Lean machines

Back in the hazy days of summer, Works Management asked US-based lean manufacturing researcher Dr Richard Schonberger to identify Britain's leanest manufacturers (see WM June 09). Among just 10 companies demonstrating improving trends spanning more than 20 years was, perhaps surprisingly, the tobacco processing machinery specialist Molins. While Dick Hunter, CEO at the £100 million turnover plc is pleased enough to be among Schonberger's elite, others might regard the company's high top quartile position with some consternation. As one WM reader wrote: "If Molins has been such a star, can you please explain the share price?" Hunter doesn't hide from the fact that recent decades have been tough for the cigarette and cigar manufacturing business that Jose Molins set up in Cuba 135 years ago and will celebrate the centenary of its transition to Britain as the Molins Machine Company in London's 2012 Olympic year. "The 70s, 80s and 90s were a fairly difficult time," he says. "There were a series of hostile takeover attempts which disrupted senior management activity. Very strong competitors established themselves in Germany and Italy in particular. Then, in the 90s, the demand for tobacco processing equipment in China collapsed. Molins was very dependent on that market and suffered accordingly." Underpinning Molins' strategic approach to the operational improvements that would halt its decline was a clear intent to move away from areas of the business where it was unable to achieve the required outcomes and to move into others where it could develop attractive business streams. This it did through acquisition, product development and focusing on the aftermarket. But that is to get ahead of the Molins story. From the time of its 1,000 cigarettes-a-minute machine in the 1920s, the company went through a long period of innovation, growing well and inventing along the way, in 1954, the hinge-lid cigarette pack that became the industry standard. The business has three operating divisions: tobacco machinery with sales of around £35 million a year, a slightly smaller £30 million packaging machinery business and the £21 million scientific services division. In summary, Hunter describes the business as "a mini conglomerate with a long history in capital equipment; small but operating globally; and continuing to be focused on the tobacco sector". When you're trying to do lean, the manufacture of high-value capital goods is a relatively challenging arena to be involved in. Generally, Molins deals with very low volumes, often producing one-off machines for specific contracts from which there is no benefit in terms of supply chain volumes or in planning. An historical propensity to extend the life of a wide range of products long after it was economically sensible to do so, coupled with high levels of customisation, "works against that objective". Absolute levels of demand were not only low, but erratic and very difficult to predict. "If we get an order in a particular year for six machines of any one type, it's almost certain that will be split into a volume of four at the start of the year, then two one-offs later in the year – again, working against any economies of scale and hindering planning activities through the supply chain," explains Hunter. And just to pile on the agony, Molins' machinery, especially its tobacco machinery, is technically complicated making its constituent components difficult to source, adding to the challenges of trying to flex the supply chain in terms of reacting to market changes. The solution? "To try to move into areas where the business streams and demand are more predictable and therefore more manageable and where we have a better chance of becoming a leaner organisation." From a strategic standpoint, acquisitions have played a key role in this process; a process that Hunter says is not finished. Cerulean, acquired in 2000, was quite a different style of business from Molins' low-volume, high-value norm. Occupying a clear market-leading position in its niche, it makes laboratory instrumentation used by nearly all the tobacco industry players worldwide. The products have high levels of relevance to their customers that allow Cerulean to work alongside them to predict demand and operate in a leaner fashion. The business already had a well run, lean logistics operation and was making good use of cellular manufacturing. A lot of time had been spent developing its supply base to be able to flex with demands. Also in 2000, Molins purchased from Škoda its small tobacco machinery manufacturing division. Barely still trading at the time, this 180-person machine shop in the Czech Republic provided secure access to a lower cost manufacturing capability for the type of components used in building cigarette-making machines. It secured supply in a way that Hunter believes was not possible by resorting to an independent outsourcing model, through a sector-savvy subsidiary that was able and happy to supply low volumes. "The purchase has enabled us to remove all manufacturing from the UK and relocate it to the Czech Republic," he says. "Not only has that given us very obvious benefits in terms of labour costs, but it's also dealt with the long term strategic issue of an ageing workforce in the UK and one that we were having fantastic difficulty in replenishing as people retired." The subsequent disposal last year of the hitherto underutilised 50-acre UK manufacturing site also had its upside, helping to transform the shape of Molins plc's balance sheet. "We've taken a very strategic view of how we've used the assets of the company," Hunter says, "The workforce in the Czech Republic is very, very capable. It now produces all the parts for the tobacco machinery division and it assembles all the machinery that we sell. The next stage is to start using it for the packaging machinery division. What started out as being quite a blunt sort of cost-out outsourcing activity, turned out as quite a strategic change within the company." In 2002, Molins acquired a US-based laboratory in Richmond, Virginia and, a little later, a laboratory in Kingston-upon-Thames in the UK. Both now called Arista Laboratories, they are not manufacturing organisations. They test smoke. "The reason we purchased these was because they're in the tobacco sector that we know something about," Hunter says. And a high level of regulation in the tobacco industry means demand from both manufacturers and regulators. The reorientation of Molins meant not only acquiring businesses but disposing of "those we couldn't get to perform in the way we required them to perform". Molmac, based in Milton Keynes, specialised in rebuilding for customers their old Molins tobacco machinery, of which there was a huge variety in the marketplace. Molmac would attempt to rebuild machines to specified levels of output and performance and send the refurbished machines back to the customer. "It meant that every piece of equipment we touched was a one-off," Hunter says, and while the business could be profitable when things were working well, it was difficult to manage. However much work was estimated as being required, closer examination often revealed more. "Trying to breathe life into old Molins equipment was a very unstable business stream," he says, "and we came to the conclusion that we could not see that business within the group as we went forward." And there was a company called Sasib; an Italian machinery manufacturer acquired in 2003 and disposed of three years later. The idea had been to extend Molins' range of equipment for which it saw a future demand and, in particular, to develop aftermarket activity. As with many acquisitions, it proved to be very difficult in terms of integration. The downturn of one of its key markets in the US and the difficulty encountered, as a foreign owner operating in Italy, in trying to adjust the business effectively in a difficult operating environment led to the firm's disposal to a local Italian entrepreneur in 2006. "It's through making these decisions that we've tried to become a leaner organisation," explains Hunter. When it comes to products, he is refreshingly frank. "Molins was very successful in the 70s and 80s but after that didn't really keep up in terms of product development." There was little to offer customers other than old machines, so as the reorganisation progressed through the mid-noughties, some robust decisions needed to be taken, killing off products and stripping the range back to something that was much smaller but in greater demand. That meant getting the commercial people to talk to the engineering people to get a clear view of a product road map. In making the decision to cease the production of certain machines, Molins had to be quite brutal if the business was going to survive. But on the back of all the reorganisation, it also had to do something about investing in a relevant new product for the future. Having maintained close links to the market place through its worldwide sales and service organisations, Molins developed a machine called the Octave. It produces cigarettes at a rate of 8,000 a minute and is deliberately targeted at medium-sized manufacturers worldwide, particularly those operating in challenging production environments such as the Far East, South America and Africa. A fresh product offering for which there was a clear market demand, it has been well received. "We made sure the company was behind getting it to market as quickly as possible and it's proven to be very successful," Hunter says. In the packaging machinery business – where customers also tend to demand lots of customisation – Molins is promoting a standard range of packaging equipment based around a stainless steel machine it produced for the food industry and is working with customers to develop standard machine modules to bring the benefit of volume to the supply chain. A further strategy has been to tease out specific niches in the packaging arena to capture the largest market share – niches like the packaging of the 'stick packs' of coffee or sugar you see in hotels, the packing of facial tissue or the handling of pharmaceutical powders. It's a policy that brings with it more predictable demand and higher unit volumes. The two scientific services acquisitions – Cerulean which makes machines that do the smoking and Arista Laboratories which analyses the smoke – have quite strong or dominant positions within their market niche. The plan is to maintain those. For Cerulean, that means continuing to work with customers to develop new products. Meanwhile, Arista is taking steps to make sure it benefits from future changes in regulations. And as primarily a manufacturer of complex high-value machinery, Molins is determined to ensure that each of its businesses really thinks about its much neglected aftermarket as "not just something you have to do but something that should be exploited as a proper revenue stream". Hunter concludes: "What underpins all this is the supply chain and operations performance – the real nuts and bolts of how we operate our factories and how efficient they are, and how we locate and manage cost-effective suppliers." The Molins case study was presented at Works Management's annual Lean Conference in October, which was sponsored by DAK Consulting and Productivity Europe