I have been contacted by Mr. Ed Pelshaw and he has advised me that (1) he stands by the facts reported by himself, the Florida MEP and FARO regarding the results of FARO’s three month lean implementation in 2000-2001; and (2) that he has not been employed by FARO for the last three years and has had no involvement in the pending shareholder lawsuit or recent company activities in dispute in that lawsuit.
I am a dyed in the wool Michigan State fan, through rain or shine, good years and bad. As a result, when our arch-rival the University of Michigan plays the hated Notre Dame University every year, I earnestly hope that somehow, through some quirk in the rules, they find a way for both teams to lose. It is unreasonable, but the fact is that in order to savor the defeat of one team, I must endure the victory of the other, which is hard to do.
That is the same gut feeling I got when I read of a class action lawsuit filed against FARO Technologies. Lawyers and Wall Street versus an outfit that blatantly mocks lean manufacturing. If it weren’t for the fact that many good people who work in the trenches for FARO would be hurt by it, I would think the best outcome would be for FARO to spend every dime they have fighting the suit, and lose. That way, FARO would be gone and the lawyers would get zilch. Again, though, too many FARO people would end up on the street. I’m going to keep thinking about it, though. There has to be a way for both to lose.
This pathetic tale actually began in 2001 when FARO and the Florida MEP jointly announced some astounding accomplishments at FARO as a result of the folks at the MEP helping them become lean. In only three months, according to Mr. Ed Pelshaw, FARO VP and the greatest spinner of yarns since Aesop, FARO increased capacity by 89%, reduced WIP by 84%, cut floor space by 47%, and reduced labor costs by 45%. Now that was one heck of a piece of work in only three months. In fact, if this turns out to be remotely true, let me be the first to recommend kicking Shingo off the throne and renaming it the Pelshaw Prize.
It turned out the numbers may be a tad off, however. Last year, in a 10Q report issued by the company, they said the FARO "implemented a new enterprise resource planning (ERP) system. In order to ensure that the system had been properly implemented, management tested the physical inventory in October of 2005. the testing identified a difference between the book balance reflected in the financial records and the physical inventory of approximately $1.6 million related to inventory costing and consumption variances."
These guys turn inventory at the very unlean rate of about four times a year – a little more, I guess, now that they have found a big chunk of it missing. In between Ed and the rest of the boys at FARO telling the world they are the leanest company since Toyota, and fessing up to the ERP debacle, it turns out the company had an IPO and the owners got pretty rich.
The whole thing irked a bunch of Wall Street types and their lawyers, so a class action lawsuit was filed on behalf of anyone who bought stock in FARO last year. The lawsuit says that "FARO represented itself as having implemented lean manufacturing principles that brought about numerous operating efficiency improvements in its production capacity. However, these statements were materially false and misleading because the Company’s internal inventory and accounting controls were defective…" In other words, Ed, how in the heck could you have claimed inventories went down by so much if you had no idea what inventory was either before or after you hooked up with the miracle workers at the Florida MEP?
This whole story is such an in depth study of Bovine Scatology (or B.S. as we professionals call it) it is hard to draw any clear conclusions. I am back in the Michigan versus Notre Dame dilemma.
The honchos at FARO deserve to lose. Anyone who would publicly proclaim such lean manufacturing success when their operations are spinning ludicrously out of control is making a travesty of the entire lean concept. They demean the work all of the Superfactory readers are doing, and thousands more people who are honestly committed to improving manufacturing. These guys clearly did not even think lean was important enough to learn the most basic fundamentals, otherwise they would not have worked their way into being the first company in history to be such outrageous liars about lean success to actually be sued for it. Even Delphi didn’t get sued over their lack of leanness.
The big problem with FARO getting their just deserts in court, however, is that it would mean Wall Street wins. I can find no sympathy for the investment community, who does not take the time to learn the first thing about the industries or companies in which they invest, yet demand a seat on the board and a voice in the company. The investors were so ignorant of basic manufacturing they could not spot Ed’s tall tales for what they clearly were. PT Barnum used to say that he felt a moral obligation to take money away from fools before they used it to do something harmful to themselves. Those who plowed their cash into FARO, expecting more three month miracles, strike me as the sort of folks Barnum had in mind.
Finally, while it might be interesting to see a parade of lean experts in court debating exactly what the criteria is for a company to be allowed to proclaim itself ‘lean’, the notion of having that decision made by a Federal judge who, in spite of a wall full of diplomas attesting to his legal wisdom, knows next to nothing about manufacturing is a bit unsettling.
So I am back to where I started. There’s gotta be a way for this thing to end up in a lose-lose situation. I’m going to keep thinking until I figure it out.