The quest for manufacturing excellence has followed a rather tortured path for the folks at Smith & Wesson. Back in 2006 they were explaining to Wall Street that their earnings were down due to the massive expenses related to their Lean Six Sigma strategy. They apparently thought it paid off, however. By the end of the year they were buying a gun outfit in Rochester, NH, confidently advising Wall Street, “Smith & Wesson's ability to provide capital for growth and expertise in lean manufacturing processes will provide critical support for our new product pipeline and our need for increased capacity based on strong customer demand.” Somewhere along the way the wheels came off, it seems. By 2010 Smith & Wesson closed the Rochester business, gave some 350 folks to heave-ho in order to “streamline our firearms manufacturing processes and improve our margins.”
Seems funny, though, that in spite of what some would see as a failure to deploy that “expertise in lean manufacturing processes” which was supposed to support the “need for increased capacity based on strong customer demand,” Smith & Wesson saw things differently. Just a few months before they bagged the Rochester operation that their lean wizardry couldn’t take to new heights, a Smith & Wesson VP was sharing the stage explaining the secrets to their success with likes of Mike Hoseus, Gary Convis, Jim Womack and other lean legends at a conference in California.
With inventory slugging along in low single digit turns the next big idea was a new ERP system. Now I don’t know whose idea the SAP solution was, but in all my years in manufacturing I have never heard a shop floor production person say ‘what we really need is a new ERP system’. That impetus always comes from people not adding value for customers – accountants, schedulers and the like – who want to create waste more efficiently. Regardless of the source, Smith & Wesson took the plunge. It seems German software was going to do what their ‘Lean Six Sigma’ strategy couldn’t – namely to provide for “the scalability and the visibility required for future growth.” (And here I thought their “expertise in lean manufacturing processes” was the necessary ingredient to manage growth)
Oh well … so off they went with SAP and, in what might be the understatement of the year, their CEO said, “we incurred some unforeseen one time issues”.
The SAP project was expensive – a tad more expensive than they thought. Keep in mind that the gun makers sold $587 million worth of stuff last year, so when their CFO tells investors “Last time, we had -- I think, we had dialed in most of our expected SAP, and there maybe $1 million or $2 million more. I think the total SAP was around $15 million, approximately,” that’s a pretty big deal. I mean, $15 million for software is a big deal for anyone but these guys have to sell a lot of guns to come up with $15 million.
But that’s not the good part …
Seems they were brought to their knees – shut down – for eight days due to the SAP project getting all hosed up. In the eloquent words of the CFO, “Yes, I mean -- yes, because -- not only that, we lost the 8 days that we didn't really like forecast.” Because they "didn’t really, like, forecast" losing those days, “The fact that you missed 8 days is all that fixed overhead that wasn't absorbed.”
Not to mention …
Analyst: “Is it fair to say that if it weren't for the loss production days in Q2, your revenue guidance would have been $15 million to $20 million higher?”
Silver tongued CFO: “You can pretty much -- if you look at the revenue for each quarter and divide by the production days, that's up about where you'd get to.”
They asked the CEO about the debacle. His response: “And you may ask the question, "Well, why didn't you anticipate any lost days in the first place?" Well, we timed it to go live during our 2-week shutdown, so that we insulated ourselves from any -- anything that could arise from go live.” He then said they ought to go back to asking the CFO about how the two weeks turned out to be not nearly enough insulation.
So …. $15 million for the SAP system, plus $15-20 million in lost sales revenue, plus whatever the fixed overhead was that kept cranking while the factory was shut down due to the SAP fiasco. Not to mention this unhappy Smith & Wesson customer and who knows how many more like her complaining about having a lousy gun and finding out that the company was shut down for two weeks every year, rendering customers in need of help out of luck. She says this is her last Smith & Wesson purchase … and that is before the two weeks got another week and a half tacked on due to the SAP comedy.
Now I have always been a solid supporter of Second Amendment rights, but this has got me thinking. Gun control might be the only way to keep these guys from launching any more strategic initiatives and doing even further damage.