Stanley Furniture just announced their first quarter results. Sales were at a record level, earnings were off a bit from last year, but strong enough to pay another dividend. They company was honest with Wall Street about the earnings. Energy and raw material costs were up, but the big hitter was that labor costs relative to sales were too high. They had anticipated even greater sales revenue, but furniture buying in what they call the "car states" was soft. Just the same, they made a decent profit, cash flow was good and the company repurchased another million bucks worth of its stock.
The company will "caringly and lovingly manufacture two-thirds of what we sell, relying on imported furniture to offer companion furniture pieces or items Stanley does not build", according to Jeff Scheffer, Stanley’s chairman and CEO. The Wall Street analysts were apparently challenging him to join most of the furniture manufacturers in the US in their exodus overseas. Company spokeswoman Robin Campbell said Stanley "does not anticipate using layoffs or reduced work weeks to cut production costs". All of this according to the Roanoke Times.
Instead, Stanley’s plan is to get lean. They hired a veteran lean guy named Rick Lovorn from Masco, which I have mentioned previously, to run their four manufacturing plants. Scheffer says "Stanley will compete by offering furniture customers want, speedy delivery and products of high quality". They’re gonna "ramp up efforts to adopt principles of lean manufacturing, focusing on ways to monitor efficiency and continuously improve production".
It all sounds good to me. Sales are good, the company is making money, paying dividends and generating cash. They could do better and competition is tough, so they brought in a high powered manufacturing expert to start draining the swamp.
Wall Street’s reaction? The price of a share of Stanley Furniture stock dropped two bucks upon hearing all of this.
This is why it is so difficult – perhaps even impossible – for publicly traded companies to adopt lean manufacturing. Wall Street wants earnings to increase NOW. They want headcount reductions and plant closings NOW. They want Scheffer to start buying products in Asia NOW. They want earnings up this quarter. Nobody plans on hanging onto Stanley Stock long enough to wait for Rick Lovorn to start getting results.
If Jeff Scheffer is like most CEOs these days, his compensation plan includes some healthy stock options. His annual performance bonus is most likely tied to the stock price. Announcing a lean strategy and having the stock price drop, rather than outsourcing, probably cost him a lot of money – not the company – him – personally – the Scheffer family – the Scheffer kids college fund. The same is apt to be true for his direct reports.
And it’s going to get worse before it gets better. From what I can tell, the Stanley swamp is pretty deep. Inventory is turning so slow as to be imperceptible, so when Lovorn leans it up, there is going to be a lot of under-absorbed overhead hitting the bottom line. All the years of waste the accountants have put on the balance sheet through their blind devotion to full absorption and the matching principle have to come off the books, into the light of day, and it will be ugly. The company will be improving by leaps and bounds, but you would never know it by the way the accountants do arithmetic. To Wall Street, the company will be going in the tank, and the pressure on Scheffer and the rest will be enormous. If he sticks to his guns long enough, the board of directors might even decide to fire him.
The path not chosen by Scheffer sure is a tempting one. Instead of Lovorn and lean, and committing to the employees, it would be awfully easy to close the plants, throw in the towel, and announce that all of the Stanley products are coming from Asia. The stock would skyrocket, earnings would be great – for a few years, anyway – and Mr. Scheffer would put quite a bit of money into his pocket. Long before the bottom drops out at Stanley, he could have moved on to ‘turn some other struggling company around’. He would be a Wall Street hero and he would be rich. But he did not choose that path.
He may not be able to sustain the journey down the road to lean manufacturing. The pressure might be too much, or Wall Street might pull the plug on him. No matter how it turns out, he is already a hero in my book.
It’s easy to complain about a lack of strong leadership and executive failure to commit to lean. I do it all the time. I am sure many of you have some not so complimentary things to say about the boss where you work. The fair thing to do, however, and the decent thing to do, is for all of us – me especially – is to knock off the criticism of the CEOs of the public companies who do not commit to lean. In an honest moment, I am not so sure I would have the personal courage and integrity to take the high road Jeff Scheffer is on when the guaranteed payoff on the low road is so great. Instead we should all recognize and admire the few like Scheffer who commit a lot more than mere words to lean manufacturing.