Lack of Basic Stability affects Stock Price

Sturm Ruger stock price dropped dramatically after stellar performance in the past year, as reported by Will Swarts of Smartmoney:

“In April (2006), the company outlined an eight-point turnaround plan that started with a major inventory reduction in the second half of 2006. Ruger cut inventory by $28.3 million in the second half of 2006 and $26.6 million in the first half of 2007.

Trying to fix all the problems of a troubled company can easily lead to misfires, and the strength of Ruger's brand and robust performance of its stock made it harder to spot its looming earnings miss.

Most of Ruger's robust first-half performance was driven by "last in, first out" accounting benefits, which were boosted by the company's intensive inventory reductions.

..once inventory was cut, Ruger was able to look at its operations, and what it found was troubling:

The sharp reversal was caused by management too quickly moving to introduce lean manufacturing. Once the implementation was underway, management realized it had inadequate machinery, its machine changeover times were too long and it had vendor supply issues. As a result, production problems returned and Sturm Ruger once again faced difficulty getting product out the door"

Sturm Ruger management now has a dilemma on their hands, go back to the old way of doing things, i.e. use buffer inventory to protect the instability in the basic process, or dig in and start solving problems.

Unfortunately, the majority of companies that “go Lean” in America start their Lean journey by drastically reducing inventory, forgetting about the basics until it is too late. The simple, plain truth is that we don’t question why we have inventory in the first place. The answer lies in the fact that our process is not stable at the individual work level. Take a look at this problem sheet used in Job Instruction and ask yourself if these problems are not related to “inadequate machines, long changeovers and supply issues.” These examples come from a 65 year old manual. Not much has changed in 65 years. If this isn’t evidence that “each and every person” in the organization can affect the stock price, I don’t know what is.

Links:

http://www.smartmoney.com/cfscripts/Director.cfm

http://www.ruger.com/corporate/PDF/2007-Q3ShareholderLetter.pdf

URL for Smartmoney article:

http://www.smartmoney.com/onedaywonder/index.cfm?story=20071025