Ruger Drains the Swamp

Those of us that have gone through a lean transformation or two know that it is hard, very hard.  Probably the most difficult aspect is learning what you didn't know... those surprises that throw all the planning out the window.  The good news is that you're still on the right track, and poised for success if you can weather the intervening storm.

That storm can be pretty intense, especially in public companies that come under the scrutiny of lean-ignorant analysts.  Which is what gun-maker Ruger is experiencing today.  Last year they knew they had to make some changes to remain competitive.

The CEO said that Ruger in 2006 faced challenges in manufacturing, including excess inventory, congested factories and an annual order system that complicated production planning.

Sounds familiar, doesn't it?  Many companies would simply give up and outsource, but CEO Michael Fifer's team created a transformation plan based on Lean. 

Our transformation plan included eight major components. Altogether, they are intended to change our culture and the way we do business, and we refer to them internally as the Ruger Business System. The key elements are modernizing our manufacturing through adoption of all of the key principles employed by Toyota, creating a strong new product development process, and instilling urgency behind new product introductions. We expect this transformation to take at least three more years, and very likely as many as five years. And it will not always go smoothly or show constant improvement in our operating results.

They knew it would be hard, and they prepared their people... but not the Street analysts.  Their first step was to whack inventory, which they knew was hiding problems.

The first major step in transformation of our manufacturing was a deliberate, severe reduction in inventory and elimination of the practices that produced it. We reduced inventory by $28.3 million in the second half of 2006 and $26.6 million in the first half of 2007. Inventory masks problems in the production process. By reducing inventory, challenges from poor machinery and tool reliability, manufacturing issues, long machine changeover times, and vendor supply issues are all brought to the forefront. Because there is not spare inventory to draw upon, these challenges need to be addressed in real time, with a focus on permanent corrective actions that address the root cause problems. That is a very painful process in the short term, fraught with line stoppages and operating within a firefighting environment. It requires expanded engineering resources and training for front line supervisors and perseverance in the face of sometimes seemingly insurmountable obstacles.

I couldn't shorten that quote... Fifer said it perfectly.  He knew it would be a challenge, but he also outlined why that pain was necessary to create future improvement.  They are already working on the next steps.

The next major steps in the manufacturing transformation include setting up manufacturing cells, which convert materials into finished goods or key subassemblies in one area and which emphasize flow production rather than batch production, and implementing pull systems. Cell manufacturing and pull systems are a major departure from the old-style, batch process centers. Currently we have the initial cells in place for approximately one half of our manufacturing and assembly processes.

Exactly write, and there were similar programs to improve non-manufacturing areas.  But then Wall Street got a glimpse of what the intermediate steps of a lean transformation can do to traditional accounting metrics.

Ruger went way off target Thursday after swinging to a quarterly loss. The gun maker's shares closed down 38%.  Ruger, based in Southport, Conn., posted a loss of three cents a share for the third quarter, down from a two-cent profit a year ago.

The share price was also driven by a traditional analyst perspective of traditional accounting.

Jim Barrett is one of the few Wall Street analysts keeping Ruger in his sights. "The sharp reversal was caused by management too quickly moving to introduce lean manufacturing. Once the implementation was underway, management realized it had inadequate machinery, its machine changeover times were too long and it had vendor supply issues. As a result, production problems returned and Sturm Ruger once again faced difficulty getting product out the door," he wrote.

Of course he perceives that as a negative, but those of us in the lean world know it's a positive.  If you don't realize you have inadequate machinery, changeover times, and supply chain issues then how can you fix them?  Actually, maybe I should give Mr. Barrett more credit.

But as a believer in a "slow but steady improvement toward fixing its manufacturing operations," Barrett said Ruger's weak earnings "will clearly be painful for RGR shareholders in the near term, but we think it is very good news for prospective shareholders." Ruger doesn't get a lot of attention from the Street, so any bargain hunters should draw a bead on Fifer's turnaround plan letter and decide if it's on the mark.

Agreed, although I don't believe it is always necessary to go slow.  Ruger appears to be doing things right to focus on being competitive over the long term.  If they can weather the intermediate storm, they could become a great company... and investment.

Comments

[Mark Graban]

I have a post I was holding for release, so it was interesting to read yours, Kevin. I had an initial reaction that was more negative toward Ruger, particularly around the idea that maybe they "lowered the water" too quickly. You want to be able to avoid the rocks, rather than crashing into them.

It sounded like they made the leap to smaller batch sizes without first addressing the long changeover times. The old EOQ formula isn't obsolete... you have to reduce your setup cost (time) in order to be able to pull off smaller batch sizes. Otherwise, you run the risk of "underproduction" and not being able to make enough product to meet customer demand.

But, after reading your post, I'm a bit more sympathetic to Ruger's plight, that they appear to have a good long term direction, yet the Street wants instant results.

Either way, you're right, it's NOT easy, this Lean stuff.