OpEx Review April Edition by TBM Consulting Group

OpEx

A TBM Consulting Group Publication

Review

April 2013 | Issue 2

Reinvention of Products and Processes Drives Growth at Glatfelter By Tonya Vinas

As the 149-year-old company continues its transformation from a single paper mill to a global provider of fiber-based engineered materials, leaders are pushing continuous improvement further to leverage best practices across the growing enterprise.

Ask people to name the world’s most innovative companies, and you probably won’t hear them say Glatfelter, a publicly held global fiber-based engineered materials manufacturer based in York, Pa. But if necessity is the mother of invention, then Glatfelter is the patriarch of reinvention. The company is a shining star in an “old economy”

industry not only due to a demand-driven productdevelopment strategy, but also because leaders are pushing their Continuous Improvement (CI) program to a higher level of Operational Excellence maturity across the 11-site organization. By moving from the tools stage to the systems stage1, Glatfelter expects its CI efforts

to yield more cost savings and increased profit potential. Growth is one driver. From 2005 to today, Glatfelter has grown from $500 million in revenues to nearly $1.7 billion through product-line-expanding strategic acquisitions. (continued on page 3)

www.tbmcg.com

Leading Thoughts

A Business Journal for Leaders Who Embrace Operational Excellence April 2013 | Issue 2

Publisher: Anand Sharma: asharma@tbmcg.com Executive Editor: Angela Scenna: ascenna@tbmcg.com Associate Editors: David Drickhamer Jon Katz Tonya Vinas Contributors: Ashwin Badve Ken Koenemann Beth Morrison Bill Remy Eduardo Spina Art Direction and Design: Crossbow Group crossbowgroup.com

Amplify Your Margins by Keeping a Lid on Costs It’s simple accounting. In a growth environment everything that you do to hold down costs amplifies margins. Say your average margins have been in the 25-to-30 percent range. For the six months, nine months or even 12 months that you can grow sales without proportional increases in overhead, the product margins for that incremental growth can easily exceed 50 percent. To capture such gains senior business leaders can’t allow costs to grow in lockstep with sales. Currently enjoying strong revenue and volume growth, the CEO of a multibillion-dollar company who TBM works with recently fended off requisitions for over 100 new hires from his finance and supply chain departments. His response—which was all about protecting those fallthrough margin gains—was that his managers had to be more creative about managing growth with existing resources before he would be willing to sign off on any new hires. Keeping a lid on costs and improving productivity as sales grow are just two of the top concerns of C-level executives today, according to the results of the recent CFO Sentiment Survey conducted by The CFO Alliance in partnership with TBM. As featured in this issue of OpEx, some of the other high priority challenges identified in the study are the need to improve productivity, drive quality improvements, and reduce lead times in order to speed up the orderto-cash cycle and preserve working capital. Those objectives are especially important in a volatile economy that is growing but still—according to survey respondents—highly uncertain due to the threat of inflation and other political risks. To meet such challenges—and slow the growth of SG&A costs as sales increase—CFOs and operations leaders must work together to make sure that Operational Excellence activities are directed where they will yield the greatest returns. Doing this requires a clear, line-of-sight connection between management priorities and projects that will deliver the necessary financial impact as well as other business objectives.

Printing: Carter Printing & Graphics, Inc. carterprintingnc.com

Bill Remy President & COO TBM Consulting Group, Inc. bremy@tbmcg.com

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(continued from page 1)

“As we acquired different entities we inherited a wide range of continuous improvement knowledge and capabilities,” says Chris Astley, VP of Corporate Strategy. “Dante Parrini, our Chairman and CEO, decided it made sense to leverage pockets of internal CI best practices—particularly in our Specialty Papers Business Unit—and package it into a comprehensive and consistent program that we could call Glatfelter’s Continuous Improvement program.” Astley said a more standardized approach should accelerate knowledge capture and learning so that CI efforts will drive quicker benefit capture.

Glatfelter traces its history back to the purchase of its first facility, a paper mill, in York, Pa., in 1864.

“Our goal is to create an environment in which we’re all speaking more or less the same language. We don’t want people wasting time reinventing the wheel as they work to implement CI methodology across the enterprise.”

Problem After years of continuous operations and multiple acquisitions, Glatfelter experienced inconsistent results from its myriad of mostly site-based continuousimprovement (CI) programs. Executives determined the company needed to accelerate the capture of meaningful CI benefits. While pockets of CI excellence existed, it was important to develop a program to ensure consistent performance across the enterprise.

Solution After a period of initial assessment, Glatfelter engaged TBM to support development of a CI program. Initial efforts focused on the following: • Creating and rolling out the CI roadmap concept. •D eveloping a clear vision of what a “CI model site” would look like including: Full Potential Analysis, MDI, Strategy Deployment and KPI Management System— cascading and aligning strategies and performance goals to the point of action.

The need to be faster and more successful with the application of CI is becoming a more common goal for companies such as Glatfelter that have mastered a certain number of CI tools and practices over the years, but now require bigger results to remain competitive. •A dding Managing for Daily Improvement (MDI) problem-solving methodology at the supervisory level so that site- and function-specific teams can quickly and independently solve problems. •C reating a repository of training modules to instill a common understanding and language around CI from the executive suite to the shop floor.

Results •A ctual results as a percentage of net sales for 2012 exceeded the corporate target by over 50 percent. •M odel site launched in Europe to pilot rollout of full suite of CI tools. • I nitial wave of managers and operators trained through CI modules. • MDI deployed in all three business units. •C ontinued enhancement of ability to create value via acquisition through the use of CI. (continued on page 4) OpEx Review | April 2013 | www.tbmcg.com | 3

(continued from page 3)

in a rapidly changing market. Again, Glatfelter followed the practice of many other companies at the time in linking CI results to annual sales goals.

GLT Share Price Growth

“The program was primarily focused on what I would call strategic projects,” Astley explains. “Instead of it being CI at the shop floor level, it focused on projects that engaged the larger population and would enable the company to achieve budget goals or provide some cushion if unexpected setbacks occurred during the year.” Then, a string of acquisitions added more variety and complexity to the CI programs at Glatfelter.

On March 18, 2013, Small Business Newswire (SBWire.com) named Glatfelter (NYSE:GLT) a “Hot Stock.” Share price has grown about 68 percent from $13.89 in March of 2008 to $23.38 on March 27, 2013, eclipsing $1 billion in market capitalization for the first time in over two decades. Source: www.stockcharts.com

TBM VP Ken Koenemann describes this as the “tools stage” of Operational Excellence maturity.1 “At this stage, the process improvements are obvious if you walk through the factory—these could include dramatic inventory reductions and productivity improvements, and cleanliness if 5S is emphasized,” Koenemann says. “Although these efforts may not have always made a significant impact on the P&L statements, at least not yet.” As many manufacturers did in the 1990s and early 2000s, Glatfelter used some CI tools on a selective basis, such as kaizen and SMED; but it did not, as a company, adopt a system-wide CI strategy. Then in the mid-2000s, the business unit now called Specialty Papers started a more aggressive CI program in response to mounting competitive pressure

“ Most recently, we have put more emphasis on the shop floor supervisory level with Managing for Daily Improvement, which is intended to get people at the operational level focused on dayto-day or hour-to-hour problem solving.” — Chris Astley VP of Corporate Strategy, Glatfelter

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“Up until two to three years ago, CI was not particularly coordinated at the enterprise level,” Astley says. “It was very specific to each facility.”

Parrini, then EVP and COO, started the coordination effort by hiring Astley in 2010 and putting him in charge of facilitating the development of Glatfelter’s global corporate strategy, global M&A and CI. At the same time, Glatfelter invested in hiring a Global Director of CI, reporting to Astley. After an initial assessment period, TBM was engaged to support development of a system-wide CI program. Initial efforts focused on a roll-out of the CI roadmap tool, developing a core set of CI training modules, and evaluating the merits of implementing a Managing for Daily Improvement Program. “When we think about CI, we think about it from the shop floor all the way up to the C-suite,” Astley explains. “Most recently, we have put more emphasis on the shop floor supervisory level with Managing for Daily Improvement, which is intended to get people at the operational level focused on day-today or hour-to-hour problem solving.

Focusing on High-Demand Products Glatfelter’s ongoing strategy for counteracting the decrease in traditional paper use has focused on niche specialty papers (such as for food-grade applications, i.e., candy wrappers and hot dog trays; and high-end color-packaging applications, i.e., cosmetics and perfumes); engineered materials (such as airlaid materials for sanitary-care products); and composite fibers (such as the paper used in coffee pods, traditional tea bags and nonwoven wallpaper base). The company has used both acquisitions and aggressive new product and new business development to offer a variety of products into growth markets. From top left to bottom left: cosmetics and perfumes, disposable cleaning products, personal sanitary products, and single-service coffee pods.

Prior to MDI, we had not executed very robust training at the operational floor level that included all of the elements of CI.” An evolving aspect of Glatfelter’s transformation is how goals are set, and performance measured. Traditionally, Parrini sets a company-wide CI target as a percentage of net sales. But Astley says there is a shift in thinking as the company’s CI efforts mature.

“We’ve got a lot of work to do,” he says. “We are just at the beginning, but we’re making meaningful, consistent progress. While the journey is just beginning, we believe there is significant future value to be created for all of Glatfelter’s constituents.” 

“While our thinking is still evolving, we are starting to consider tools such as strategy deployment to cascade higher-level strategic goals down to the business unit and facility level.” As part of that, the company has chosen one of its European facilities to be a CI model site, where they will identify the full improvement potential of the facility and then develop a CI program to fulfill that potential. If it proves successful, Astley hopes to be able to roll out the program to other facilities, thereby creating the infrastructure to deploy strategic-level goals through CI. Astley said, if done well, strategy deployment can be an attractive alternative to setting a singular net-savings goal because it is more transparent and more easily translated from the C-suite to all other levels of the company.

For a more detailed overview of the Lean Progression Model, go to the Resource Center on the TBM website (tbmcg.com) and click on Management Briefings.

See “Management Briefing: The Lean Progression Model: Maximize the Returns from Your Operational Improvement Efforts over the Long Term,” by Ken Koenemann, available in the Resource Center at www.tbmcg.com.

OpEx Review | April 2013 | www.tbmcg.com | 5

Big PICTURE

Business Finance Outlook A study underwritten by TBM Consulting Group reveals top challenges to growth in 2013 according to U.S. CFOs. About The CFO Alliance

The CFO Alliance is a community of 4,000 CFOs and senior financial leaders, primarily from mid-sized companies. It helps financial leaders network and share knowledge through frequent in-person events, virtual interaction and a rich knowledge base.

By Bill Remy

Focus Returns to Growth In spite of the uncertainty generated by the ongoing tug-ofwar over fiscal policy in Washington, the economic outlook of chief financial officers (CFOs) is relatively unchanged from last year, according to the 2013 CFO Sentiment Survey conducted by The CFO Alliance in partnership with TBM. “Uncertainty is always a factor when it comes to business confidence,” says Nick Araco, CEO and president of The CFO Alliance. “It’s still an issue, but CFOs are no longer as reluctant to make decisions because of it.”

Araco characterizes 2008-2011 as a period of cleanup from the standpoint of financial and capital management. Last year, after many businesses had created some room to breathe and a relatively healthy cash flow, they still weren’t ready to focus on growth. “Flat was the new up,” he says. Starting in late 2012 and into 2013, they are now focusing on growth, primarily from existing customers, while keeping an eye on profitability. (See Figure 1)

Figure 1

THE CFOs’ Top Five Operational Challenges for 2013

DRIVING GROWTH

INCREASING GROSS MARGIN

IMPROVING RESPONSIVENESS AND MEETING CUSTOMER EXPECTATIONS

IMPROVING EBITDA

GENERATING FREE CASH FLOW

Profitability and growth, primarily from new customers, are CFOs’ top operational challenges for 2013.

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Figure 2

REVENUES ARE RISING FASTER THAN PROFITS

Process Improvement Disconnect A healthy majority of CFOs say their company has a formal continuous improvement program, and three out of four report that there is at least some alignment between improvement projects and financial objectives. Despite such beliefs, there is contradictory evidence in the study that the CI programs of most companies—at least the ones that are growing—are not in fact achieving the full financial benefits. While two-thirds of CFOs anticipate revenue gains this year, only 37 percent (See Figure 2) anticipate margin improvements as well, a clear indicator that business improvement activities are not aligned with financial goals.

66%

PREDICT HIGHER REVENUES

52%

ANTICIPATE EARNINGS GROWTH

51%

37%

EXPECT TO INCREASE SPENDING

EXPECT MARGIN IMPROVEMENTS

While two-thirds of CFOs anticipate revenue growth, smaller proportions expect margin gains or earnings growth.

number of barriers, including 1) a lack of time and resources, 2) organizational resistance, and 3) the absence of a standard approach to G&A cost management.

When it comes to the ongoing challenge of reducing general and administrative spending, CFOs identified a

Performance Always Comes Down To People Four of the top five internal issues influencing budgets and planning this year revolve primarily around human resource issues, according to CFO respondents. (See Figure 3) “During our recent roundtables many CFOs cited their ability to retain top talent as a major factor influencing future performance,” notes Araco. “They’re now making the investment decisions to keep top people.” In addition to updating compensation plans, these investments include

giving high potential employees more career opportunities by redeploying them to new areas of the business. For More CFO Insights

The 2013 CFO Sentiment Survey surveyed a diverse group of private and public sector CFOs on topics that ranged from G&A spending and succession planning to unemployment and healthcare reform. Read more on The CFO Alliance blog or register (for free) to read the entire report.

Figure 3

PEOPLE ISSUES TOP CFO BUDGET AND PLANNING CHALLENGES

39%

FINDING AND RETAINING TALENT

31%

HEALTHCARE REFORM/ HEALTHCARE COSTS

27%

INNOVATION

21%

EMPLOYEE COMPENSATION & PERFORMANCE PROGRAMS

19%

EMPLOYEE DEVELOPMENT AND TRAINING

Finding and retaining people, healthcare, compensation and performance programs, and employee development top budget and planning concerns.

OpEx Review | April 2013 | www.tbmcg.com | 7

NeW PRODUCT DEVELOPMENT

Would Faster Speed-to-Market and Higher Success Rates Grow Your Business Faster? If so, it might be time to integrate Design for LeanSigma® practices into your new product engineering and

Design Reiterations

development processes.

Depending upon the definition of “new,” observers estimate that anywhere from two-thirds to upwards of 90 percent of new product and new service introductions fail to achieve the targeted revenues or return their cost of capital. To reduce the risk of failure, many companies follow a deliberate and sometimes elaborate stage-gate process to evaluate new product viability from idea generation to launch and follow-through. Sometimes it works. Sometimes it doesn’t. By integrating market intelligence, design-for-manufacture and design-for-assembly into existing processes—while improving communication among functional areas at all stages—Design for LeanSigma® (DLS) speeds up the new product development cycle and reduces the risk of market failure. Case In Point: ConMed Corporation ConMed Corporation (Nasdaq: CNMD) has used the DLS methodology for more than a decade to shorten its development cycle time and reduce the risk of failure.

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Traditional New Product Development Phase

DLS (3LP) LeanSigma New Product Development Phase

Market Feasibility

Concept Preparation Phase

Design Preparation Phase

Production Preparation Phase

Post Market Surveillance

Figure 1: DLS reduces late-stage design reiterations and speeds product launch.

Headquartered in Utica, N.Y., ConMed manufactures and markets a range of medical products and services. It reported net sales of $767 million in 2012. “Our primary objectives [with DLS] have been and continue to be: maximum customer satisfaction, faster speed-to-market, and minimal design risk,” states Bill Mazurek, ConMed’s Continuous Improvement Director. “The total advantage varies by product complexity, but, on average, using Design for LeanSigma, our speed-to-market time savings range from 15 to 45 percent versus a standalone, toll-gate process.” (See Figure 1.) ConMed began applying and adapting the DLS methodology in 2000 within its ConMed Linvatec division, and has since

THE 5 PHASES OF DESIGN FOR LEANSIGMA AT CONMED CORP.

Market Feasibility

Concept Preparation

Design Preparation

Production Preparation

Post-launch and marketing surveillance

THE PRIMARY BENEFITS Superior fulfillment of customer needs – Determining absolute customer wants and critical-to-quality inputs at the outset streamlines the design development cycle by reducing the need for design reiterations.

Faster speed-to-market – Applying structured, quantitative analysis to determine how well design proposals meet business and customer requirements, making it possible to quickly evaluate many iterations.

Reduced risk – Shorter development cycles, fewer design reiterations, and quantitative decision-making reduce the drain on cash resources during product development.

Figure 2

rolled it out to the entire corporation. The DLS approach combines key principles of lean manufacturing and Six Sigma tools with the 3P process (concept preparation, design preparation, and production preparation). The company applies DLS as part of a five-phase process that emphasizes collaborative engineering solutions to gather input from relevant stakeholders. (See Figure 2.) The phases enforce a cross-functional approach that replaces the too-frequent throw-it-over-the-wall mentality. By bridging departmental silos, ConMed is able to optimize design activities across development, engineering, manufacturing, quality and service organizations. At an even more fundamental level, DLS replaces gut-based, we-have-always-done-it-this-way decision-making with a team-based quantitative methodology that produces solutions that satisfy more customer requirements and use company resources more effectively. DLS does not replace existing new product development processes. It provides a framework that improves decision-making across the organization, essentially establishing a lean product development value stream. Another characteristic that makes the DLS process both powerful and practical is that it can be tailored to specific business needs. A simple product or process change, for example, will not require all of the preparation phases, while a complex new product or new process requiring validation

“ Using Design for LeanSigma, our speed-to-market savings range from 15 to 45 percent versus a standalone, toll-gate process.” — Bill Mazurek Continuous Improvement Director, ConMed Corporation

typically requires the use of all three preparation phases (concept, design and production) and analytical tools. “Design for LeanSigma also establishes a common structure and toolbox for everyone in the organization to use and reference,” Mazurek adds. In summary, DLS reduces design iterations and improves initial quality by focusing the development process on clear customer needs and manufacturability, identifying and eliminating uncertainties, and optimizing design inputs around critical business KPIs. 

For a more detailed overview of how ConMed uses Design for LeanSigma, go to the Resource Center on the TBM website (tbmcg.com) and click on Practitioner Briefings.

OpEx Review | April 2013 | www.tbmcg.com | 9

CASE STUDY

Social Media Redefines Quality Requirements How Scholle Packaging Used Sigma Kaizen to Achieve Quality Levels Well Beyond Six Sigma for a High-Profile Food & Beverage Customer.

Client

Solution

Scholle Packaging is the primary producer of â&#x20AC;&#x153;bag-in-a-boxâ&#x20AC;? food-and-beverage packaging systems: a bag that holds the product and a valve that protrudes out of the box for dispensing the product.

A cross-functional team narrowed down the culprit to a plastic injection-molded part. The team surmised that variation in the injection-molding process was causing the defect. Because each site producing the part had unique variables, creating the same standard for all facilities was not a workable solution. So each plant conducted Design of Experiments testing to determine optimal machine settings to produce the part within a narrow band of acceptable tolerances.

Challenge A customer with a global brand name received 30 complaints regarding leaking boxes in one year. Even though that represented a miniscule percentage of the 30 million bag-in-a-box systems shipped, and a quality level far in excess of Six Sigma, the customer wanted Scholle to correct the problem quickly to prevent additional negative reviews on social media.

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Results Scholle improved process capabilities at each of its production sites. Cpk levels now range from 1.5 to 3.8.1 The posting of complaints of leaking valves on social media sites has been stopped, and customer confidence was restored.

Even though the defects occurred in 30 million opportunities (a 6.25 Sigma level), the customer wanted quick resolution because complaints were being posted on social media sites.

Social media commentary is upending the concept of “quality” in the food and beverage (F&B) industry—even at companies that already have the highest quality standards. Consider the negative publicity PepsiCo received in January from an online petition with 200,000 signatures that demanded the removal of a Gatorade ingredient that the beverage industry has been legally using as an emulsifier since the 1930s. Scholle Packaging experienced a similar problem when a relatively small number of consumer complaints got the attention of one of the food-packaging company’s brand-name clients. “Individual consumers are now able to comment on their product experiences almost instantaneously,” explains Scholle Global Process Engineer Martin P. Malloy. “Both Scholle and its customers [whose names are on the finished products] are extremely sensitive to any defects in the field, even if the defect rate is extremely low because a complaint shared online explodes exponentially across several web-based communities.” Scholle’s “bag-in-a box” packaging system is popular for commercial and retail F&B products. The company produces about 95 million systems a year. Its brand-name client received 30 complaints about leaking boxes in one year.

Even though the complaints reflected a perception of quality issue rather than actual quality issue based on commonly recognized statistical parameters, Scholle’s customer wanted a fast fix to prevent any more negative posts. Scholle already was using lean practices, but something else was needed. SigmaKaizen Tools Identify Root Cause SigmaKaizen combines the DMAIC process (DefineMeasure-Analyze-Improve-Control) used in Six Sigma problem-solving with the rapid pace of the kaizen method of process improvement. The resulting tool is ideal for projects in which there are many sources of variation in the process, and the process owner wants fast results. SigmaKaizen can shorten the timeframe from Define to Control from several months to several weeks. “SigmaKaizen is a great tool for the food and beverage industry because they have to do a lot of testing, and there’s a huge amount of variation in how that testing happens,” according to Beth Morrison, TBM Consulting Group Senior Consultant and mentor on the bag-in-a-box project. (continued on page 12)

Six Sigma: About 6–8 Months

Define, Measure, Analyze and Improve

Control

Define & Measure

Data Collection

Analyze & Improve

Control

1 WEEK

4 TO 6 WEEKS

1 WEEK

SigmaKaizen: About 6–8 Weeks SigmaKaizen merges the precision of the DMAIC problem-solving method with the speed of a kaizen process-improvement event. During a SigmaKaizen project, the cross-functional team typically spends one week defining and measuring; four to six weeks collecting data; one week improving and analyzing; and one week controlling. Traditionally, the DMAIC methodology takes six to eight months.

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CASE STUDY (continued from page 11)

DOE Identifies Optimal Molding Settings The team used Design of Experiments (DOE), a statistical method that simultaneously tests multiple variables, to determine what could be adjusted in the production process to reduce variation. After a round of experiments, the team was able to determine the optimal settings to produce components with the desired characteristics. As they had originally planned to do, the team then attempted to replicate the improvement in other facilities by applying the optimal settings—but the initial results were disappointing.

Scholle replicated a DOE-based problem-solving technique at each plant to determine optimal machine settings to eliminate leaking valves.

Scholle’s first step was data analysis. The facility that produced the most units for the customer became the beta site. Improvements developed there could then be leveraged to other facilities making similar components. As part of the SigmaKaizen process, a cross-functional team at that facility began the work of getting to root cause. Using a combination of returned units, brainstorming, and failure-mode effects analysis, the team was able to quickly focus their efforts on a single, injection-molded component. They hypothesized that differences in molding parameters could result in a component with behavioral characteristics that varied not only from facility to facility, but also from lot to lot within the same facility.

The team resumed research and realized that they had to back up a step in the process: Instead of replicating the optimum injection-molding settings, they needed to replicate the problem-solving technique. Differences in equipment and tooling caused enough variation in the process that the DOE needed to be repeated at each facility. This would result in optimal machine settings that were unique to each plant. Once standard work for the DOE had been developed, it was rolled out at the different sites. Today, each location, using different tooling and different equipment, can produce a part with characteristics within a very tight tolerance band. Following the process, using a cross-functional team, and making sure that the team had something to measure that would reflect future performance all added up to a better product for the customer. And complaints have stopped. “The methodology of SigmaKaizen was perceived as a very cumbersome and slow process, but I perceive that this was due to the initial large-scale investment of resources,” Malloy says. “In the end Scholle addressed an issue that had been a thorn in both our and our customer’s sides for many years. We accomplished this in a matter of months.” 

The team then faced this question: What characteristics of the component could be measured that would be indicative of performance of the entire system? Following the DMAIC process, the team developed a repeatable measurement system that would characterize the component in a manner that would predict its future performance. The team also began researching the potential sources of variation to determine parameters that would result in the most consistently produced component.

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For a more in-depth version of this article, go to the Resource Center on the TBM website (tbmcg.com) and click on Case Studies.

Cpk is a measure of process capability. The higher the Cpk, the less likely a process will produce defects. A Cpk of 2 is the same as Six Sigma process capability.

RESHORING

Hand-Tool Manufacturer Profitably Reshores Core Product Line Redesigned production process and supplier collaboration allow Pacific Handy Cutter to cut costs and dramatically reduce the length and complexity of its supply chain. Pacific Handy Cutter Inc. (PHC) followed a well-worn path in 2005 when it outsourced production of its S4 safety cutter to a contract manufacturer in Jiangsu Province, China. But when it came time to launch its next-generation S8-series carton cutters to replace the S4, PHC executives determined that manufacturing in the United States was a better choice. Rising labor costs, long lead times, and quality issues drove the decision to reshore.

Based in Irvine, Calif., PHC manufactures cutting tools, including safety cutters, utility knives and hook knives. Private-equity group American Capital owns PHC. Its flagship product, the S4, is an ergonomically designed safety cutter used in grocery, retail, and warehouse settings. (continued on page 14)

“We wanted better control over the manufacturing process and believed we could produce the product faster here in the United States as opposed to all the back and forth we experienced with the Chinese manufacturer,” says Mark Marinovich, PHC’s President and CEO. In addition to the cost savings, PHC is counting on revenue growth from increasing customer preference for U.S.-made hand tools. Marinovich says such sentiment could increase PHC’s revenues for the safety cutter line as much as 10 percent annually. And he sees a potential for 20 to 30 percent growth if PHC can add a few larger customers.

A PHC employee tests a two-tube dispenser designed to deliver parts directly to the point of assembly.

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RESHORiNg

(continued from page 13)

To make the S8 product line at a lower cost than its Chinese supplier, PHC determined it needed a 3.5-second takt time with no more than two employees per work cell. The cutter currently produced in China requires about 12 employees.

25-mile radius, and its three packaging suppliers are about 10 miles away. The reshoring strategy should eliminate or significantly reduce logistics challenges and inventory shortages that PHC has experienced with its Chinese supplier.

PHC asked TBM to help identify opportunities to reach its reshored production goal. With the help of TBM, PHC designed automated machinery with unique material-delivery features along with a kanban replenishment system supported by a network of local suppliers.

In December, PHC nearly ran out of its flagship product during an eight-day strike at the ports of Long Beach and Los Angeles, Garavaglia says. Localizing production can mitigate similar supply chain disruptions, which cost U.S. industrial products companies $2.2 billion in 2011, according to a PricewaterhouseCoopers study. Such delays are unacceptable for PHC’s clients, which include major, high-volume retailers.

Local Supplier Engagement Crucial Engaging suppliers, operators and the machine builders was key to the project’s success, PHC Chief Financial Officer Joe Garavaglia says. Localization or regionalization of the supply base is necessary for PHC to make reshored production financially feasible, according to Eduardo Spina, TBM Senior Management Consultant.

To help achieve its delivery goals, the company involved local suppliers and its machine in a four-day kaizen event that took place in early October.

The company producing the automated machines for the S8 is located two miles away from PHC. The company’s suppliers also are nearby. PHC’s three parts suppliers are within a

PHC executives realized that assembly workers needed to multi-task to achieve the desired takt time using the one-piece-flow process aided by the machine automation. Spina and the PHC team came up with seven assemblyprocess options during the kaizen event.

“ We’re able to produce a high-quality product— small hand tools suited for Asian production—here in the U.S. with the same goal I had when I entered the business 30 years ago: to increase profitability.” — Mark Marinovich President and CEO, Pacific Handy Cutter Inc.

Basic Automation Minimizes Operator Movements

They ultimately chose a model with two large irrigation tubes situated on each side of the operator to deliver parts directly to the point of assembly. This allows the operator to simultaneously grab the plastic cutter body with the right hand and the blade channel with the left hand and then connect the two parts. The parts then move clockwise through an automated assembly process to the next five stations before entering final assembly and packaging. The process requires only two workers and a water spider to load the parts into the machine. During the test run, the company was able to meet its assembly goal of 3.5 seconds per product. At this rate, PHC expects to produce 7,714 cutters per day. A PHC kaizen team works together to design the automated work cell that will produce the new S8 cutter.

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The company also made adjustments to cut packaging costs by 30 percent. PHC will use perforated bags on a roll that will be automatically heat-sealed and released into a 12-pack box. The perforated bags and heat-sealing process eliminate the need for glue or binding materials as well as secondary operations to fold and seal the packages, Garavaglia says. New Marketing and Revenue Opportunities PHC expects to begin S8 production by April 2013 and ramp up to more than 7,000 units a day once all customers

are converted from the S4 to the S8. As production ramps up, PHC executives expect to win new business from companies that have committed to buying U.S.-made goods. For instance Wal-Mart, a former PHC customer, pledged in January to source $50 billion over the next 10 years from U.S. suppliers. PHC hopes to win back that business plus more from customers that have large union workforces that prefer using “Made in America” products, Marinovich says. “We’re at the cutting edge of a resurgence of ‘made in the United States,” Marinovich says. “We saw it happening and wanted to be a part of that.” 

How a re-designed assembly process will enable Pacific Handy Cutter to make higher quality products in the United States for less Pacific Handy Cutter utilized three classic lean methods to cut production costs by a projected 30 percent and make it economically feasible to bring production of a core product family back to the United States from China.

REFILL

30%

Reduced labor from 12 people to 2 with a newly designed one-piece flow work cell

Highlights

Reduced packaging costs by 30 percent per unit by using new technology that eliminates the need for glue or binding materials

Future State

a kanban 3. Designed replenishment and fulfillment

process with suppliers to minimize inventory facility in Kansas City, Mo.; Concordia, Mo.; and El Dorado, Ark.

Benefit

Reshored manufacturing and assembly of new product series

Move production line from China to the U.S.

Mitigated supply chain disruptions by localizing production

# employees per work cell

Reduced from 12 employees to two

Labor savings

Suppliers

Parts and packaging suppliers located 10 to 25 miles away from PHC

Reduced freight costs and eliminated inventory shortages

Lead times

Reduced lead time by 45 days

Able to reliably meet major customers’ delivery requirements

Packaging costs

Implemented heat-sealing packaging technology

Cut packaging costs by 30 percent

Expected sales increase

+10 percent

More business from large retailers focused on “Made in the USA”

OpEx Review | April 2013 | www.tbmcg.com | 15

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