Mission critical Featured

10:19am EDT February 24, 2005
In January 2002, Shiloh Industries faced a crisis.

The engineered metal products manufacturer had tapped nearly all of its $290 million line of credit to fund growth and acquisitions in the 1990s and was in default.

Profitability was suffering, and the company, with annual revenue of $600 million, was burning cash at an alarming rate. The banks refused to extend further credit, and the independent auditors couldn't give the company the unqualified opinion it needed without an additional banking agreement. SEC filings were due, and the closing of the 2001 fiscal year had been delayed to buy Shiloh a bit more time.

But there was no time left.

"We didn't have years, we had days," says Ted Zampetis, Shiloh's president and CEO. "The transformation had to start immediately."

Zampetis, a semi-retired executive who worked for The Standard Products Co. for 27 years, including as its president and COO, was a member of Shiloh's board in 2002. He knew full well how bad things were. When things started looking critical, the board asked him to spend a month visiting the various Shiloh facilities to assess the situation, interview the people and report back to the board.

There were four questions that needed to be answered to provide a full diagnosis: Are the margins healthy? What is happening from an operational point of view? What is happening with leadership? How strong is the strategy of the company?

"Diagnosis is the most important tool because you have to understand what is happening," says Zampetis, who immigrated to the United States from Greece at the age of 25. "The business strategy was not what we were led to believe at the board of directors level. Once that was diagnosed, I was able to come to the board quickly. Unfortunately, in all four areas we were suffering at Shiloh, suffering big time.

"I expressed the view that we were either going to turn it around fast or we were going to lose the company. There was no other way out."

Zampetis says the board didn't take independent action sooner because no one wanted to undermine the company's leadership. But after Zampetis reported back, they knew change had to be made and that there was only one person who had the knowledge of Shiloh and the knowledge of the industry to pull off a quick turnaround.

"I didn't realize what I was doing and painted myself into a corner," says Zampetis. "Because as soon as I told them that (the diagnosis), they came to me and said they had no time to look for a new CEO and we have no time to experiment. I had no intentions or plans to do that (become CEO), but I had a moral responsibility to do what needed to be done."

With the company already burdened with a cash shortage, Zampetis offered to work the first three years for stock instead of a salary. The board readily agreed.

So on Jan. 28, 2002, Zampetis took over Shiloh Industries, and the turnaround process began.

"Once I got in, I knew a couple of things," says Zampetis. "After the diagnosis, you have to follow with action that would work. It has to be credible action, quick action and action that had an impact quickly on the financial and operational aspects and morale of the people, both internally and externally. When you are suffering internally, you are suffering externally, even if the customers won't tell you that.

"The transformation of Shiloh had to go very fast and in a credible way."

Setting the tone

One of the first things Zampetis did after taking over was to rehire a receptionist. While it might sound like a pointless move with the company teetering on the edge of ruin, it set a tone with the employees - the receptionist was brought back at the same time 11 vice presidents were let go.

"It was unbelievable to see the structure of this company during that time," says Zampetis. "We basically had fired the receptionist to save money. So if you wanted to call Shiloh, you were going around in circles until finally you'd get frustrated and say the heck with it. Firing the receptionist saved some money, but at the same time, they had 11 vice presidents they were paying a high amount of money to."

Bringing back the receptionist sent the message that the company had a new focus on customer service. The 11 empty offices sent the message that Zampetis meant business.

Now that he had everyone's attention, the sales process to get employees and customers to believe in him began.

"I had to stand up in front of everyone internally and externally and explain to them what was happening," says Zampetis. "I had to explain why the company was in the shape it was in and, more importantly, how we were going to get the company out of that booby trap. I had to explain my role and the role of everyone else. That's the start of a culture.

"If you sit in front of people and talk to them, and you know what you are saying, you can see it in their eyes that they believe what you are telling them. They see the difference between this and that. They see and say, 'Oh my goodness, this fellow knows what he is talking about.' So the cultural transformation started immediately."

Zampetis met with employees in small groups, sometimes holding as many as 10 meetings a day.

"For union, nonunion, hourly or salary, there is one story," he says, wagging one finger in the air for emphasis, "not two different stories. The first thing is, there is one message that is common and consistent. You reinforce and support it, and you say it to everybody. You tell them the truth. My objective was to create clarity in the mind of everybody.

"Once you create clarity, you create unity. Then, if you create unity, the action plans you put in place will be executed with intensity."

Employees were taught about process ownership and how they fit into the overall company and why their skills were important to the company.

Zampetis had been through this before. In his time with Standard Products, he spent most of his career troubleshooting and turning around operations across the globe. There was a lot of work to be done to save Shiloh, but he knew where to find the answers.

Margins were suffering because of bad deals, customer givebacks, inflation and overhead. Spending practices weren't monitored properly, and there was too much waste at just about every level of the company. There were too many areas that Zampetis would question employees about and the answer was simply, "I don't know."

He created a detailed plan that addressed specific issues and assigned a person to take ownership of that issue. These action plans were put into place immediately, and the person in charge was given a 12-week window to accomplish the goal -- a time horizon that is still applied to everything the company does.

"If you give them 12 months, they will take 12 months," says Zampetis. "If you give them 12 weeks, they will move quickly and prioritize the impact. When you look quickly, you can separate and prioritize and determine the impact of an action.

"If the impact is maximum, then I'm going to do it. If it's minimum, I'm not going to do it."

Profit power

When Zampetis took over, he was the equivalent of a doctor working on a patient for which he had no X-rays, MRIs or vital signs. His experience gave him a good idea of what was wrong, but nursing Shiloh back to health required better data. With that data, he could start making changes that would make the company profitable again.

"You have to maximize the cash you generate from operations," says Zampetis. "You cannot just cut costs and survive, profit and grow. Cutting costs saves some cash and helps for a few weeks or months, but if we are going to grow as a company and gain some self respect, then we better start focusing on profitability."

One way to increase profits is to decrease waste. Zampetis defined waste costs into five categories so everyone in the company was talking about the same things. Then he institutionalized the idea of focusing on waste all the time by instituting a daily conference call with all the plant managers.

Each day, they are asked what they have done in the last 24 hours to improve on scrap, rework, chargebacks, environmental health and safety and quality.

"This takes place in front of everybody," says Zampetis. "If there is a problem, I ask the others if there are any recommendations. They suddenly understood that I was holding them accountable, but also creating some teamwork to create a cohesiveness. The good plant managers love to jump in and help their fellow managers."

Productivity also had to increase. Zampetis instituted a formula to measure it at each of the company's plants, which can vary greatly in what manufacturing methods they use.

"The way we evaluate the productivity of the human factor is simple: We take the value added and remove the material costs, and by removing the material costs, everyone is operating on the same foundation," he says. "Laser welding is different than stamping, but if you take the material costs away, there is no difference.

"We cannot create value if our productivity and waste costs are not what they should be."

In three years, productivity has improved by 50 percent. As a result of the productivity gains, Shiloh decreased its work force by 37 percent in that time period.

Manufacturing as a percent of revenue was also too high, according to Zampetis.

"Like every other company, manufacturing as a percent of revenue was 35 percent," he says. "I told everybody we need to get below 30 percent. They looked at me like, 'What is he smoking?' I've never smoked anything in my life."

In 2004, manufacturing as a percent of revenue was down to 28.5 percent, and Zampetis says they have good momentum going to take it even lower.

All the gains in productivity have not come at the expense of quality; it's been the opposite. As productivity has increased, so has quality.

"You cannot improve productivity until you improve quality," says Zampetis.

Shiloh's facilities were due for recertification for QS9000 and Zampetis shocked everyone when he said they weren't going to spend the money on the recertification process.

Instead, he thought a better investment was in the new quality standard known as TS-16949.

"It's the new worldwide quality standard that's the latest and greatest," says Zampetis. "It's much upgraded over the old standards."

In July 2003, the first plant was certified in the new standard. The other 10 plants and two technical centers, plus the corporate office, quickly followed. The investment in the new standards and the emphasis on quality paid quick dividends. Defects dropped into the single digits per million parts shipped, and for some major customers, it dropped to zero.

"Customers are telling me that they view Shiloh as the benchmark for irreversible improvement," says Zampetis.

Administrative costs as a percent of revenue were 9.6 percent in 2001.

"At the time, I told everyone it needed to be below 6 percent," says Zampetis.

In 2004, it had dropped to 5.8 percent.

"We created a flat structure and took out most of the vice presidents," says Zampetis. "There are nine people reporting to me, and that's the company. We created an environment that operationally, culturally and strategically, we are able to really be much more responsive and save money and the customer doesn't have to go through a lot of levels."

Six Sigma principles were adopted to optimize the performance of the company.

"The first thing you have to do is understand what value the company possesses and how are we going to unlock that hidden value," says Zampetis. "That's how we will create a capability that is different than anyone else in the eyes of the customer. Can we provide a competitive advantage they can't refuse?

"I talked to the employees about certain aspects about what we have to do to optimize purchasing, customer relationships and strategy. Each and every customer is different. Each has different issues and needs. Some problems are common, but some are uniquely different. The common ones are easy to understand. The unique ones - if you know them - then you can manage them effectively. So we developed a strategy for every customer, then optimized our performance. There is no substitute to unlocking value like optimizing performance."

That's where Six Sigma comes in. The processes with the most impact on the company were identified at each plant. A 12-week road map for improvement was created for each of these processes by using teams of employees and corporate coaches.

Part of the process was just getting everyone to think in the right mindset.

"Part of Six Sigma quality is understanding what 100 percent delivery is," says Zampetis. "We had people targeting delivery ratings of 98 percent. I told them, 'Why do you do that? Delivery has to be 100 percent, it can't be 98 percent. Delivery is either there or it's not. Either you made the truck or you didn't. What's the problem?'

"So I got them all to think 100 percent."

Strategy session
Zampetis also faced the challenge of getting 11 plants and two technical centers to think like one company rather than individual components.

"I brought in our top 10 people and spent one week to develop our business strategy," says Zampetis. "There was a lot of confusion. Shiloh is in the blanking, laser welding and stamping business. What's our strategy? People who worked for years in blanking were pushing our focus to be blanking because we were good at it.

"People from the stamping part of the business were pushing stamping and so on."

But Zampetis was undaunted.

"By the third day, I got them to see if we fragment strategically the core capabilities of Shiloh, we will be nothing but a commodity supplier until the cows come home, and one day the Chinese will obliterate us," he says. "I got them to see the light. The strategic value of Shiloh and way we position ourselves is Shiloh has world-class expertise and capabilities in all these areas. You have to bring the capabilities together and integrate them to produce a product that is stronger --using laser welding -- and lighter -- using steel more efficiently and cheaper. The business strategy is not to look at Medina Blanking and Ohio (Welded Blanks), but to look at Shiloh as an integrator of technology for the purpose of creating product leadership so the competition can't touch us.

"There are hundreds of stampers. There are a handful of laser welders. Only Shiloh has all these capabilities and can bring them together. When I explained that to everyone in one afternoon, it was like a baptism for everybody. It was an eye-opener."

Once the core capabilities of the company are integrated, there isn't much competition to worry about. The company created operating strategies to allow this integration to happen.

"It has to be continuously supported by communication internally, so everyone knows why we are doing it and what their role is," says Zampetis. "We have to explain the strategy so it is not misunderstood. We have to be clear. And once we do that continuously inside and out, it optimizes our synergy, executes our business strategy and provides us with an outcome that gives us a sustainable business model.

"Shiloh can become a higher-quality, lower-cost, full-service supplier to our customers. That was the outcome of what we did, and you see that in every approach. There is no flavor of the month."

The road ahead
Today, Zampetis has the data in place to monitor his patient. A wall in his office is covered with charts, graphs and numbers that illustrate the recovery process. The numbers show things are moving in the right direction. Revenue and profits are up, and 2005 looks promising.

"Am I finished? No," says Zampetis about the transformation of Shiloh. "The big, big bleeding for Shiloh is repaired. We either plugged it or the cause is gone. The company was shrinking and people were worried, but sometimes you have to shrink before you can grow because otherwise, you have cancer and you are going to die. Like a tree, sometimes you have to prune it before you see it grow."

To improve the company, Zampetis needed to understand it. To understand it, he needed to measure it. And when the measurements came in, the cause of the illness became apparent.

"We found out that Shiloh had some customers and some markets that were destroying the company," he says. "We were losing more money in one-fifth of the business than we were making in the other four-fifths. We identified it so we can fix it or dump it."

Part of fixing it meant going to one large customer and explaining that Shiloh could no longer do business under the terms the previous management team had agreed to, putting all future business with the customer at risk. It meant using Zampetis' personal reputation to get the banking agreement the company desperately needed. It meant passing on material costs to smaller customers.

Thus far, everything has worked out for Zampetis and Shiloh. The debt has been paid down (Zampetis cut it almost in half in his first 24 months) and the big customer agreed to new terms. And, employees have bought into the new culture.

"I knew I turned the corner when, within a month of me taking over, the announcement was made that the 11 vice presidents weren't there anymore and the receptionist was back," says Zampetis. "You have to put your money where your mouth is. We need a receptionist. When somebody calls, they hope to talk to a human that cares about the company. The employees got the message right there.

"The result of this enormous effort is an operational excellence that is creating cash flow that finances productivity and that creates customer loyalty," he says. "When a customer looks at Shiloh, we are not one of 500 companies, we are the benchmark."

How to reach: Shiloh Industries, www.shiloh.com