A spate of mergers, acquisitions, and divestitures seriously impaired the ability of Centennial, Colo.-based Stolle Machinery Company LLC to manage its own performance. But by rethinking its approach to forecasting, budgeting, and related activities, Stolle has created a consolidated entity with sharp insight into its costs and revenues.
BPM Magazine: What does Stolle do?
Michael Kalkman: Stolle Machinery Company provides capital equipment, spare parts, tooling, and services to the beverage and food can industries. We sell our machinery and services on a global basis to all the major can manufacturers.
Stolle Machinery is a collection of several companies acquired over the past 35 years. We were previously owned by Alcoa. The entities that made up Alcoa Packaging Equipment were sold in January 2004 to American Industrial Partners (AIP). AIP renamed the company Stolle Machinery Company LLC. AIP then acquired Sequa Can Machinery from Sequa Corporation in November 2004 and incorporated Sequa into Stolle. AIP sold Stolle in September 2006 to our current owners, Littlejohn and Company.
BPM: This M&A activity must have created challenges in your budgeting and management reporting.
Kalkman: Absolutely. Bringing together so many processes and people is our biggest challenge. On March 17 of last year we all went onto the same system, all sites. It's been a challenge to merge cultures and processes, and the way people plan and operate.
BPM: What software do you use?
Kalkman: We use IFS Applications as our ERP system and a combination of IFS and Excel for performance management. At the corporate level, we went live on IFS Financials in 2004. We haven't gone live yet with the forecasting module. We have a lot on our plate as far as learning the modules that we are already live with. Since people only have so much capacity to change, we still use some Excel, but less and less with time.
BPM: How did you approach coming up with one budgeting and management reporting process?
Kalkman: There are just too many inputs into the system to be on multiple software tools. Some of the companies that were rolled into Stolle competed with one another and dealt with many of the same customers; their product lines overlap. And it wouldn't make any sense for managers of an acquired company in Ohio to forecast for the same sales opportunities as the managers in a business unit in Colorado. They would be stepping on each other's toes, and our forecasts wouldn't be accurate because only one of those divisions would be able to make the sale in the end. We all have to be on the same system.
Plus, we have close to 900,000 part numbers. The cleanliness of our data is key to making the best sales and marketing and production decisions. If our data isn't complete and accurate, it's going to drive processes that may produce a wrong outcome. Our budget and management reporting system is linked to a scorecard approach, where we measure more than just EBITDA. We also measure inventory turns, procurement variance to standards, etc.
BPM: How does your budgeting process work?
Kalkman: We're budgeting from a sales perspective to drive the expense budgets. So to start the process, we're in most can plants multiple times per year and know our customers' new equipment, spares, and service needs intimately. We also have an ear for new opportunities concerning green field projects, where new fillers enter the market. These opportunities, coupled with 40-plus years of historical corporate experience and thousands of years of combined can business experience among Stolle managers, help us build a realistic sales forecast. We also see trends. As the world's wealth increases, so does can consumption. So we also lay into our forecast room for this new growth on top of the historical or organic growth.
On the expense side, we can forecast the costs of literally hundreds of pieces of customized canning equipment and spare parts and support, then we can roll up rates, hours, purchased parts, overhead, etc., into the budget for the year. The budget for one project or piece of equipment comes from a combination of what the customer requires in their purchase order, as well as a history of the piece of equipment that we're going to make for them. We have thousands of can-body makers in the field, but each one of those body makers can be different.
Engineering sits down with sales, and they go through the requirements and figure out where the costs are, in both indirect time and direct time, as well as what purchases need to take place or machined parts need to be produced and assembled in-house. We roll all those costs up with our expected margins to come up with a sales price, including all the extra charges such as crating and shipping. And then that all rolls into our sales price that we present to our customer.
BPM: Do you put that together in spreadsheets?
Kalkman: Yes and no. In IFS, you have a sales-quotation process that drives the sales-order process. Before you get to the sales-quotation process, you have to come up with the sales part number, which is driven by inventory part number. The inventory part number can be related to a previously made inventory part, such as a piece of equipment, and from there we can drill down into our actual project and equipment costs -- down to the penny from the last project where we made this type of equipment. We can figure out: Where was our labor? Where were our purchases? What was our plan? What were our actuals? We can nail it down and find out where our opportunities are and figure out what is a realistic market price.
BPM: Then for your annual budgeting process, you just roll up numbers from all of the individual projects you expect to work on in a given year?
Kalkman: Not exactly. We look at the whole world for new equipment, spare parts, and service opportunities. Our sales and marketing departments know every buyer and every can plant in the world. We know what capital expansion is going to take place in the next 12 to 36 months -- for instance, what new can lines are expected to be online -- and then we get the opportunity in the bidding process. But we're the gorilla in the industry; we're probably near 90 percent of new equipment orders, as well as probably in 65 percent to 75 percent of spare parts orders. So we know when we do our budget exactly where we can expect our revenues to come from. Currently all this rolls up in an Excel spreadsheet, but we're in the process of designing and loading this data into IFS's CRM package. We're putting some high-tech tools in place to automate some less-than-scientific processes.
BPM: Have you had any cultural challenges in moving to more technology-driven forecasting?
Kalkman: People are absolutely necessary in the organization; they are the experts. We have people who have been with Alcoa, Stolle, Sequa, CIP, and the other acquired companies for dozens of years each, so they have this wealth of industry knowledge and they know all the players in the industry. To a large degree, they are the ones who are driving the forecasts. It's getting that expertise down into the system that's the challenge -- and doing that in a manner that's controlled.
We have managers in each of these companies who are used to using ACT, Outlook, Excel spreadsheets, Access databases, and even paper-based general ledgers that are handwritten. So data on all of our thousands of pieces of equipment resides in a wide range of systems. When we implemented IFS, we wanted to move information out of these individual systems into an IFS module that includes information on our install base in the industry. It now contains data on what piece of equipment is at each plant and how many hundreds of millions of cans come off that piece of equipment per year. Documenting this data from our senior managers and putting it on the system so we can all get a holistic view of the market -- versus each division having its own niche view -- has been a challenge. The first step was showing the senior managers the benefit in letting go of their own information and putting it into a process that can extend to others in our organization so that we can present a single mission to our customers.
BPM: How did you make clear to everyone in the company that letting go of control of their data was in their best interests?
Kalkman: We had no consistent visibility across our divisions, which sometimes made us look pretty silly to our customers. For instance, one of our salespeople might walk in the door to sell a new decorator, and meanwhile two service techs would be out back working on a can-die system -- where they'd been for two months doing warranty work for another Stolle division. We had situations where one group that was trying to close new business didn't realize another division had an unresolved negative issue with the same customer.
BPM: Have you seen any improvement in your financials as a result of the changes in your performance management processes?
Kalkman: Absolutely. We have better insight into our install base and their needs. We may see that we're doing $150,000 in business with a customer, but based on our internal calculations we should be doing $450,000 with them. So we know that our competitor is in there. With this knowledge we can build a strategy on how to penetrate that account because we understand the business based on all the data, from all our different divisions, that we now have coming out of the single ERP/CRM system.
We've also taken a different approach with our suppliers. Before, half of our purchasing department was spending half their time going out for quotes. For every project, we looked at who could get it to us quickest or at the lowest cost. Now we're making long-term agreements with suppliers based on families of parts they produce at an economical price. That reduces a lot of churn in our purchasing department.
BPM: Have you saved money as a result?
Kalkman: Yes. We measure our cost savings based on a 2005 baseline, on what we paid in 2005 for the same or similar parts. Last year we saved 6 percent, and we're going to save another 13 percent this year. That comes out to about $15 million over five years.
BPM: Do you have any doubt that the performance management improvements were worthwhile?
Kalkman: No doubts. We could not have sold our company had we not shown that our processes were in control. We could not have shown our processes were in control without putting this kind of system over all the different companies that were becoming one. If we still had five different sites doing business processes five different ways, it would have been a roll of the dice to show control.