Sexy and Arvin Industries Inc. just don't go together. The $3.1 billion auto parts manufacturer specializes in exhaust systems and ride control products. It generated profit growth of 16% last year, but investors failed to reward that performance, and the Columbus, Ind., corporation's stock price hovers disappointingly around $18. At that level, Arvin's dreams of growth by acquisition are limited unless the company can find sources of cash elsewhere. To keep customers happy and to fuel his vision for the company, CEO V. William Hunt, who wants the company's revenues to reach $5 billion by 2002, has his supply chain working like a well-oiled machine. The productivity system introduced in 1993 first saved money in Arvin factories and then was extended to the plants of the company's largest suppliers. Words like total quality and value chain didn't always flow from the CEO's lips as easily as they do today. In college Hunt studied labor law and joined one of Indianapolis' oldest firms. "I thought I'd practice law my whole life," he recalls. That changed in 1976 when Arvin, one of the firm's largest clients, recruited him as labor counsel. Hunt worked his way up the executive ladder to general counsel in 1982. The 1980s proved to be a punishing decade for the corporation. It grappled with two strikes involving pay reductions of as much as 30%. The one in Arvin's hometown proved especially bitter because it lasted the better part of a year. In negotiations with the union Hunt began learning words like productivity, quality, and value. When Arvin finally settled with the strikers, Hunt realized the negotiations had taught him a good deal about running a manufacturing plant. In 1993 he put that knowledge to use when the company promoted him to president of Arvin Exhaust, its largest division. There Hunt discovered a group of people tinkering with the supply chain. They liked to experiment with ways to improve quality, and turned to a series of lean management principles borrowed from the Toyota production system. With Hunt at the helm, the group tried different forms of training to show new hires, and veteran employees new to quality principles, how to use productivity tools including leadtime reduction and employee involvement. When they found lessons that worked they implemented a certification program. That experimentation and training would form the basis of the Arvin Total Quality Production System (ATQPS) -- a crucial link in the manufacturer's supply-chain-management system. The creation of ATQPS came just in time. Arvin's customers -- among them Ford Motor Co. and General Motors Corp. -- were making seemingly impossible demands, such as annual price decreases of 5%. Arvin rolled out ATQPS in its 50 factories, and required new employees to take concentrated 40-hour doses of training. By 1997 it had reduced labor costs by 19% and almost cut in half the cost of quality. At the same time, inventory doubled. A corporate-wide restructuring involving selling off assets outside the auto sector also lowered costs. These successes helped Hunt to land the post of president and COO. As such, he was in a position to push ATQPS into hidden corners, such as administration, product design, and the executive suite. "I may be the worst ATQPS performer," he quips. Hunt also began introducing the system into joint ventures, which Arvin establishes to enter global markets, and into acquisitions. By 1998 Hunt, now CEO, started devising ways to take ATQPS to Arvin's suppliers. The manufacturer buys $1.5 billion worth of materials annually, and its employees-turned-quality-vigilantes realized that damaged goods from suppliers drained resources. They helped develop Value Chain Management (VCM), based on the original lean productivity principles that had helped them. Arvin presented the ambitious value-chain management program to suppliers and predicted it would enable them to cut costs by 20% over four years. Some companies balked at Arvin's demand for extensive competitive data and the time required to make it work. Others saw benefits. "We're exploiting the word partnership. The better we are for them, the more business we'll get," declares Vito Catanese, senior vice president of distribution and service at Thyssen Steel Group, a unit of Thyssen Krupp AG, and a major source of steel for Arvin. If all of its suppliers adopt VCM, Arvin will save $300 million a year in procurement costs, but so far only one-fifth have signed on. Those adopting VCM already boast savings of 5% each, and Hunt is optimistic others will see the benefits and participate, or cease working with Arvin. He insists other industries with demanding, cost-obsessed customers can learn from Arvin's experience at becoming lean and mean. IndustryWeek Senior Editor Weld Royal sat down with the Arvin chairman and CEO to discuss his value-chain strategies, how they affect labor relations, how they have changed the culture of Arvin's suppliers, and why they must succeed for Hunt to remain in charge of an independent company. IW: When negotiating the bitter 1980s strikes, what lessons did you learn that apply today? Hunt: Some aspects of labor negotiations never change, such as the drama before a settlement. What has changed in our company is a result of the Arvin Total Quality Production System. For the first time we clearly communicate to our employees their great value. IW: What used to be communicated? Hunt: There had been a tendency to devalue labor to keep costs down. The whole premise of improving production through ATQPS is a recognition that employees want to be fulfilled, but also want to benefit when the company prospers. So the biggest change in contract negotiations is that they're not adversarial anymore. They're based on involvement and working toward a common goal. IW: Who best promotes Arvin's quality system? Hunt: People leading a collective bargaining unit are often the kind we're looking for to lead change in factories. One big question when we introduced ATQPS was whether it could be implemented in a union environment. The answer has been a resounding yes. The amazing thing is that the largest plant that struck in the 1980s is today one of our best plants. No one will forget the strike, but that facility has become one of our ATQPS showplaces. IW: How easily have Arvin's acquisitions adapted to ATQPS? Hunt: You have to be patient. Most people who make claims about realizing synergies have no idea how they will achieve them, and most don't get [claimed synergies]. You have to deal quickly with the low-hanging fruit, and then build a strong ladder. An Arvin veteran should hold the ladder for the employee from the acquired company rather than both of them shaking the tree and disrupting things. In this way, we believe the ATQPS makes our acquisitions stronger, and will bear fruit over time. IW: Why bring the system to suppliers? Hunt: We weren't a sophisticated purchaser even though we were a big purchaser. We didn't maximize our leverage, we didn't demand quality, and then we'd end up as a filter for other peoples' poor work. When we realized something like 55% of our costs came from the supply base, we knew that we could not meet the cost-reduction commitments we had made to our customers without changes from the suppliers. IW: So what did you do? Hunt: The same waste we recognized in our processes occurred in the companies we bought from. We had to expect the same type of productivity improvements from them. We borrowed the best from Ford's and DaimlerChrysler's programs to cut supply-chain costs. We added that to what we knew and called it value-chain management. It involves developing a cross-functional team between Arvin people and employees at a supplier to identify and eliminate waste. IW: Does this rationalization involve eliminating purchases from smaller companies? Hunt: We can only manage so many relationships. We are consolidating, but not necessarily to the largest companies. We have many small suppliers who have proven to be very committed to Arvin and very good at producing cost reductions. IW: Have any suppliers fired Arvin? Hunt: We have had some, particularly in our shock absorber business. We represented probably one-tenth of 1% of their sales. They said, "We are not going to come to your value-chain meetings. Take us or leave us." Typically we left them. IW: Who else resists value-chain management? Hunt: We've seen a globalization of our sources. With steel, for example, we're buying on a global basis and asking sellers to quote on our total business. That requires them to form alliances if going into a new market, or to drop out of the bidding, or to say "we can't cover North America but here's our price for Europe." We then can decide if the benefits of one global source outweigh the benefits of buying from several regions. Global sourcing can be hard to implement because when you consolidate purchasing, you get resistance from local area purchasing managers. They know in many cases they can get a lower price than we can get on a global contract, but the total benefit to Arvin is greater from the global contract. IW: How do you spark change in an acquisition satisfied with its high-priced suppliers? Hunt: In 1998 we acquired 49% of Zeuna Starker GmbH & Co. KG, a German manufacturer of automotive exhaust systems. When we were negotiating there was a lot of discussion around value-chain management. We always tried to present its benefits, and not say, "we have a way of doing things and we must do it our way." Discussions have to be fact driven. We take the sentimental attachments out of the equation, and when people see prices and quality ratings, it's pretty hard for them to say, "but our supplier, even though it charges higher prices and offers lower quality, is run by really nice people." IW: What about taking another big value-chain step, and contract out all manufacturing? Hunt: We can be better buyers of products if we also make products. This doesn't mean we need to make 100% of them. For example, with stamping and heavy press work we do some of it ourselves. We know the process, and the materials, but we also have outsiders doing it, too. That's probably the best situation, but you really have to know your value chain: Are suppliers available, are they capable of meeting cost and technical targets? IW: How is managing your value chain a work in progress? Hunt: Pricing pressures in automotive parts have been considerable. They have caused Arvin's sense of urgency and commitment to the supply-chain process. There are other sectors where prices have dropped faster, but certainly this is a mature industry, and when you consider the amount of material in our product, getting the cost out of it is significant. It will continue to be our biggest challenge.