The Midwest Foundry, an example of employees taking control in a crisis by re-inventing the business and adapting their skills.
While there is little doubt that we are experiencing a time of rapid change and many skills are becoming obsolete, there is plenty of evidence in the way workers respond to this that this situation is not unique to human history. In fact, history indicates the way human beings learn and adapt suggests we are suited to change and crisis. In all this, “education” has never been our fallback strategy. The following case is an illustration of both the threats and opportunities that these changes bring and illustrates the way that one group of workers adapted.
The Midwest Foundry Company (MFC)* was in crisis and hundreds of workers were about to lose their jobs. MFC is a medium sized manufacturer of castings and molds for large-scale items like cast iron engine blocks for freight trains. While profitable for a number of years, by the time we arrived, they had experienced 32 months of losses. Sales were down 11% in the year. They had millions of dollars locked up in excess inventory. Flawed parts were scrapped and in need of rebuilding at a rate of 13% (“scrap rate”) in an industry that had an average scrap rate of 6%. Less than 30% of their orders were delivered on time, and they had developed a six-week average “lead-time”, which refers to the length of time it takes from the date of the customer order to date the item is shipped. Added to these problems, MFC recently found out that they were in violation of the terms and conditions of a large asset based loan. Just to maintain their customer base, they had to cut prices below the cost of production. The only department growing in the company was the complaint department.
In collaboration with the workforce, we developed a gamified model of the business. We conducted a two-day immersive simulation exercise in which workers rehearsed various solutions to meet a set of non-negotiable outcomes in a miniature version of their casting and delivery process. The goals were simple: every order had to be on time, every piece made had to have a customer order “pulling” it. Every piece was made for less than it was sold for. Solutions for the real business emerged, including using technology to control the business and gain visibility into the status of parts, orders, real costs, and the location of in-process work.
After implementing the solutions generated in the simulation, MFC began turning around. After 9 months, they were able to develop and implement solutions that reduced lead times to 2 weeks from 6 weeks. On time delivery went from 30% to 82%, and the scrap rate dropped from 13% to 9%. When we followed up a year and a half later, on time delivery was at 100%. The scrap rate was down to 2.9% (well below the 6% industry average). They had eliminated their customer complaint department entirely, and resolved their bank loan problem. A company that was 6 months away from running out of cash and going belly up was able to turn itself around and sustain competitive advantage in a tough industry. Workers were back at work.
This kind of turnaround required a major transformation of the MFC, from the shop floor to the executive suite, which begs the question: In an industry steeped in tradition and not known for its agility, how was the MFC able to achieve such a dramatic turnaround in such a short time period? The purpose of this piece is not to demonstrate the success of the MFC or the effectiveness of the Rehearsal method we used. Rather, this case is an opportunity to raise a number of questions about the nature of large scale organizational transformation — to probe what is possible in changing organizational behavior, emerging from the day-to-day challenges of a real organization caught in a complex crisis.
The Midwest Foundry Company (MFC) is an old foundry that makes all sorts of iron castings, including small machine parts and large-scale castings such as cast iron engine blocks for freight train locomotives. However, over the last several decades, the foundry business has changed drastically. Many items once cast in iron are now fabricated using other means (e.g., 3D printing), and small castings are outsourced offshore at greatly reduced cost.
However, there is still modest demand for domestically made very large (multi-ton) castings, which are normally not made in large quantities. MFC had facilities capable of making castings weighing as much as 30,000 pounds, with their average casting being 5,000 pounds.
When sales in 2000 were down 11% — the general perception was that the company was losing money because it was losing sales. As a result, the owner and the management entered into increasingly risky agreements in order to attempt to retain customer business. These were viewed as marketing programs designed to secure additional business. However, many times prices charged to desirable customers were below cost of production for MFC. As such, the more castings they made, the more money they lost.
MFC’s real opportunity resided in their close proximity to their customers who needed very large castings, but they needed to look at the opportunity differently than they had been. They needed to offer greater value rather than lower prices. Customers would pay a premium for something they need quickly and which is hard to get. Large castings are often used in other products that are not bought in large quantities but which, when needed quickly and which are highly profitable for the seller. Therefore, price cuts were not necessary for items customers are desperate to have or which have high value.
Problems on the shop floor. Just as the process of casting has not changed much over the centuries, foundry workers and managers tend be 2nd or 3rd generation foundry men. Most of the workers had lived in the mid-west for generations and still farmed the land they were born on as a way to subsidize their living. The workers and many of managers were also not financially knowledgeable enough to know how their foundry was doing or what they could do to contribute to its survival. Notions like breaking even and covering overhead were not part of their daily language on the shop floor. They were efficient and skilled mold makers, pourers, and finishers, not businessmen. They tended to make as many molds as they could — whether there were orders for these items or not, because it was a more efficient use of the pattern.. This created a widening disconnect between the day-to-day operations and the larger goals of the company.
There was also a disconnect between the different functional areas. The life of a casting begins with the pattern. A pattern is made and handed off to the mold makers. Large-scale casting molds are made in three pieces. The true craft of large casting involves getting as much of the intricacy of the final piece to be a part of the casting by controlling the flow of the molten metal in such a way that you get uniform filling and cooling. As such, mold makers cannot simply follow a set of directions. Rather, the real expertise for the mold makers is in understanding how the molten metal will flow into the mold, based on its size, and shape even weather conditions. This requires a complex placement of holes and chills that control the proper moving and cooling of the molten metal. With large items, the placement of the holes and chills and the skill in making each individual mold is as important as the design of the pattern.
A near non-existent tracking process led to a six-week lead time from the time a customer placed an order to the time of delivery, even though much of that time, the casting may have been sitting in a pile of uncleaned inventory. Six weeks was about the amount of time needed to get through the 20 foot pile that resulted from excess inventory. Once an item was selected for cleaning, the focus of the workers’ attention was on doing a stellar job of preparing the casting for a customer, even if there wasn’t one yet! Again, the workers proved superior at this task as others did at making the molds. A great deal of artisan skill and knowledge accumulated over generations was involved in preparing the final casting. However, many of these were not due for shipment while others that were already late could not be found.
This process led to a less than 30% on time delivery. In addition, because the molds were not cleaned with any priority, any flaws in the castings were only revealed when the part got through the finisher. Flaws in the castings could have a root cause in a problem with either the pouring process or with the original pattern. Understanding the nature of the flaw requires visual inspection by mold makers. Yet, often a casting was not scrapped until quite a bit of labor had gone into knocking off the sand mold to reveal the flaw. Since this happened in another building entirely, the molding and pouring personnel may not know that rework had to be done until weeks after the casting left their control.
Simply, MFC could not afford to continue with the same work patterns that had made them successful in the past. Business used to move more slowly, on-time delivery was not as important as price and inventory practices. Workers had decades of expertise as mold makers, pourers, or finishers. They had developed their priorities and impressive decision making skills in response to environmental pressures at a time when quality was difficult to obtain and timing was not as important.
Rehearsing the future with gamification. For MFC, we developed a Rehearsal to develop expertise in on time delivery and value pricing. MFC’s Rehearsal was a 2-day, simulation-based game, in which participants engage with a reality analogous version of the foundry’s mold making, pouring and its ERP system, as well as its profile of customers.
Organizing forces and leading activities. Before designing the mock work environment, we needed to understand what kinds of thinking supported their current practices. We asked the workers to develop an as is map of their process, outlining how they see the workflow from pattern to delivery, and subsequently develop a to be map. This was done with cards representing the major functions of making products. We asked them arrange them on a large table top the way it is now, and the way it should be.
During this exercise it emerged that their as is map did not include on time delivery, and their to be map seemed to be an extension of the current way of thinking — they simply created new ways to push more product through the pipeline, without realizing the new bottlenecks that this would create. In addition, for the mold makers, cleaning and shipping were not part of their process maps. Activities not involved in actually making the casting were not the object of their thinking and decision making. Therefore, entire parts of the process, such as handing off the job, trucking the unfinished casting to the cleaning facility, and storing were not represented in their thinking and were not objects of their attention. We needed to get them to think about these missing things. This helps us design a game in which they would be able to explore things they had not thought about before.
If their old ways of thinking had emerged in response to adapting to one environment, we needed to create an environment with new goals that were highly visible. Therefore, the rehearsal design began with a set of outcomes to which they would be held accountable:
1. Customer orders must be shipped on time; anything late had to still be delivered, but there would be no payment for it.
2. A lower cost per item budget.
3. Reduce scrap rate goals.
4. A specific revenue goal with specific profit margin that had to be met by the game’s end, with reasonable interim milestones along the way showing progress.
We knew that — given their knowledge of how to make castings, if these goals were immovable — they would use what they knew about making castings in a new way to achieve these targets.
We constructed a miniature foundry in which they had to make molds from miniature patterns, prepare them for pouring, and generally route the product through the process laid out on a series of large table tops. We did not replicate the entire foundry in miniature, rather we created an environment that exaggerated what was important to work on and downplayed what was not. In that sense, it is a physical caricature of the decision space.
The rehearsal design ideally represents those aspects of the work environment where critical decisions are made and places them in the context of the new outcomes. For MFC, we replicated pattern retrieval, mold making and casting cleanup, because these are the points in the process where decisions are made and things can go awry. We used a polymer sand that, when mixed with water, makes a temporary mold used for making plaster of Paris castings. This also replicated the fragility of the real molds; within 30–45 minutes, these polymer molds start to fall apart (real life sand molds start degrading within days). They are supposed to be used immediately.
The process of making molds engaged their default, routine work activities, but in the rehearsal, these activities were placed in the context of the primary decision points that were tied specifically to high-level outcomes for which they were held accountable. On the shop floor, mold making alone is the final measure of their performance. In the rehearsal, mold making, and routing is part of a larger process of on time delivery, cost reduction, reduced scrap rate, and meeting profit margins. Also, we brought all the critical functions together. The pattern shop, the mold makers and workers who clean the sand off and prepare the castings for shipping. Therefore, workers could see their contribution to the whole process.
While making molds was easy for them, in the context of new requirements the task became more complicated. For example, there are about 8 steps to making most castings. If you are late with step 2, you are already too late, even if the casting is not yet due to the customer. Thinking about the lateness of a casting by step 2 was not part of their thinking. Time had not been thought about in that way before in the context of their work. To develop this kind of thinking, we gave them tools offering visibility into the effect of accumulating lateness. One tool was an ERP (the planning software used by most production and factory industries to track work in progress and calculate raw material requirements) generated list of internal deadlines (by customer order) for internal customers (i.e., the 8 steps in the process) such as making the cores, the pouring room or finishing facility, which allowed to them see that delay in one process had a domino effect on other parts of the process, even if it is weeks ahead of the planned ship date. We required that the ERP router (a printed form with all the steps and interim due dates) travel with the job (pattern, mold and casting) and each person had to check off their step and when they did it. The due date (or game period in this case) was shown for each step, not simply the due date at step 8. Thus, at every hand-off, they could see the accumulating lateness. In addition, the customers (played by staff facilitators) did not always accept orders that were late and certainly did not pay for them. MFC had had an ERP system for nearly four years, but they had never used it except to store customer information, such as shipping addresses, customer item numbers and sales contacts.
Results in the rehearsal. The first day of the rehearsal, the MFC workers replicated many of the dysfunctions that had occurred in real life. Less than 30% of the orders were on time, and the financial picture by the end of Day 1 was nearly identical to their real finances. All the molds and castings were beautifully done, but always late. As the day progressed, we tracked their performance and projected charts using an LCD projector. The projected charts were updated every few minutes. Even though they could see where they were headed, they could not come up with a solution. In order to get the customers to take the castings, they cut prices below cost and tried to make up the losses with volume. Even though this group had developed a careful to-be plan and process map, this was entirely abandoned during the rehearsal. The phones keep ringing and the suppliers kept sending bills. We stayed in role as unhappy customers throughout the day, allowing the numbers to speak for themselves. We told them at the end of the day that this is normal and not to worry. This is the purpose of the game. Tomorrow, they will have better ideas because of what happened today.
On the second day, we reset all of the numbers and gave them an opportunity to meet privately and devise a new approach. The second rehearsal was thus an opportunity to rehearse a new strategy. All of the same parameters were in place. They had new molds to make and were held accountable to the same top line revenue goals, but the customers and orders were different. Nearly everyone showed up early and each team was re-arranging their tabletop work floor before we got there. When they saw us, they asked for their data again, and asked for it in different forms. They were given a prep period of a couple hours to figure out what went wrong the day before. When the rehearsal started again they had to come up with a plan to fix the problems that had occurred the day before.
Very early into Day 2, they began asking the customers (facilitators in role) how important was it that the castings be on time. They wanted to know if –we would pay a premium if we got guaranteed on-time delivery. We said we would pay full price for on time delivery and a slightly higher price for a shorter lead time. They took this information back to their huddle. They also rearranged their tables and examined their data from the day before, and began strategizing how they would move the casting quickly from stage to stage with as little sitting around as possible. They also discussed developing ways to know where a given order was and if it was late. A sample of dialogue illustrates:
D: “Okay, but when you’re done with making that, you can’t just say “okay I did my part” and make a little pile at your elbow. I am waiting for you to be done with that so I can do my piece. You have to let me know it’s ready or give it to me, because if you get it to me later than I need it, it’s late, period
T: “Right, and the whole team doesn’t get paid.”
L: “Yes, we don’t get paid. Everybody got that! You don’t move your stuff, we don’t get paid!!!!!” So maybe we should move you guys to be closer together and come up with a way to signal that you’re done.
B: Listen up you guys. I just got the customer to agree to a higher price with a shorter lead time. Can we do that? Let’s look at the routing and see if we need all the time on there.”
T: Has anybody figured out the break-even by piece? Are we charging enough? We need to look at the prices; the more stuff we made yesterday, the more money we lost.
It should strike the reader that long term experience of the workers has not changed, but their thinking is changing, both individually and collectively. In fact, it is their experience that makes the new level of expertise possible, even though before, it was the very thing holding them back. By rearranging the context in which their expertise is deployed, new goals will select ways of thinking and develop capabilities that make meeting those goals possible. The design of the rehearsal only focused the participants on accountability for outcomes, not on the best way to get there. This stimulated participants to begin to find new ways of thinking about the same things.
On the second day of the Rehearsal, on-time was incorporated as part of excellent casting and more throughput was transformed into the idea of more of what we need; less of what nobody is buying. By the end of Day 2, they had designed a pull system as opposed to the push system they had previously had in place. This made the ERP routings and reports as central objects in the decision landscape. Important to note, all the unachievable goals of Day 1 were achieved easily on Day 2.
Results in the real world. After 9 months, they were on time nearly 82% of the time and returned to profitability. As a result, they reduced their scrap rate from 13% to 9%. They began to turn a profit focusing on premium pricing and on-time delivery and gradually retired commodity products.
A few months later the company confronted a crisis. The owner was involved in a lawsuit with the bank; he was accused of using bank loans secured for capital improvements to make acquisitions of other businesses. The bank took possession of the company and the owner suddenly passed away. This was very discouraging news since the workforce had made considerable progress in understanding the key to profitability in today’s market. Although the plant never actually shut down, the workforce struggled to meet commitments. They found it hard to pay suppliers with assets being seized by the bank. After trying to negotiate with the bank, some of the managers who had participated in the Rehearsal sought out and found a financial backer. This backer bought the company on an “assets only” basis (he did not assume the debt), which allowed the workforce to continue with their program of improvement while the investor acted largely as a silent partner. The idea was that they would repay him with interest from the profits.
Two-year follow up. On our return visit after two years, most of the same people we had worked with were still there. Orders were being pulled through the system in an orderly fashion, on time, at a low cost, with little scrap. They had achieved 100% on time to the customer and had shortened their lead-time from six weeks to two weeks and negotiated premium prices from customers for shorter lead times. They had reduced their scrap rate down to 2.9%, well below the 6% industry average. The entire customer service department was eliminated, profits were consistent, and for a foundry, the margins were higher than is typical.
We found that they were still using a version of tools developed in the rehearsal, but had gone beyond them, innovating new technologies. This was remarkable for workforce that had been computer illiterate two years before. As the industry changed again the workforce modified the information tools to support better decisions. Each team of workers gets information each morning with all orders and all offsets, and a detailed version of accountabilities for the whole company. The larger goals and complexities of the entire process were made transparent to workers in all parts of the process. In other words, every worker has visibility of his or her work in the context of the whole business and all workers have access to the tracking technologies.
As stated earlier, two years prior there was typically a 16-foot high by 40 foot in diameter pile of sand-encased castings to be cleaned in the cleaning area. Cranes were used to move the multi-ton castings in order to find out what was there and find those that were due to be cleaned in time for shipping. During our follow-up visit, there were only two relatively sand-free castings that had just arrived for cleaning. Within 20 minutes, cleaners who were expecting them had them moved them to cleaning booths.
I wandered out on the shop floor and asked one of the younger workers how things were going with the new financial backer and the company in general. This was a young man who had never used a computer, seen a spreadsheet or had any business training before. He said:
“We do four 10 hour days with the regular workforce. At 3pm today we broke even for the week and earned our loan payment to the bank. It’s all profit from here on out. On Friday we do proactive maintenance, which prevents any losses from downtime, and which lately doesn’t take a full day. The regular workforce gets that day off. We keep this up, the loan will be paid off soon. We are looking to acquire another small foundry to help us be closer to some customers when we can afford it. “
In summary, the workers had gone well beyond what they learned from the rehearsal. What they developed in their Rehearsal was a first principles understanding of dynamic nature of their business and ability to continually adapt and change their strategy as the business changed.
* To honor the anonymity of the company, “MFC” is a pseudonym that will be used throughout the paper.
