. Middle managers who suggested that a trial period might be a good idea were told to meet the startup deadline and work out bugs later.
When the warehouse did open, it seemed that nobody had counted up all the Delta products. There weren't enough spots allocated for them on the lines where workers at so-called picking stations fill orders. Nor had anybody considered what might happen when heavy Delta tools ran into Porter-Cable products on the conveyors, or that some Delta tools are shipped in crates moved only by forklift. The biggest Delta saws ship in two crates. Even when they survived encounters with inexperienced forklift drivers, just one would go on the truck.
In May, Pentair recruited Greg Oliver, 42, then running a Schering-Plough distribution center in Memphis, to take on the Jackson mess. When he arrived, he says, he found a bunch of tiring workers wandering around the cavernous space trying to read labels on boxes, and assembling orders by walking them through. The job was complicated by returns that seemed to be everywhere. Says Oliver: "It's a wonder they got anything out."
Oliver cleared out the returns by renting space for them elsewhere. At one point he had more square footage rented than he had in the new distribution center. To straighten out the software snafus, Oliver brought back the consultants but added an expert who walked the warehouse, whittling away one by one at problems software could fix.
To help with the conveyors and other hardware, Oliver turned to the people who had built the system. Room for more products was added to the picking-station area. Equipment was installed at the bottom of slides to prevent collisions. Orders were split so workers could cover short zones of picking stations rather than racing back and forth over a 250-foot stretch. A dumbwaiter was cobbled together for $100 to move paperwork up and down the three picking-station levels so people didn't have to. One oddity couldn't be fixed: Conveyors moving past the picking stations travel toward the back of the warehouse, not the shipping docks. Most orders get a grand tour around the perimeter of much of the building.
On July 7, 2000, with all orders in hand shipped, the lights in the warehouse were turned off for the weekend for the first time in six months. Plenty of challenges remained. In 2001 shipping a completely filled order correctly was still more aspiration than achievement. This year sensors on conveyor lines were still being confused by very small packages, but better than eight out of ten orders were going out complete and correct.
Fixing the distribution center didn't eliminate the tool group's problems. As Hogan realized early, the old management's "we have all the answers" attitude had crippled the business. "When we walked in here," says Frank Feraco, "there was a lot of low-hanging fruit, which was the good news." He then fills a PowerPoint slide with the bad news: no discipline to metrics, arrogance, decisions based on emotion, no initiatives to reduce cost, no pricing strategy, and on and on.
It all goes back, Feraco says, to a great coup Porter-Cable scored in the early '90s, when it got Home Depot to carry its tools just as the retailer was launching a huge expansion in its number of stores. Archrival Lowe's, another Pentair customer, tried to keep up with its own explosion of openings. Pentair's tool sales climbed sharply, and because volume rose, margins improved. In an all-too-common mistake, hubristic executives confused fortuitous timing with brilliance. But by the late '90s the business was changing. Once accommodating to manufacturers with good brand names, Home Depot and Lowe's became more demanding, insisting on price reductions and special deals.
Feraco figures that the price of an improved version of a tool that sold for $100 in the early '90s is now around $60 and falling. He says, "There's no way around it. We're as good as anybody in trying to keep the price where it is, but eventually you've got to yield because somebody else is dumb enough to do it." As a consequence, "annual decreases in price have to be matched by gains in productivity. If not, it's an equation for disaster." For Pentair, the pressure on prices was made worse by what Hogan now admits was a serious mistake in 2000: "thank you" pricing--special deals given to customers to assuage their anger and try to hang on to shelf space. But especially for the home centers, a price reduction is permanent. Says Hogan: "When you' re dealing with the big box stores, it's hard to get it back."
When Feraco arrived, he says that he found a willing middle management in place, but it took time to assemble a team of executives to provide direction. Max Mitchell, 39, who now heads group operations, didn't join Pentair until late 2001. Since then he's been striving to boost productivity by vigorously introducing modern manufacturing methods.
So far, the plants in Jackson, the biggest at over 460,000 square feet each, have gotten the most attention, introducing cell production, kaizen events, kanban methods to control work in progress, and subfactories dedicated to single product groups so production flows in as straight a line as possible from receiving to shipping. This year productivity throughout the group is up about 12%, with more dramatic gains at specific spots. For instance, a motor-manufacturing line has been converted to a U-shaped cell for a 38% gain in productivity and a one-fourth reduction in floor space. Some of the gain came from replacing a 40-foot-long tunnel where parts cooled in ambient air after coming out of a varnish-baking oven. That's now done in four feet with the help of a small air conditioner.
Saving space is common to kaizen events anywhere. So far the tools group has freed up 112,000 square feet. Most of it remains empty, the floor shining from a new coat of urethane, the area blocked off by yellow caution tape so it doesn't fill with something else. In time it will be used for new products.
One way to relieve pricing pressure is to pass it on. For that job, Pentair relocated Greg Lawler, its supply-chain chief, from headquarters to Jackson. Among other gains, he has changed the company making Pentair's injection-molded products, for a savings of nearly 20%, and concentrated purchasing of packaging materials with one supplier under a five-year contract that is lowering costs by over 16%. In the first six months of this year purchasing costs have been cut by 5%, a $30 million saving.
Introducing new products that will bear higher prices also improves margins. Pentair's product lists are regularly spruced up with substitutes for which "new" equals "cosmetic change." That gives salesmen something to talk about, but prices can be boosted only with gotta-have-that improvements. In 2000 the tool businesses brought out nine new products with only one that was a real change. This year the group is introducing 40, including some in the "wow" category: a pocket level with laser beams for each axis, which grown boys will covet; and the Tiger Claw, a reciprocating saw with a double articulating front end. You don't need to be a contortionist to operate the blade at just about any angle.
Feraco aims to get 25% of sales each year from new products. To do that he will compress product-development time, partly by doubling the annual investment in R&D from the current 1.5% of sales. Besides trying to pull up prices, the company will use some products as a lever to get more shelf space with industrial distributors. Many sell direct to building-trades professionals, who are, as Feraco says, "suckers for innovation." Porter-Cable is giving distributors first crack at the Tiger Claw, which retails for $279, vs. $149 for a standard reciprocating saw. Home Depot doesn't have it--so far.
Feraco says that Pentair's tools group is entering attack mode: "We've got our house in order. It's time to grow." He intends to beat an ambitious Pentair corporate goal of 10% to 15% annual increases in sales and a 20% return on invested capital. To pull that off, the group, which claims "harsh facts are friendly," will have to deal imaginatively with some at both ends of their business. One of those is the unrelenting expansion of market share by Lowe's and Home Depot, which already account for more than four out of ten of the group's revenue dollars. Feraco says, "Nothing's going to stop these guys." But if they're tough to deal with today, what will they be like in five years when their market share will be even greater? Pentair can do far better than it has in the higher-price, better-margin distributor market, but it can't dispense with the home centers. It also has lots left to do kaizen-ing and kanban-ing in the factories, but it will need to move smartly to cut manufacturing costs faster than the retailers push down prices.
Then there's China. Pentair is acutely aware of the capabilities of Asian plants. It has a 40% interest in a group of four plants, two in China and two in Taiwan, that will account for about 80% of Delta's production this year. It also turns to Taiwan factories for cordless and air-powered tools. Says Feraco: "The Chinese have figured out how to make tools." They also are fast figuring out how to make them efficiently. A kaizen session on an assembly line for jointers at Delta's partly owned factory in Qingdao increased productivity by 163% and reduced work in progress by 71%. Feraco says that when he was in that same plant recently, a manager finished a presentation on costs by posting a number, $52,000. "I said, 'What's that?' He said, 'That's the payroll for this plant for one month, 400 people.'"
Pentair's tight relationships in Taiwan and the mainland are bound to get tighter. More product inevitably will be built in Asia. What then are the best uses of the U.S. factories? What if other Asian companies conclude they don't need a U.S. partner to get to market? Pentair has extraordinarily strong brands with which to defend against imports. But so did Chevrolet when it didn't seem to have cause to fear Toyota and Honda. Pentair's tool managers have shown their stuff by solving the errors of their predecessors. Now, they say confidently, they're "in for the long haul." So they are.
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