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Focus is on total cost of ownership
[March 10, 2006]

Focus is on total cost of ownership

(Purchasing Via Thomson Dialog NewsEdge)A bit more than a year ago, the management team that owns and operates Myers Container decided to stop buying materials and supplies solely on price and start looking at the total cost of ownership. Management also launched an assault on administrative overhead costs, began to automate process technology, started to streamline the supply chain, initiated the development of waste-free operations and started applying Six Sigma and lean manufacturing principles throughout the corporation.

Results so far? Overall savings of about 50%and they are only a third of the way into their three-year cost-reduction initiative.

"I always thought we were lean. It took a consultant to teach us there was fat throughout the corporation that needed to be eliminated," says John Cutt, president of the Emeryville, Calif.-based independent drum company. "We know we've got a long way to go, but we're on the way to a leaner and more efficient Myers Container."

It wasn't that the company wasn't considered competitive in its manufacturing niche, or that it had a bloated, inefficient management hierarchy. "But steel prices went crazy, and so did our costs," says Cutt.

What had happened was that a year-long transactional price spike had peakedand boosted monthly costs by 120% for the company's biggest commodity purchase, cold-rolled steel sheet. In studying ways to deflect the price spike, Cutt and his buyers and equipment operators began investigating alternate supply sources, new inventory control methods and ways to expand turnover of raw materials. "Today, thanks in part to a vendor-managed inventory system, we only have two weeks supply of steel," he says. "We used to keep 60-days inventoryactually that sometimes could go out as much as 100 days if there were mill delays in delivery."

The trigger: Cold-rolled sheet steel. But, there were other costs Cutt and his team found they needed to reduce. "We knew we had to do somethingactually a lot of thingsto get our arms around costs, but it took some effort to find out what the problems were and how we could solve them," he recalls.

One problem the team couldn't control, was that West Coast companies such as Myers pay regional price penalties for energy, transportation and logistics because of the extra shipping charges their suppliers incur. That reality made it all the more important for Cutt to manage the costs he could control. So, his first step was to analyze all of the company's spend with MAS 200 software from Sage Software so he could find areas for possible consolidation. Then, he brought in the consultants.

A team of experts from Ogden, Utah-based Technical Change Associates (TCA) studied Myers' business processes and then adapted its "Extreme Lean" system to do many of the company's supply chain operations.

Combining elements of Six Sigma and lean manufacturing, TCA's Extreme Lean has several components:

Integrating the suppliers with company purchasing and materials management personnel to cut the size of inventory.

Consolidating the number of suppliers.

Expanding raw-materials turnover from the present six times a year to 12 times a year.

Improving production and materials forecasts.

Boosting turns of finished steel drums to 100 times annually.

Consolidating SKUs (stock keeping units), the unique numeric identifiers used to refer to a specific material in inventory or finished product in inventory or in a printed or online catalog.

Developing cost-per-product metrics to help control costs and boost cash inflow.

And ditching those products that can't be adjusted to be made profitably.

"The development of Extreme Lean is a three-year process," says Cutt, "but once you start, you better plan to do it forever." Superb quality, on-time delivery, and doting on the customer had simply become requirements to participate in the marketplace. Continuous improvement had to become part of the purchasing and manufacturing lexicon.

At Myers Container, the lean manufacturing system affects five separate sectors: supply chain management, sales and marketing, mergers and acquisitions, information systems and finance. Because the company has a no-frills management team, each sector has an executive sponsor. Cutt now also shepherds the supply chain organization.

"We did this so our employees would see that management was fully committed to the design and execution of revamped business processes such as 'the new purchasing and materials management system' that aims to eliminate waste and maximize the productivity of every employee in the organization," Cutt says. So, every one of the 350 employees at Myers Container participates in an incentive program based on safety, quality, customer satisfaction and profitability.

Three familiesthe Cutts, the Stavigs and the Holmeshave been involved in corporate ownership of Myers Containers from the beginning some 89 years ago. The company extends back to George Myers who started reconditioning used barrels in 1917. The company evolved from Myers Barrels into Myers Drum and was eventually sold by Gib Myers to Kaiser Steel in 1968. The company was re-acquired from Kaiser Steel in 1984 by the current management team of Cutt, the chief executive; Kyle R. Stavig, vice president of sales & marketing (who also is the great-grandson of the founder) and Michael Holmes, vice president of finance.

Today, Myers Container has estimated annual sales of $50 million for such products as new steel drums from 8 gallons to 85 gallons in capacity, reconditioned steel drums and plastic drums from 15 gallons to 55 gallons in capacity, and reconditions IBCs (intermediate bulk containers) in 275-gallon and 330-gallon capacities. The firm has steel drum reconditioning plants in Hayward and Richmond, Calif.; Dalton, Ga., and St. Helens, Ore. It operates new steel drum production plants in City of Industry, Calif., and Killingsworth, Ore., and a steel preparation plant in San Pablo, Calif. It also has IBC reconditioning plants in Dalton, Ga., and Portland, Ore, as well.

In separate interviews, Cutt and Stavig point out that the use of vendor-managed inventory systems with a half dozen major suppliers has been a pleasant surprise. The suppliers have been at the plants for some timeand Myers sees the purchasing, material handling and manufacturing personnel cooperating with suppliers and developing tighter business relationships.

Stavig points out that cost-cutting partnership teams often include Myers Container personnel from various divisionsfillers, drivers, warehouse personnel, regulatory staff, packaging design-to work with the customers and the suppliers. One success has been the elimination of a "whole bunch of inventoried parts," Cutt says, "parts and products we don't use or need but are occupying space in the warehouses."

Myers Container at a glanceBusiness:
Steel and plastic containers production

$50 million

Key challenges:
Eliminate waste and reduce cost of materials and manufacturing

Key initiative:
Implement the Extreme Lean system

"I always thought we were lean. It took a consultant to teach us there was fat throughout the corporation that needed to be eliminated,"John Cutt, president of Myers Container

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