Steelcases Focus Profit And Growth

January 30, 2004
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GRAND RAPIDS — The restructuring of the North American division will usher in a new Steelcase Inc., as the world’s leading office furniture maker looks to shed a cost structure that has become out of whack during the industry’s devastating three-year downturn.

The structure, built up during 30 years of growth, worked well for Steelcase until late 2000, when the bottom fell out of the office furniture industry. The deep downturn accelerated the need for Steelcase to change its vertically oriented business model, even though the company has maintained sound financial health during the period, said Frank Merlotti Jr., president of Steelcase North America.

The restructuring, announced last week, is designed to create a leaner, more nimble company, improve gross margins and profitability, enable Steelcase to aggressively pursue growth markets, and drive quicker product innovation and design. The change in the business model will flatten the highly vertical structure that evolved during Steelcase’s growth years of the 1970s, 1980s and 1990s and left the company with a cost structure that was out of line with today’s sales volumes and future expectations, Merlotti said.

“There’s a new Steelcase emerging. We have been very concentrated on kind of moving from an old model to a new model,” Merlotti said in an interview with the Business Journal.

“If you boil this all down to two words, it’s profits and it’s growth. Even though we don’t expect the industry necessarily to grow, we’re positioning Steelcase to grow,” he said. “It’s about taking control over what we can control and making good business decisions and it’s about being aggressive in the marketplace.”

Under the restructuring, the world’s No. 1 office furniture manufacturer plans to cut 770 positions across the division; close wood plants in Fletcher, N.C., and New Paris, Ind., within six to 12 months; and reduce manufacturing capacity by 1 million square feet.

For West Michigan, the restructuring means the loss of 85 to 90 salaried positions from Steelcase’s local facilities, which the company will offset through the creation of 150 new jobs at the Gaines Township wood plant, a move that hinges on successfully negotiating an incentive package with the state.

The restructuring is “pointed directly at the health of our company and positioning our company in a healthy way for the long term,” including driving lean manufacturing principles from the shop floor to the corporate offices, Merlotti said.

“We’re going to be a heck of a lot more efficient with our resources,” he said.

To Mike Dunlap, an industry analyst and head of Dunlap & Associates in West Olive, the most notable aspect of the restructuring is a major change in how products are developed and marketed. Steelcase is creating dedicated, cross-functional product teams led by general managers who will answer directly to Merlotti, eliminating two layers of corporate bureaucracy.

The move is designed to enable Steelcase to respond faster to changing market demands, to foster quicker decision-making and a “much clearer focus on product line profitability” and to place accountability “squarely on the shoulders” of product general managers, Merlotti said.

The change should help Steelcase in the marketplace through quicker new product designs and faster modification of existing products, Dunlap said.

“It’s going to shake up how they have been doing things in recent years,” Dunlap said. “The market is demanding it and investors have been demanding it.”

Steelcase is also re-thinking its sales organization and structure to better focus on “hot markets” that are spending capital dollars, health care and higher education for instance, and identify future growth markets, Merlotti said.

Merlotti expects job cuts to occur over the next four weeks and the North American restructuring to take six months to implement. The restructuring will place a greater emphasis on outsourcing the production of components, abandoning the business practice of the past.

“One of the things we’re saying in this new model is outsourcing has its place. We’re pretty prudent about how we do it,” he said.

For decades, Merlotti said, Steelcase “did everything in-house” — things like building its own paint lines and its own equipment from proprietary components that were made into products.

No longer seeing the sales growth that’s needed to cover the three decades of rising fixed costs, Steelcase must move from a vertically integrated business model to a “variablized” model that positions the company to better operate in a global business environment that has become more cyclical and increasingly volatile, Merlotti said.

“We did it well and it was very successful, but it was all at a fixed-cost basis. We were constantly adding fixed costs, but that was OK because there was growth to cover it. Our belief today is that all ended when the bubble burst in 2000,” he said of the former business structure. “As a result, if you’re carrying a lot of fixed costs when you’re in that kind of volatile cycle, you’re going to get killed every time the thing drops, and that’s what we’ve seen happen here in this three years.”

The office furniture industry has seen sales plunge nearly 40 percent since 2000, leading to the loss of thousands of jobs and forcing manufacturers to shed excess capacity. Steelcase alone has trimmed 11,000 jobs in the last three years, about 5,200 of them in West Michigan, and now has a global workforce of about 15,000.

In the most recent quarter that ended Nov. 28, Steelcase reported sales of $614.5 million, down 3.3 percent from the same period a year earlier. On a year-to-date basis, Steelcase’s revenues of $1.78 billion were down 6.5 percent from the $1.9 billion recorded through the first nine months of the prior fiscal year.

Executives at the time told brokerage analysts that in the current fourth quarter, and following seasonal trends, Steelcase expects revenues to fall 3 percent to 5 percent sequentially from the third quarter and a loss of 6 cents to 11 cents per share, including after-tax charges of $3 million to $8 million.

Merlotti expects the North American restructuring to generate “some benefits” for Steelcase’s bottom line during the first quarter of the 2005 fiscal year that starts in March.           

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