LLPOH’s SHORT Story: Another Tale of Woe

Some twenty plus years ago I came to work for a company we will call AJAX. This company was founded in the 1930’s, and remained in family hands until the 1980’s, when the CEO bought it from the founder. In addition to its primary business of industrial supplies sales, the company manufactured a range of commercial widgets. The industrial supply side of the business was the dominant part of the business and represented in excess of 90% of its sales and profits. Manufacturing widgets was a sideline.

One large multinational organization dominated the US widget business. The multinational decided it was time to modernize its manufacturing facilities world-wide and built two identical plants – one in the US and one overseas. These plants were identical in every way – same size facility, same equipment, etc. Foreign markets would be supplied by the overseas plant and local markets by the US plant. The company quickly found – much to its disgust – that the local plant produced only half as many widgets per man-hour as their overseas plant, despite being identical. Additionally, local labor costs were dramatically higher. The reason for this was simple – the new local plant was built at the same site as the previous plant, and used the same employees – highly unionized and militant employees – who refused to run the new equipment beyond the capacity of the old plant. When the multinational realized that they could import widgets cheaper than they could make them locally, they closed the local plant entirely and built a second new plant overseas to supply the US market. Goodbye jobs, hello imports, thank you militant union.

The owner and CEO of AJAX noted the closure of the plant with interest – and determined there was an opportunity. He decided that he could take over the entire US market for widgets, by building a new widget plant in a non-union part of the country, and thus saving the not insignificant transport costs his competitor incurred. He believed AJAX could dominate the market on price and by promoting the product as local made.

The owner put together a business proposal for building the new plant, and went to the banks for the $25 million required to build the plant. The bank was suitably impressed – after all the business was long-established and profitable, and further the CEO/owner was also personally guaranteeing the loan via his personal wealth of some $10 -15 million.

The CEO immediately hired a flash young manager to manage the new facility, an experienced engineer to design and commission the facility, a new accountant to account for all the expenditure, and he also hired the most experienced sales manager of widgets in the country (indeed he hired the only experienced sales manager in the country – the sales manager from the competitor that moved overseas). Of course there were a range of other personnel hired as well – planners, supervisors, engineers, etc.

The story now jumps approximately two years forward. The plant has been built, and has largely been commissioned. Unfortunately, it is running at only about 10% of design capacity. The plant is fully staffed, and is bleeding money by the hundreds of thousands of dollars per month. The initial bank loan has blown out to over $35 million, and the parent company is going broke owing to the ever increasing losses and inability to fund the interest bill. The bank is desperate to try to recover some of their money, as the plant is virtually worthless in its current state, and the only really security they have is the CEO’s personal assets. They demand that a new manager be brought in to run the plant. And that is where I come in.

The bank recruited me to take charge of the plant, but allowed the CEO/owner to remain in place, and had me report to him. This would prove to be a terrible mistake.

All manufacturing and engineering personnel reported to me, including the previous young plant manager. I quickly discovered that this flamboyant young manager had been using huge slabs of company resources to assist him in building his new house. This was well known among his employees, but as they worked for him, no one said anything. As the CEO was located in another city, he did not know it was happening – although he surely should have known. I summarily dismissed this young manager, and suggested he be charged for various crimes. The bank and the CEO opted not to do so, for fear of negative publicity. I do not understand that reasoning, but it was not my call. This young manager, to my understanding, never again succeeded in resurrecting his career, lost his partially built new house, and disappeared from sight.

Every three months we undertook a complete physical count of inventory. I was in charge of this inventory count. I would oversee the count, and send it to the accountant for pricing and summation. The accountant would send it back to me for final verification. I completed the first count, and received back the summary for verification. There I caught a $1 million dollar discrepancy – the accountant had keyed in 10,000 widgets when there were in fact only 1,000. I duly documented the discrepancy, and notified the accountant both in writing and verbally of the discrepancy – after all, a $1 million discrepancy was nothing to ignore. Three months later we undertook the same process. I did the count, the accountant did the summary, I verified the count was accurate – and sent it back. I immediately received a call from my panicked CEO – the count was off $1 million, and he wanted to know how I had lost a million dollars of stock. It took me about 2 nanoseconds to realize that the accountant had screwed the pooch – and that despite my best efforts, he had not fixed his mistake. The CEO went very quiet at my explanation, and I could sense his fear (not unexpected, given his personal fortune was hanging by a thread). The idiot accountant was never again heard from, and I understand his career in accounting was over from that moment.

The CEO made a series of catastrophic errors, each leading him ever closer to his doom:
1) The CEO made the fateful decision to abandon his core business of industrial supplies and enter manufacturing on a large scale. He had no experience in manufacturing. He then made a series of errors in hiring the wrong personnel, and of letting overheads get away from him, costing some millions of dollars.

2) The CEO, at the age of 55, guaranteed the $25 million loan (which then grew substantially) with his substantial personal wealth.( I and my partner never personally guarantee anything. We are too old to recover should anything go wrong.) This was a fatal mistake for the poor old CEO.

3) The CEO opted to interfere in my daily handling of resurrecting the business. This was somewhat understandable, as he could see his personal fortune disappearing, but it was a terrible mistake. There were two incidents where his interference cost him dearly. I had developed a spread sheet for ordering parts – a very basic MRP system that was not very pretty but was effective. The CEO saw this spread sheet, and determined that his system was better (i.e. prettier), and took upon himself the task of ordering 1) the high dollar imported products we needed in widget manufacture, and 2) the order of the high dollar specialty steel we required. Upon receiving the containers of imported product, we discovered he had ordered the wrong parts – some $500,000 of wrong imported parts, that were, of course, non-returnable. Upon receiving the steel, we discovered he had ordered the wrong steel – again $500,000 of steel that could not be returned. In a time of crisis, the CEO blew $1 million dollars. The bank, of course, was not amused. He decided it was best to leave me to do the ordering in the future.

These errors, unbelievably, were not terminal, and were in fact recoverable. I managed, over the course of a few months, to get the plant fully operational. In fact, if the interest on the bank loan was ignored, the plant was making a modest to reasonable profit, and the future looked pretty good. Unfortunately, the CEO had made one more error that had yet to come to light.

When the plant was fully commissioned and up and running, the CEO, the sales manager, the bank and myself sat down to discuss the next step. The plant was fully operational, and needed to be filled with orders. The CEO turned to the sales manager and said, “Sales manager, go forth and sell, and bring in orders for 1 million widgets, as that is the plant capacity”. The sales manager sat there and blinked, and was quiet. Finally the sales manager spoke – he said “The entire US market for widgets is only 200,000 per year.” This was a fateful comment indeed.

It seems that the CEO had used the figure of 1 million widgets per year in his business plan to the bank. He had never confirmed these numbers with anyone, and no one knows how he came by these numbers. The bank accepted this information (heads rolled at the bank over this), and loaned $25 million (and expanding to $35 million over time) based on these fictitious numbers. The sales manager was not with the company when the figures were created. Nonetheless, he knew that the numbers in the business plan were incorrect, but decided not to tell anyone, as to do so would likely have meant losing his job. He was over 60 years old, and his entire career had been spent selling widgets, and he believed he could not get any other work, and so he kept quiet until he could no longer do so. He was unethical in the extreme.

So, in the end, the CEO went bankrupt and lost his company and his wealth owing to his mistakes and his personal guarantee of the loan. His wife of many years left him (it seems to be a common theme). I have heard little of him since.

The sales manager lost his job owing to failing in his fiduciary duties. He disappeared from sight.

The bank took ownership of the business, and eventually sold it for a fraction of the monies owed. It was recapitalized at a value, including the industrial supplies arm, of approximately $15 million, and generated a reasonable profit at that valuation. The bank in the end lost about $10 million. The 100 or so manufacturing employees got to keep their jobs, which was a great result. I moved along to the next stricken company shortly thereafter, having accomplished my goal of saving the plant.

In this tale there is arrogance aplenty, there is unethical and criminal behaviour, and there is sheer incompetence and stupidity. But when I think about this story, I keep coming back to something I have long believed – that there are simply very few people out there who are capable of effectively running complex organizations – it takes a lot of skill, experience (both diverse and in-depth), and talent. There are a great many people who are incompetent and a great many more that simply do not care.

As a nation, we are an incredibly complex entity. We rely on politicians, for the most part, for leadership. These politicians are frequently life-long politicians or academics, with little or no real-world experience, and in many times they have entered the family business of politics (think Bush and Kennedy and Paul). And yet we rely on them to formulate and implement solutions to very complex solutions. For the most part, they simply are not up to the task – they do not have the requisite experience or skill. People with the appropriate skills and experience, as rare as they are, tend to avoid politics like the plague.

And so I despair when I consider the future – who will lead the people? I am convinced that politicians have insufficient skill, experience, and perhaps most importantly, the will to do what needs to be done. The American people show no inclination, on the whole, to reject the politicians we have for those we should have. So the grave question remains – who will save the country in the time of coming crisis?