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Going With The Flow and More

"We don’t often think about it but one of the major reasons that the United States has been so successful in recent global economic competitions recently has been our ability to restructure the Japanese concept of just in time inventory to modern commerce. "
It is a little known fact that American Multinationals have been able to cut down the size of the inventories that they hold from over 60 days to under 30 days. However, in order to do this, the entire world of transportation had to be changed. Inter-modal shipping of goods has become the order of the day and everything now seems to shipped by unit trains, containers and Post Panamax ships of such prodigious size that many are now bigger than three football fields and can take of 10 miles just to stop.

Our containerize ships along with the monoliths that carry our oil have already outmoded the Panama and the Suez Canals and for materials that flow, massive pipelines have become the transportation of source. Gradually we are fitting less viscous materials into these pipelines and eventually it is conceivable that solid as well as liquid material will be shipped utilizing this technique. Moreover, industry has found that be relocating the parts manufacturers that supply the production lines in close proximity to the plants that produce the goods, the savings in shipping time becomes astronomical, feeding the bottom lines of most of the giant companies.  

The drumbeat of getting the goods to the next location on time creates congestion at shipping locations, air-controllers losing their tempers and the people packing and shipping the merchandise a cased of nervous stomach. Matsushita Electric brought in psychiatrists to analyze what could be figured into the work equation to make the work-force somewhat more sanguine. The unusuallrecommendation was the creation of what were called "worker control rooms" where they would erect various dummies that were designed to take on the appearance of their foreman. In the corner next to the door to the control room was an umbrella stand filled with bamboo sticks. Workers on a break or on special dispensation could visit the room and beat the living daylights out of the foreman figure. This amazingly relived tension and increased production. Interesting enough, Matsushita's production increased annually over 30 percent a year for the next 25 consecutive years. Honda seeing these astounding results also installed a system where fried workers could get their work related problems off their chests. This is termed a "waigava" session and it can be called a the drop of a hat by any employee bothered by a workplace problem. During these sessions he is allowed to blow off whatever steam is necessary to get the subject out in the open. 

What occurs when you a able to control inventories in this way is economically staggering. The cost of attributable to warehousing, financing and obsolescence vanish and the bottom line profits expand exponentially. The firing of unproductive middle management and elimination of unnecessary benefits can often be the difference between a business success and failure. And then their is always the increasing chance of pilferage as the inventory becomes static. If you are making something that everyone wants, pilferage costs created by stagnant inventory can become astronomical. If you are selling dog food or cat liter, you could probably leave the stuff under a tarp in an empty lot and know that it would be there when you came back. Some items are more valuable then others even at the upper end of the spectrum and as Entertainer Natalie Cole said in her biography.

She started out by doing acid in college due to the fact that her next door neighbor in the dorm was an "enterprising chemistry major." She moved up to heroin in the 1970s and then to freebasing coke, whatever the case may be. She stated, "I cooked so good, I developed a reputation as a gourmet cocaine chief." In order to make certain that she could buy enough to take care of her needs, she and her husband began dealing in the stuff. "We would smoke up half the inventory before we ever got around to selling it, we were really pitiful." I guess the moral of this story, is never let your inventory get to stale or you will find yourself addicted to it.

One of the great advocates of corporate transparency, tight inventory controls, convenient production sources and just plain good management was a gentleman by the name of Hacksaw Al Duggan. He went up the later and managed bigger and bigger companies and had numerous publication relations companies touting his magic touch. His story is a great deal of interest.

Chainsaw Al

Sunbeam, which was founded in 1897 by two partners, John Stewart and Thomas Clark under the name Chicago Flexible Shaft Company and was the industry innovator in many areas while enjoying a well-earned reputation for superior products.  Originally, the company began as a manufacturer of agricultural tools however the partners soon recognized that a market also existed for superior kitchen utensils.  Soon innovations like the first automatic coffee maker, first pop-up toaster and the first Mixmaster started rolling off the "Shaft" assembly lines to the delight of upscale housewives.

Chicago Flexible changed their name to Sunbeam in 1946, a move that management felt more adequately reflected the non-agricultural business that for some time had been the company's main business.  During this period Sunbeam acquired Oster which gave thes company a full product line and made Sunbeam appear very attractive to companies that wanted the creditability of name brand products along with top-flight management. During this period, Sunbeam was favorably compared to General Electric, which then held the top spot in the industry.

Sunbeam, in reality, shone out above the crowd and it didn't take long for another Chicago based company, IC Industries, the old Illinois Central Railroad which had been on an acquisition kick to take a serious interest. In 1980, they made an unfriendly tender offer and in the middle of series negotiations between the two companies, Alleghany International headed by Robert Buckley, toped the bid and the company suddenly became a division of Alleghany.

Buckley had a thirst for high living at company expense along with an ego that required a constant flow of acquisitions. Not all of Buckley's deals were profitable and his style of living represented an enormous drain on corporate profits. However, in spite of Buckley's spotty record in the past, Sunbeam became nothing short of a cash cow for Alleghany.  Funds were up-streamed into the parent at an alarming rate and the infrastructure along with new product development seemed to die on the vine. Buckley seemed more interested in supporting his lifestyle and previous bad deals than attending to his source of cash flow.

Buckley made one bad decision after another and was relieved of his position in 1986 by his stockholders. The rubber band had snapped and new management went into divestiture frenzy and sold whatever divisions were profitable while laying off thousands. When the smoke had finally cleared, things had gone from bad to worse and in 1987, the company filed for reorganization under Chapter 11 of the bankruptcy code. Paul B. Kazarian, an ex-Goldman Sachs official with the backing of two large hedge fund shareholders took charge of the company after a heated proxy battle that went on for two years. Kazarian turned out to be made of the right stuff and quickly turned the company around. On the other hand, many considered Kazarian's management style bizarre and another palace coup was strung together by the hedge funds.

This time a former high-ranking official from General Electric, Roger Schipke was  given the mantel at Sunbeam to see what he could do to turn things around in less bizarre fashion.  Schipke had created a great name for himself in the corporate culture of GE by working long hours and bringing home a better than average bottom line. However, uultimately at GE Schipke had to take leave because he had worked himself right into the ground giving Sunbeam the opportunity to utilize his services.   But Sunbeam was not GE and it soon became readily apparent that Schipke just didn't have the background to work for a company that what trying to dig itself out of hole. In addition, Schipke was a high-grade individual that may not have had the necessary tools to be in the top job requiring trench warfare and probably a complete a reorganization. 

Enter, stage left, Al Dunlap who had made quite a name himself on Wall Street as a no-nonsense guy who could turn a company around under the most difficult of conditions.  Al never took any prisoners and seemingly had no friends.  Thus, he was the ultimate shareholders dream come true. Turning a company around was declared war and in the heart of battle, his motto was fittingly, win or perish.  Perhaps that is how he got the nickname Chainsaw Al and it certainly showed where his head was at. On the other hand, the real origin of the nickname according to Dunlap was that it was given to him by "John Aspinall, a British Naturalist who had said that he was like a chainsaw that cuts away the fat and leaves a great sculpture.  Dunlap joked that the epithet made him sound like a serial killer. He much preferred the designation given to him by his mentor, Sir James Goldsmith, who dubbed his American friend, "Rambo in Pinstripes." ([53])

Chainsaw Al was a graduate of West Point where he apparently received his early instructions on trench warfare and fought the good battle everyday of his life.  On the other hand, he graduated near the bottom of his class and was not going anywhere in the military. Al got out of the Army as soon as he had served the time that he had committed for. He had determined that there were not going to be any big wars coming up that could enhance his chance of promotion. In the meantime, at home, Al was totally miserable to his wife and child and in spite of her firm Catholic roots, she despised Al so thoroughly that she received and accepted with exuberance a divorce that only granted her $15 a month in alimony, saying it is worth anything to be out of jail.  However, Chainsaw Al was an equal opportunity son-of-a-bitch and his family received no better treatment. Moreover, in an attempt to recreate himself, he created the story that he had come from extremely poor parents and had to fight for everything he ever got. Al was literally born in with a silver spoon in his little hands but that wasn't a good story for the newspapers.

According to his own family members, Al was either delusional or mad and that none of this had ever occurred. However, one way or the other, it didn't really matter due to the fact that  Al had determined that he wanted nothing more to do with his family. No one had ever thoroughly analyzed the Chainsaw's resume or his business. As turned out, the resume was cooked and fundamentally he was not a builder, he was a destroyer. Whole communities were went on the unemployment lines, not because of Al's harsh methods of turning companies around but because he was able to quickly show a profit, which in turn created a substantive bonus for him, but soon thereafter the entire enterprise would be in shambles.

In spite of Dunlap's quick temper and inability to get along with anyone close to him, he needed to bring in his underlings to really do the dirty work  when it came to firing people. Chainsaw Al when the chips were down didn't have the courage of his own convictions and needed surrogates to carry out his dirty work On the other hand, by this time, Sunbeam was hardly a prize, its factories were old and out-of-date, its products were uncompetitive having been last designed over a decade before, and new and fierce competition had entered the marketplace such as Black & Decker.  Sunbeam's warranties were costing the company a fortune because there was little quality control within the company and the old name recognition was becoming history as non-homogeneous logos replaced the consistency of recognition that the company had once known.

To some degree Al’s epitaph has had to be revised a bit since recent information has been released and the original title, which was to be, “If you want a turnaround, Al’s your guy.” The revisionists have changed the title to, “When it comes to pillaging a company, Chainsaw has never had an equal.” What original appeared to be good management in retrospect now appears to have been an act of, working a bonus pool out for himself relative to reducing costs at any price a little similar to what Sherman did to Atlanta, burn it to the ground, gut it and line up at the pay window to collect the proffered bonus. Interesting enough, as it related to Chainsaw Al, the second he left the pay window he socked his loot away in government securities so that he could not be taken in by anyone else’s claim at restoring a company to its historic profitability.  Chainsaw Al knew better. For awhile after Al had left people believed that he had done a masterful job of managing the company and that his successors were always incapable. This was not the fact, Al left nothing to save. 

In retrospect, Chainsaw’s only real success was Scott Paper where he did his usual quadruple amputation on management and personnel. Somehow, not only did Wall Street buy his act and the stock skyrocketed when a purchase of the company was arranged buy Kimberly-Clark, whose management was reading material released by Hacksaw’s public relations people and they thought that indeed he had performed a miracle.  This temporarily bailed out were shareholders quick enough on the draw to get out. But the facts were that when he walked out on Kimberly-Clark Chainsaw Al had left them with so much excess inventory that what was supposed to be a $100 million fourth quarter profit for Scott mystically turned into a $60 million loss. By that time though, Al was gone and $100 million richer in Kimberly stock ensconced in his gated mansion in Florida.

Al cashed in and moved on to Sunbeam Corporation and was originally  looked upon as the second coming.  At first, no one really caught on to the fact that Sunbeam was all hype and no substance. While Al was sending employees to the unemployment lines with his glib comments about the fact that it was either him or Doctor Kevorkian; his dogs, Cadet III & Brit, were doing living up in style at a suite in a posh hotel near the Sunbeam plant.  Some said, maybe he should have treated his employees as dogs and then they would have been better off. Dunlap's "last will and testament" called for his bodyguard to get custody of the dogs, with $1 million for each mutt to maintain the lifestyle in which it had become accustomed. However, one might think from the way the man treated his animals that he was mister nice guy but by comparison, Dunlap did not attend the funeral of his mother or father. He had virtually no contact with his first son, Troy. Dunlap did call his son after the boy talked to a reporter about the old man and the following is part of that conversation:  ([54])

"You may get your five minutes of fame," Dunlap told his son. "But I guarantee you and your mother a lifetime of aggravation." ([55]) These and other pleasant stories about Al tell us a little about the man's environment. The Chainsaw man had so many threats against his life that he walked around wearing a bulletproof vest in addition to his omnipresent bodyguards that followed him everywhere he went.

The Business Week story of September 24, 1998, Where are the Accountants?, quick makes a most interesting point:

“To take just one of the headline screamers, how did auditor Andersen (Arthur Andersen) miss the red flags at Sunbeam Corp. last year, when inventories began piling up and accounts receivables soared? Chief Executive Albert Dunlap had never been exactly reticent about his desire to do all he could to keep his high-octane stock levitating. So shouldn’t someone have noticed when the company reported surging sales of heating blankets in the summer and barbecue grills in the late fall? Yet at a board meeting on June 9, a partner at Anderson assured Sunbeam directors that the 1997 number complied with standard accounting procedures. Four days later, the scheme unraveling, Dunlap was fired. Sunbeam later acknowledged it was booking sales before the goods were actually delivered to stores.”

Naturally, the Securities and Exchange Commission’s interest was peaked by this bizarre story and when this was announced, the shareholders ran for the hills. Al was terrific with the books, he turned operating expenses into restructuring charges and then capitalized them, a most bizarre accounting maneuver. As an encore he booked sales before the goods had been shipped making earnings soar and the stock rise. If that hadn’t been enough, in order to bring in short term earnings he guaranteed merchants discounts but only after sales had been made a retail. In other words, when he sold the goods to merchants he had dramatically higher immediate net but no accounting hit because the goods had to be sold in order for the rebate kicked in. When it kicked in, Al was unceremoniously given the boot.  Al, in typical Chainsaw fashion indicated that he was unaware of any accounting irregularities that had occurred at Sunbeam.

His creative accounting forced an earning restatement and all of 1997 dropped into the toilet from $1.41 that had been reported to a measly $.60 per share. In addition, the first quarter loss was increased by about 20% on the readjustment. The Inventory losses were still to come. With all of that, I guess you wouldn't tend to believe that Sunbeam and Al Dunlap are friendly. Well, tough times make strange bedfellows is the only way we see it. Both Al and the company, facing massive litigation from shareholders, investigations from the SEC became victims of Arthur Andersen's accounting misdeeds. Instead of being the perpetrator, they chose to make Arthur Anderson the patsy. A commonality of interest has been agreed up with mutual decision being that the accountants did it all. Deloite & Touch adding insult to injury did a review of Anderson’s work. This was to be the pot calling the kettle black as Deloite has seen their share of accounting mishaps as well.

The real problem that occurred while Al was at Sunbeam was the fact that the accountants at Anderson were awed by his reputation and thought he walked on water. They sat idly by when Al said he was going to do this or that even though they knew or should have known that this would have come back to haunt them forever.  Now, of course we now know that Al’s mission was to not only fire as many people as possible but also to cook the books in order to goose the stock so that he could sell at a higher price.  Pathetically, Anderson went along with the game without a whimper and have been punished with bankruptcy for their efforts on his behalf.

Today Al lives in Florida in a multimillion-dollar home, not to far from where he used to work at Scott. There are a lot of people out there that would still like to get a piece of Chainsaw Al. Turns out that almost everything in his resume was untrue and all the jobs he said he had were an illusion. Of course when he wakes up every morning he is forced to see his own reflection in the mirror and live with himself. However, the moral of the story is that Al was able to manipulate Sunbeam's books by a few seemingly innocent changes in the way inventory and orders were booked. Its all in the logistics as they say.

However, while the Chainsaw operator had his way of separating people from their money and their jobs, a new model for destroying businesses is probably created every minute. You could convince people that losing money was profitable if you did the right amount of public relations. We are all lemmings at heart. In any event, public relations can work for you or against you. We attempt to give an example of each. In the winter of 1999, the Guardian in London  announced their winner of the "Greatest Public Relations Disaster of the Year" award. It went to Deputy Prime Minister of England, John Prescott who was giving a speech on limiting the British population's use of their cars. It turned out that he had taken a car a total of 200-yards to get to the conference center because his wife didn't want her hair blown in the wind. On the positive side of public relations we have the story of the owner of the Cincinnati Post, Edward Scripps.

It turns out the while in Detroit, Scripps had a mistress that he consulted with regularly. After he moved to Cincinnati, the woman apparently could not find any permanent consulting jobs and was out of money. She paid a surprise visit to Scripps in Cincinnati and told him that unless he forked over substantial cash, she was going to tell the world about his indiscretions. Scripps thinking on his feet, told his city editor call the rival newspapers and bring them into his office for a story. When they arrived he introduced the Mistress by stating, "Miss Brown used to live with me as my mistress. She was paid for what she did and we parted on good terms. She has come here today threatening to revive that story and asking asking me for money to keep her quiet. You are at liberty to print the story. As far as I am concerned, the incident is closed."

While the story was printed, Scripps fast work had defused a potentially insidious attack upon him and also permanently got rid of Ms. Brown. The paper's circulation was not harmed by the expose and Scripps was thought of as a standup character especially at his club.

Public relations rules the world and keeping a modest inventory comes in a close second.

 

 

 

 

 

If you have an interest in pursuing this, please contact us at your convenience.

 

 

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