Manufacturers Are Redefining Themselves

For decades, Thogus Products supplied custom injection molds for the automotive industry. But to its president, Matthew Hlavin, it felt more like running a savings and loan -- except he wasn't setting the terms. The customers were.

At the time, the automotive industry represented 56% of Thogus Products' business base. But with the auto giants having a hand in how the company aligned its production system, determined the price of its product, set up shipping and scheduled payments, Hlavin had had enough.

He fired his auto customers and laid out a diversification plan for the company, moving into industries ranging from medical to pharmaceutical to food and beverage, aerospace and plumbing. As a result, Thogus Products grew to just over $14 million in business in 2010, an increase of 76% over 2009, and Hlavin is anticipating growth of another 60% this year.

For Thogus Products, that meant Hlavin had to come to terms with the fact that the company, which his grandfather had built more than 60 years ago, was operating under a corroding business model.

"We had no debt, but we were still in trouble," says Hlavin. "We were still thinking linearly and following the traditional manufacturing path. We had to change our model if we wanted to shape the landscape of our business."

That meant shifting from being a mass producer of plastic parts to one that emphasized engineering and product development. Just as important, Hlavin wanted to stop fighting for smaller and smaller slices of densely competitive industries and identify "blue ocean space," a reference to the best-selling 2005 book Blue Ocean Strategy, by W. Chan Kim and Rene Mauborgne. Blue oceans are a metaphor to describe the wider, deeper potential of market space that is not yet explored.

Michael Collins, a consultant for small and midsize manufacturers, says companies have for years sought to improve their bottom line by refining their processes through best practices and lean strategies. But in the process of looking inward, he says, many have failed to explore new opportunities beyond their current customer bases.

"You can't cost-reduce yourself to growth," says Collins. "I look at some of these companies that have been successful and see what they're doing differently from those that are just floating along. You know what I see? They're willing to go out on a limb and develop unique strategies. That's what separates them."

Value Proposition

Not so long ago, a walk through Hoppe Technologies' sprawling shop floor would result in a mucky combination of shards of machined metal and greasy slurry on the bottom of your shoes. In the span of a decade, the Chicopee, Mass., midsize manufacturer has replaced a lineup of a dozen milling and turning centers with fully enclosed, automated systems. The floor, to be sure, is immaculate.

Its president, Eric Hagopian, likes to describe that shift as one of technology and entrepreneurial outlook. But another element, he says, is generational.

"My father used to say, With enough of our time and their money, anything is possible,'" he says. "In a lot of ways, that was the value proposition of a job shop mentality back then. It still stands true today, but with a different meaning."

While Hoppe Technologies will offer quotes on a variety of work, Hagopian and his brother, Douglas, are highly selective about choosing to manufacture designs that fit their chosen niche. Instead of competing for the lowest price, the company's engineers will work with customers to help design subcomponents for manufacturability, marrying cost with quality.

A large proportion of their work is centered on defense contracting, specifically in opto-mechanical night vision systems. Hoppe Technologies will design and build a lightly assembled group of parts into a kit or complete the assembly themselves.

"We had to rethink what our value is to the food chain," says Hagopian. "I could see what was happening to medium-sized companies. They were getting bigger, getting smaller or just plain disappearing.

"What we realized we had to offer was leveling out the customers' bill of materials," says Hagopian. "The customer doesn't need to have more than one supplier for the whole subassembly. There are procurement costs and costs of quality. We manage all of it and we're able to do it more effectively."

"We invested heavily in automated machinery and it's provided us hundreds of hours a month of unattended machining time," says Hagopian. "We're able to do more work with less man-hours than a lot of our competitors, and that keeps us price competitive, especially since we have lower overhead than a lot of larger operations we're competing against."

Recognizing Risk

Changing what products a company sells, how it markets itself and, indeed, how it operates is a daunting task. This goes for any operation, regardless of its size, points out Mary Vermeer Adringa, CEO of Vermeer Corp., a midsize manufacturer of agricultural, construction, environmental and industrial equipment.

"Really what you're talking about is the ability to ask really, really hard questions and be able to answer them as honestly as possible," she says.

Adringa's perspective stretches beyond her Pella, Iowa-based family-run business to her seat as a member of President Obama's Export Council and as vice chair of the National Association of Manufacturers.

"Good executives can recognize the need to ask the questions in the first place," says Adringa. "And the hardest ones, I've found, are being able to identify what are the real threats to your business and what are the real opportunities."

As an example, she cites the challenges that came with Vermeer's growth during the late 1990s and the speed bumps it faced in trying to establish a presence abroad. The processes and discipline that Vermeer employed domestically were virtually impossible to duplicate when it came to opening manufacturing facilities in Asia, Europe and South America.

"We had to give more autonomy to some of our groups to allow them to make better and quicker decisions, but do it within the context of the philosophies of our company," says Adringa. "There's a tension I think a lot of companies deal with, which is between being agile and flexible in the value that they offer, while keeping the processes in place. There's kind of a tug-of-war there."

Finding That Niche

Before Hlavin took over the business side of Thogus Products, he cut his teeth in the family company by cold-calling manufacturing clients on the road, a process he soon learned was wildly inefficient. But through that experience, which he refers to as "dialing and smiling," Hlavin became aware of an inherent disconnect on the supplier side of the business between the chemical companies and OEMs.

"The chemical companies didn't know how to sell or convert their materials into parts manufacturers could actually use," he said. "What I saw was a need for someone that could actually make the product."

Hlavin believed Thogus Products could be presented as a partner to the chemical companies, to help develop the materials and pitch products, with an eye specifically on the medical industry.

One company Thogus worked with was Cleveland-based polymer materials developer PolyOne Corp., which had a compound called Gravi-Tech. One manufacturing application in which Hlavin saw Gravi-Tech could be used was as a substitute for lead in medical devices and equipment thanks to its effective but benign radiation-shielding properties.

In recent years, lead products have come under heavier scrutiny. Hlavin anticipates federal officials will soon ban the use of lead in medical devices and seek to replace it with tungsten-filled polymers such as Gravi-Tech in radiology equipment.

Offering specialized products and, more importantly, specialized services is what separates those that thrive from those that merely survive. Collins, in his 2006 book Saving American Manufacturing, outlined several such elements, including emphasizing customized, low-volume products that can't be easily duplicated.

"We've beat internal efficiencies to death, so we've got to try to do something else," says Collins. "There are still a lot of opportunities in our own market. But you have to be on top of it and you have to know how to find them. You have to know how to develop products and services and you have to do it quicker than the Asians can copy them."

Hlavin sees a strong generational edge to the equation. When he talks about manufacturing, he mentions Mark Zuckerberg, Steve Jobs and Google nearly as often as he might talk about processes and lean.

"I didn't want to be defined as a processor," says Hlavin. "It's a function of what we do, but it doesn't define who we are. The way I look at it out there right now is, if you're not diversifying your portfolio and going after new markets and new opportunities and new technologies, all you're doing is trading dollars amongst suppliers. You're already dying."