A survivor's tale Featured

10:03am EDT July 22, 2002

In books and movies, catastrophes don't take their time buffeting a protagonist. The hero usually gets hit squarely with the blow that defines the struggle and profoundly complicates his existence.

But for the business owner, failure is often less circumscribed. Its fury is felt in small increments over years; markets dry up, technology falls behind, a shortfall in management skill lets profits trickle away a few dollars at a time, a little here, a little there until it becomes a flood. Like a frog in a pot of water brought to a boil, the business tries vainly to adjust to its deadly environment, only to succumb to it.

For Larry Strobel's company, Strobel Machine Inc., the decline came slowly-but nonetheless surely. By last year, Strobel found himself with $600 in the bank, facing the first $2,800 installment payment on $200,000 worth of machinery he had purchased the year before. The purchase of the equipment, complete with modern computer-numeric-control technology, was to upgrade the Worthington machine shop his father, George, had started in 1946 in a tiny building in this tranquil Armstrong County hamlet.

The new machines brought to three the number of CNC units at Strobel, but they as yet hadn't delivered the additional revenue the company's owner had hoped would be generated to pay for them.

"I didn't know how I was going to make those $2,800-a-month payments," says Strobel, courteous and soft-spoken, but direct and candid about his business and the troubles it has endured.

With the help of a consultant who took a realistic and visionary look at the company, Larry Strobel has been able to make what might appear to be a dramatic turnaround, going in less than a year from the brink of failure to profitability and a future that seems filled with promise instead of pathos.

In fact, Strobel Machine's reversal of fortune has been impressive enough to earn it the designation as an Advanced Technology Company by the state, qualifying it for a $300,000 low-interest equipment loan from the Manufacturing Equipment Loan Fund. The company has also won the 1998 Staples/Hammermill Small Business of the Year Award, a national competition sponsored by five large companies to recognize the efforts of small businesses.

But more importantly for the company's long-term prospects, profitability has returned, and although the focus has been to control costs rather than immediately increasing revenue, net sales grew by almost 20 percent in 1997, passing the $1 million mark. Strobel Machine is expecting to reach the $5 million mark by next year, placing it in the most profitable income bracket for companies in its business. It plans to accomplish that feat through an aggressive marketing plan, a new business unit and a networking concept that will link it to several similar companies.

Rise and fall

The bottom hadn't fallen out suddenly for Strobel Machine. Larry Strobel openly concedes that his company languished for a number of years, with market changes playing a large part in the company's decline. Still, he says he accepts much of the responsibility for the problems that led to last year's troubles.

Trained as a mechanical engineer at Penn State, Strobel started working in the shop when he was 12. He came of age during a time when simply good engineering and steady customers were enough to make a shop a success. By his own admission, however, only about a third of the knowledge necessary to make his business successful lies in technical skill.

The rest, he admits, resides in sound management practices, some of which he neglected to develop and employ.

George Seeley, a senior operations consultant for Southwestern Pennsylvania Industrial Resource Center, says it's not uncommon for such businesses to run into problems because the owners, while they may have extensive technical knowledge, fall short when it comes to general management expertise.

"Managing a business involves a bunch of skills," says Seeley, "and good managers need all of those skills."

Market changes

Strobel Machine started out as a repair business for farming equipment when it was founded in 1946 by George Strobel. He found early success in providing replacement parts for the machinery that crushed and pulled coal out of Western Pennsylvania's mines. By the 1960s, when Larry entered the business after completing his degree, more than half of the products made in the shop were destined for the coal-mining industry.

The replacement-parts business proved lucrative for Strobel Machine. The mining-machinery manufacturers sold equipment to the industry at a slim profit but reaped revenue on replacement bits, which wore out and had to be replaced periodically. Strobel Machine was able to capture a chunk of the market by selling parts for less than the mining-equipment manufacturers could sell them, yet still earning a handsome profit. Until the early 1980s, it was easy to raise prices without raising eyebrows, Larry Strobel says.

But the boom was not destined to last. The coal industry found less-expensive methods to mine coal, thus depressing prices and, in the process, putting a slew of mining companies out of business.

A ton of coal that sold for $50 in 1974, for instance, now hits the market at $24 a ton. Environmental regulations, meanwhile, made coal a less attractive fuel to burn; the domestic steel industry began its sharp decline in the late 1970s and early 1980s; and other manufacturers began making replacement parts, squeezing prices and profits.

Strobel Machine was not isolated from the larger business environment. Customers became more cost-conscious and kept prices down, and the downturn in the business cycle in the early 1990s coincided with weak years for the company. Moreover, as with most businesses, costs for health care rose substantially for Strobel Machine.

A pattern of struggle

Last year's crisis wasn't the first in recent years. Sales were about $1 million in 1990, but by 1993 had sagged to $400,000, and Strobel says he took just $1,000 from the company to pay taxes but drew no salary that year. The year before, he notes, business was so bad that he had to lay off his son, Brian, who later joined the Navy, and his shop foreman.

Strobel's forecast for his own company was so dim that he advised his son not to plan on a future with Strobel Machine.

And crises weren't the only factors to degrade the health of the company. Efforts to develop products outside the mining industry flopped. One product was an extendible arm that could be tipped with a hypodermic needle, which game officials, researchers or veterinarians could use to anesthetize animals in the wild for treatment, tagging or relocation. It was a system, Strobel says, that is more accurate than other methods currently used.

Another was a cutter head for drilling machines used in the construction industry. The company invested about $25,000 in each of the failed ventures, but in the end, it couldn't develop a market for either.

A call for help

Larry Strobel became acquainted with Robert Chastain, a lawyer and consultant who had specialized in turnarounds of family-owned small businesses, when Chastain was trying to solve a hazardous-waste problem for a company in New Castle. Chastain's client needed a way to reduce the volume of waste produced by empty paint cans, since disposal costs are calculated by volume, not by weight. An associate posited that what Chastain needed was a device which would crush the cans so that the resulting mass could be stored in drums for disposal, and he suggested Strobel Machine might be able to come up with a solution.

Chastain met with Strobel, and it turned out that the machine-shop owner did have a device that he thought might be able to solve Chastain's problem. Chastain offered to buy it, but Strobel suggested that Chastain use it, stipulating that he had to pay for it only if he decided to keep it.

As it turned out, Chastain didn't use the machine, but his association with Strobe l continued, and the two stayed in touch.

Beginning in the mid-1980s, Strobel had tried a number of consultants through both private contractors and public agencies, but problems at the company remained. So when Strobel faced financial difficulty last year, he invited Chastain to lunch, laid out his situation, and asked Chastain if he thought he could help the ailing company.

Controlling the cost side

Chastain agreed that he would look at Strobel Machine, and he spent two days poring over the financials from the previous five years, interviewing employees and perusing a contract for a piece of expensive machinery that hadn't done the job its manufacturer had promised it could. He reviewed the shop's machinery and work flow.

Sales, although they had fallen off, were not the problem, Chastain concluded. In fact, he says, drumming up new business for the ailing company would only have made matters worse.

"The underlying equipment problems would not have allowed me to go out and get a lot of new business," Chastain says. "We would have bombarded them with new customers and then lost them."

So instead of bolstering income, Chastain decided that Strobel Machine first needed to get hold of its finances.

"One of the things that was obvious to me was that they weren't watching their dollars," says Chastain.

The shop was purchasing materials months before a job was scheduled to run, for instance, then running into a cash crunch when the bill came due for the materials but the order hadn't been completed and was still weeks or months away from collection.

Chastain negotiated a deal to return the $125,000 machine that didn't perform as advertised, agreeing to pay a portion of the contract that represented the actual value the company had derived from it. To accomplish it, Chastain engaged the leasing company and the dealer who had sold the machine to Strobel in the negotiations.

Chastain took some additional decisive steps to stop the bleeding. He pressed suppliers to give Strobel Machine more time to pay its bills, stretching payables to 45 days in some cases, and instituted a more aggressive plan for collecting receivables.

Finding that some employees were ordering supplies in excessively large quantities, sometimes backing up excess inventory in the process, he required everyone to put requests for purchases in writing.

"I'd ask, 'Do you really need this or can you wait?'" he says. As a result, purchases fell off significantly.

Chastain looked at industry-wide data and concluded that a boost in the hourly shop rate was needed. Strobel Machine raised it substantially, but he got no resistance to the increase, says Strobel, which indicates to him that the shop had been working on too thin a profit margin all along.

In perhaps the boldest move, Chastain cut the shop shifts from nine hours to eight, essentially eliminating five hours of guaranteed overtime weekly to the shop employees. Some employees did resist, Chastain and Strobel acknowledge, with several employees jumping ship in the wake of the cuts. But Chastain said it was necessary to restore the company's cash position and ensure that the company survives.

But while employees have had to sacrifice, the company has provided some valuable new programs that weren't available previously. Strobel Machine has made the largest commitment to its 401(k) plan in its history, brought in a financial planner to work with each employee and made a substantial investment in training its employees.

General machine shops today need employees who not only can read a micrometer, but who can operate modern CNC equipment. For a long time, however, Larry Strobel harbored the view that spending money to train his employees would simply amount to paying them to train for their next job.

Chastain was able to convince him that, to remain competitive, Strobel Machine needed highly skilled workers. Chastain says he isn't sure that Strobel might not be right in the end, but in his view, it doesn't matter.

"I don't know that it won't be the case," Chastain says, "but I don't know that, in his industry, you can't afford to do anything else."

Now, the company pays the tuition of employees pursuing job-related education. Nine of Strobel Machine's 17 employees are pursuing journeyman machinist status. Additionally, classes were offered in quantitative thinking for all employees.

"As employees learn how to ask questions," Chastain says, "they see where technology can leverage resources."

New technology

A key piece in Strobel Machine's recovery and its link to future success is a new computer system with new shop software that links the front office with the shop floor. Strobel says he envisions a system that will integrate the customer, the machine shop and suppliers electronically.

Small shops that want to serve as suppliers to large corporations will have to have electronic-data-interchange capabilities, and those systems will have to be compatible with the modern systems, says SPIRC's Seeley. "If you have an old system, it many not be appropriate for the new way," he says.

And, Seeley adds, while implementing electronic data interchange will be necessary for small manufacturers, they will still have to maintain sound manufacturing systems that will provide fast delivery times, short product-development cycles and well-trained employees whose skills are kept current.

A new business unit

Remarkably, a company that was facing collapse little more than a year ago has entered a new business. Strobel Machine is creating a computer company to handle fiber optics, computer networking, Y2K problems, Web site design, and electronic commerce. Chastain figures that the company will be able to assist small businesses in rural areas with their computer needs. To that end, they have sent one of their employees for training as a Microsoft-certified engineer and certification in Novell networks, and they already are offering customers and suppliers Y2K patches for Windows and a report detailing other potential Y2K problems.

Networking for growth

A second reason for creating the computer company is to get the virtual manufacturing project up and running. Strobel Machine plans to move into the next millennium as the lead player in a parallel manufacturing project. The effort will bring together 10 to 20 small machine shops to manufacture replacement parts for the coal-mining industry.

As Larry Strobel envisions it, orders would arrive at a central computer via the Internet. The company would then distribute the orders to each shop according to specialty and current workload.

Chastain theorizes that other functions, such as payroll, 401(k) plan administration and insurance benefits could be handled centrally with such a system, freeing up shop personnel and owners from the paperwork burden and reducing costs, in some cases, by 15 percent to 20 percent. The computer company will help the other shops upgrade their systems and provide a common platform for all.

"This will allow us to do regular maintenance of their systems, make changes they would like, and watch for potential problems without each shop needing a dedicated computer person," says Chastain.

Strobel acknowledges that the company's transformation has brought its share of upheaval and discomfort. He also realizes that Strobel Machine might have flopped had the changes not been implemented.

"It was stressful," says Strobel, "but I still thought it was the only way I was going to survive in this business."

Enduring the stress seems to be paying off so well that his son will be coming to work for the company after he is discharged from the Navy in January. After the upheaval necessary to revive his business, that should be a change that Larry Strobel will welcome.