Improving supply chain management drives a turnaround in tumultuous times

Three years ago, PolyOne Corp., was weighed down by excess inventory, poor on-time performance and over-reliance on equity earnings from commodity joint ventures. In addition, the recent economic downturn hit hard in some of the company’s key markets, including automotive and building and construction. Certain analysts and investors believed that PolyOne—a premier global provider of specialized polymer materials, services and solutions (such as metallic-look vinyl used in home appliances, the soft-touch plastic on the handle of your razor, and medical-grade polymers for tubing)—might have to file for bankruptcy.

Instead, the company generated $218 million of free cash flow in 2009 and reduced net debt by $223 million. Its share price has risen about 580 percent to $8.97 from its low of $1.32 in March 2009. Some analysts are now recommending PolyOne stock as a buy.

How did the company increase cash flow in such a short time and during one of the worst economic recessions in history? Largely through improvements in supply chain management. This article will focus on some of the most compelling actions that led to those improvements.

Background

When I joined PolyOne as head of supply chain and operations in 2007, many challenges were clear, but progress was underway. The company was formed in 2000 through the consolidation of M.A. Hanna Company and a BF Goodrich spinoff, The Geon Company. The corporation that exists today is the product of acquisitions of several companies, each with its own way of operating. By the end of 2007, PolyOne had acquired five companies over the previous eight years. However, as new businesses were folded into one entity, the company typically did not centralize or standardize key processes along the way. The lack of cohesion and consistency was evident on many levels—from one business unit operating under different names in different regions, to three different regions each hiring separate consulting firms to provide guidance on the same issue.

CEO Stephen D. Newlin, who joined PolyOne in February 2006, already had introduced efforts to resolve such inconsistencies and enhance service to customers. And some of these, such as improving on-time delivery, were beginning to show progress. But he was up against a company history in which previous management had launched multiple initiatives, hired numerous consultants to help carry them out, and produced very little profit-and-loss impact other than creating additional expenses. Highly touted initiatives often were incompletely implemented and always abandoned before having a chance to show positive results.

Despite such challenges, I also saw a company with potential to triple or quadruple its financial performance through improved management of the supply chain and enhancement of a number of key related business processes.

Manufacturing Realignment

With more than 40 production facilities around the world, PolyOne’s manufacturing network was an obvious place to start the optimization process. By 2008, the company was seeing unprecedented increases in the costs of energy and raw materials, placing heavy pressure on cyclical business sectors. We also commenced a transition from a volume and price focus to a value-added solutions provider and were shifting our focus to more specialized solutions designed to take advantage of market trends in healthcare, electronics, bio-materials and sustainable products. At the same time, the downturn in the housing and automotive industries had diminished demand for some products. This development, combined with productivity improvements generated through the application of lean techniques, left the company faced with excess production capacity that was designed to accommodate the unsustainably high peak demand levels from the mid-2000s.

Rigorous reviews by our business units showed we could operate more efficiently and better leverage our global footprint by realigning a significant portion of our manufacturing assets with enough built-in flexibility to address mid- and long-term demand requirements, while improving service levels to our customers. We decided to rationalize production facilities and reduce our global cost structure through the implementation of a global manufacturing realignment program.

The effort faced one daunting challenge from the start: Employees were both cautious and skeptical about change. Some employees were concerned the realignment might disrupt service to customers or derail our growth plans. Additionally, the company had recently improved on-time delivery and some feared the manufacturing realignment might reverse that progress.

This wasn’t the first time PolyOne had set out to make its manufacturing more efficient; a similar effort years earlier failed to effectively consider customer supply chain and service requirements. So, when we began planning the realignment project, we committed considerable time and effort to overcoming the internal resistance created by past failures. We specifically spent time highlighting how this new approach was different from previous efforts. The team used several change management techniques and process improvement techniques such as Failure Mode Effect Analysis (FMEA), Key Stakeholders Analysis, and Risk Mitigation plans to ensure that the project plan would be both robust and adopted by the organization on a global basis.

PolyOne launched the manufacturing realignment project in July 2008, with plans to close nine production facilities, including seven in North America, over a nine-month period. Detailed timelines, transition plans, and communication efforts helped minimize both disruptions to customers and impact to affected employees. We informed customers how their product orders would be affected and when those products would be moved from one location to another. As a result, there were no surprises and customers experienced an extremely low number of service interruptions.

Since July 2008, through the manufacturing realignment and a global restructuring announced in January 2009, we have closed 20 percent of our manufacturing facilities and trimmed our workforce by approximately 20 percent.

Inventory Reduction

Just as pressing as the need to improve the efficiency of manufacturing facilities was the need to improve inventory management practices. While operations at PolyOne were generally decentralized, one process that unfortunately was consistent throughout the company was its approach to inventory. Business units spent the first six to eight months of the year building inventory levels—and consuming cash—while the strongest demand came during the second and third quarters, creating a significant dislocation between actual demand and inventory positions. This approach prevailed largely because PolyOne’s incentive compensation plans focused on year-end, not year-round, operating efficiency. Consequently, the company often produced more of an item than was needed, figuring it would be able to sell it later. By the end of the year, inventory levels typically were at their lowest, but much of what remained on shelves had become aged inventory that no longer met customer needs. So, it often languished in warehouses for years—driving up the cost of both warehousing and inventory write downs, while under-serving customers’ needs.

In August 2008 we formed a global inventory management team to reduce inventory levels across businesses and regions, while maintaining the on-time delivery performance we had achieved. The effort included a two-day Kaizen (continuous improvement) event that dedicated time for employees to identify opportunities to reduce inventory throughout the supply chain and focused on reducing cash-to-cash cycle times. The team placed a heavy emphasis on the supply chains with the highest total cost of ownership and value stream mapped these areas to identify quick wins and project opportunities. As a result of the event, we identified several areas of key focus, including consignment inventory, potential use of distributors, inventory transfer practices with key suppliers, and reorder points within our ERP system. The event and the resulting projects helped to accelerate an inventory improvement effort and provided subsequent rapid improvements in inventory efficiencies and supply chain costs.

The management team also decided to modify its incentive compensation program for every business unit and functional area, placing an increased emphasis on working capital improvements, which also helped drive new ideas and encouraged global best practice sharing.

Progress was tracked with daily monitoring and reporting. By the end of 2008, inventory was down to historically low levels for the company. Internally we had numerous individuals who wondered whether maintaining those levels was sustainable; however, when we looked at stronger-performing companies, we realized we still had a long way to go. So, we stepped up our efforts.

Before January 2009 many of our inventory management systems had re-order points that had been on autopilot driven by Manufacturing Requirements Planning within SAP. As the demand plummeted with the economic downturn of 2008 and 2009, we turned off portions of our ERP system and moved to direct manual management of the material replenishment cycle. With this change, we more frequently reviewed the amount of material required to meet major fluctuations in customer demand patterns. As demand began to stabilize, we adjusted our planning horizons within the ERP system to provide for faster response times to demand variance. The project teams also reviewed all business processes surrounding make-to-stock (MTS) vs. make-to-order (MTO) and made adjustments to account for the new manufacturing footprint, improved inventory cycle times, and customer service requirements. The degree of flexibility within our manufacturing operations allowed us to move significant portions of our solutions portfolio into a MTO environment. This provided the added benefit of reducing our slow-moving finished goods inventory and diminished our inventory write-offs while maintaining high service levels.

From the second quarter of 2008 to the second quarter of 2009, inventory management actions reduced inventory levels by $175 million—freeing up much-needed cash while nearly doubling our inventory turns. (See Exhibit 1.)

The focus on inventory management is ongoing. During the company’s global quarterly employee meetings, the CFO acknowledges the business units with the lowest inventory levels. The recognition has helped foster a spirit of competition aligned with achieving this important business goal. The inventory management team, now called the Global Sales and Operations Steering Committee, also increased the frequency of its meetings from monthly to weekly. The group’s scope has widened to include demand forecasting, differentiated inventory strategies, and customer service level segmentation projects.

Process Improvements

Our focus on lean processes has resulted in a number of changes to address underperforming businesses or practices. These have predominately involved inventory management processes. The Global Sales and Operations Steering Committee also is responsible for implementing a three-year strategic inventory plan that will move our current level of performance to world-class. The committee’s role is not only figuring out how to track performance (in many cases, these are metrics we were not looking at before), but also determining how to sequence the action plans to improve PolyOne’s performance in each area. Areas that we’re tracking include inventory levels in absolute dollars, slow-moving inventory, days sales of inventory, and on-time delivery.

We’ve implemented various process improvements in these areas, including adding inventory stratification processes to drive better analysis of which products should be made-to-order vs. made-to-stock. New processes already are starting to move PolyOne closer to world-class performance. For instance, we improved our four-month average DSI from over 55 days in the first quarter of 2009 to nearly 37 by the third quarter of the same year.

Greater Customer Focus

Every process and supply chain improvement effort is aligned to the voice of the customer. One of the most fundamental components of customer satisfaction for our business is the timely delivery of products to customers. Prior to 2007, on-time delivery was abysmal (even with warehouses full of inventory most of the year), and the results of a 2006 survey of our customers emphasized that on-time delivery was important to their businesses. Yet, prior to the first quarter of 2006, the company didn’t even track it. When we began doing so, we found that we were delivering products on-time only 81 percent of the time. For our customers, that meant one out of every five orders was late.

At PolyOne, a product is considered on-time only if it is delivered in full by the date the customer asked for it to be delivered. To start fixing the problem, we first examined causes of delays (ranging from lack of capacity to lack of the right inventory) and addressed each specifically. Management also began to establish a clear mindset among employees that on-time delivery was critical. By the first quarter of 2007, on-time delivery performance had increased to 88 percent, and in 2009 it reached as high as 95 percent, which we consider best-in-class. Even as reduced inventory and realigned our manufacturing, we remained focused on delivering products on-time to our 10,000 customers who operate in more than 130 countries around the world. Despite reductions in the size of our workforce and number of facilities—and with the changing demands of our customers, who were often making small, more frequent orders with less lead time—our global on-time delivery remained very strong in 2009. (Exhibit 2 shows the on-time delivery performance.)

The actions we’ve taken go beyond improving processes. PolyOne is also laser-focused on providing innovative solutions designed to create value and meet the emerging needs of our customers. And customers have noticed the shift. One customer recently sent us a letter complimenting our sales force and noting that PolyOne sellers have moved "from selling volume to selling value and solutions."

In keeping with that idea, we are currently developing a new business process to help us incorporate the voice of the customer. The goal is to improve our ability to identify and capture the unmet needs of our customers and then accelerate our company’s capability to provide value-added solutions that satisfy customer requirements.

Key Contributors to Change

From my first meeting with Stephen Newlin, in 2007, I knew his senior management team was ready for change. The team understood which areas needed to be improved, and they were willing to invest the necessary time and resources required to transform the company. Their commitment remained strong even as the business and the broader economy began to show signs of the recession. That commitment continues to be the most important contributor to our success.

A second contributor is the internal talent of PolyOne. While the new management team injected new talent onto teams, existing employees stepped up in a major way, embracing the new efforts as well as lessons learned from Lean Six Sigma projects. (For more on the LSS efforts, see accompanying sidebar.) The combined result has been the ability to enact significant change while building employee morale and enthusiasm for improved business performance.

Finally, a third factor that has helped drive cultural change, in particular, is communication. We knew early on that employees initially would hear talk of implementing Lean Six Sigma as simply the "initiative of the year." So, our communication has stressed that this is a new way of doing business—not just the talk of the moment. Newlin recognizes the results of LSS projects during quarterly global employee meetings; we’ve used internal newsletters and our intranet to share benchmark data that helps employees see how we compare with our industry; and we’ve shared the stories of our early successes.

Lessons Learned

I came to PolyOne with a balanced background in both global business management and international supply chain management, developed over more than two decades at H.B. Fuller Company. Many of the issues that needed to be addressed at PolyOne were ones I had already faced in my career. However, even with this experience, our approach to solving problems over the past two and a half years has resulted in three key "lessons learned" for me:

1. Never underestimate the importance of communication and the visibility of success. PolyOne management realized early on that it needed to have consistent messaging around the importance of supply chain initiatives every step of the way. Having senior management sending those messages was critical to getting the focus needed to make change happen. Sharing success stories also boosted self-confidence among team members. As we started to generate stronger numbers, people were even more willing to take on projects and make suggestions that they would not have before.

2. Information sharing and leveraging best practices around the world is critical. We held global weekly meetings during which we had formally structured reviews of our progress in inventory management. We also tracked these metrics on shared files across a global network, providing real-time visibility to performance and project status. We would not have seen our progress to date if we had not done this.

3. Common rewards and incentive plans help drive cross-business sharing. Mindful that compensation structure helped create many of the problems with inventory, we determined that incentives and rewards would be needed to help drive solutions. Tying everyone’s incentive compensation to global performance rather than solely to the performance of their own business units created an environment of cross-business and cross-functional sharing that accelerated our results.

More Room for Improvement

PolyOne is in a much stronger supply chain position today than it was three years ago. Actions taken to realign manufacturing and reduce inventory helped cut working capital and free up cash flow for paying down debt as intended. And improvements in on-time delivery and other key processes strengthened relationships with customers. While much of this was low-hanging fruit, the changes we’ve implemented so far demonstrate how properly managing the supply chain and operations can help a company manage through difficult times. Whether or not the economy improves soon, PolyOne is well positioned for growth and will be able to leverage its improved cost structure into improved profitability as demand increases.

Still, there is much more to be done. Despite management’s commitment, the slow economy has meant that we’ve had to delay certain initiatives. While we completed nearly 100 process improvement projects in 2009, we expect to take on approximately 200 more in 2010. Specifically, we have identified six global programs that are currently in various stages of implementation or will be initiated by the end of 2010. And we will continuously look for new ways to improve our businesses.

One change made earlier this year will help facilitate additional improvements and enable consistency in the way we serve global customers. As of January 1, PolyOne adopted a new organizational structure that globalizes the company’s Specialty businesses along with its sourcing, information technology, human resource and finance functions. Announcing the changes to all associates, CEO Newlin noted, "We are organizing our company in a manner that provides the best of both worlds—globally organized business units with a consistent operating philosophy reaching the customer in a very local style, with local people."

Ten years after a consolidation created PolyOne, the businesses it cobbled together from acquisitions finally are centrally organized under a single global structure. This change and the other improvements we’ve made will help us better serve current customers and win new ones. Already, prospective customers are approaching us in their search for suppliers they can rely on, and they now see PolyOne as a partner who possesses the capabilities they require.

As the demand for quality and reliability in electronics, healthcare and other industries grows, we know the company is now well positioned to meet those needs. And that fits our ultimate goal: Everything we’ve done over the past three years begins and ends with better serving customer needs.

Thomas J. Kedrowski is Senior Vice President, Supply Chain and Operations for PolyOne Corp. He can be reached at [email protected].

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