Out Of The Red

Dec. 21, 2004
Dan Turecek is using a unique blend of Western management technique and Central European savvy to propel a formerly state-owned Czech company from socialism to success.

When the Czech Republic emerged from the shadow of the Iron Curtain in the early 1990s, Western investors rushed into this heavily industrialized former member of the Eastern Bloc to snap up newly privatized companies at bargain prices. Many soon discovered an unsettling truth, however. Their Czech employees -- although often highly skilled and educated -- were seldom responsive to the management styles imposed on them by the representatives of Western free enterprise. Workforces generally were experienced only in a socialist command economy, where the state was the employer. The ultimate customer for a company's products -- not to mention the customer's specific requirements or complaints -- might never be known. Jobs were guaranteed for life (unemployment was actually illegal), bloated payrolls and inventories were considered the norm, and such concepts as just-in-time or lean manufacturing bordered on the inconceivable. In addition, individual initiative was virtually nonexistent, and the expression of potentially beneficial new ideas was frowned upon as a dangerous deviation from the way things had always been done. With employees more attuned to dogma than dollars, some Western firms soon found that their "bargains" were in fact liabilities. The Czech Republic is now littered with bankrupt and unprofitable operations, many of which have changed hands repeatedly during the decade. Among the modest number of success stories in the country, however, is a textbook example of not only how an acquiring company can best support and integrate an acquisition on foreign soil, but also how a single manager can replace a stagnant corporate culture with one that is dynamic, forward-looking, and, if not mean, then certainly as lean as they come. Ferox a.s. is a profitable and growing manufacturer of vacuum-insulated cryogenic containment vessels for storing, transporting, and using such materials as liquid natural gas, oxygen, nitrogen, and carbon dioxide. Foremost among the reasons for the success of Ferox is the company's 48-year-old chairman and managing director, Zdenek (Dan) Turecek. Turecek arrived at Ferox in April 1998, two months after the firm was acquired by MVE Inc., Burnsville, Minn., one of the world's largest producers of cryogenic storage systems. He found a company in which margins on various products ranged from negligible to -83% and where more than a million square feet of plant space and dozens of machinetools were either underutilized or merely collecting dust. Operations at Ferox were clumsily organized along departmental lines, rather than along product lines, the workforce was top-heavy with managers, and those managers found it difficult to agree with each other on anything. Rather than catch the next plane back to his home in Florida, Turecek embraced the possibilities of Ferox. "What is great on this job is that anywhere you turn, you see some opportunity to improve," he says. "It is challenging, yes, but at the same time rewarding." Through a combination of acumen and attitude, Turecek has managed to imbue the concepts of goals, priorities, teamwork, dedication, and reward for merit into his workforce. He has raised productivity by as much as 30%, lowered costs as much as 25%, reduced parts inventories by 32%, shortened leadtimes by 37%, increased profit margins by 17%, and brought the company out of the red. And he did it all in one year. Ronald Stark, the MVE vice president who helped engineer the acquisition of Ferox, has nothing but praise for the job Turecek has done. "He's increased productive capacity by about 60% while using 40% less space, and some Ferox products now have our highest gross margins," says Stark. "Ferox revenues are currently about $25 million a year, but that could be scaled up to $100 million a year without breaking a sweat." Yet even Turecek is quick to point out that he was not starting from scratch at Ferox. MVE had acquired the company from Air Products & Chemicals Inc., which had purchased Ferox in 1992. During its tenure, Air Products did "much of the heavy lifting, and they deserve credit for that," says MVE's Stark. Air Products trimmed the payroll from about 1,100 to 550, installed enterprise software, and began to focus Ferox employees on meeting the needs of customers. Yet Air Products itself would be the principal customer of its subsidiary. Although the company began to pursue other markets for Ferox products, it made only marginal headway and never turned a profit. The primary disadvantage of Air Products' ownership, Turecek believes, was that the managers installed at Ferox were from the United Kingdom and could not speak Czech. "I think this hurt direct communication internally and slowed their progress," he says. Turecek, on the other hand, is a Czech native with 17 years of experience working in Canada and the U.S. He is fluent in Czech and English, is knowledgeable about Czech culture, and knows North American business methods. Still, at the time of Turecek's arrival in the spring of 1998, the company was losing money, and much remained to be done to fulfill MVE's vision of Ferox as the low-cost, high-quality producer of cryogenic equipment in Europe. Along with its substantial problems, however, Ferox also boasted a number of potentially valuable assets. Labor costs in the Czech Republic, for example, are far lower than those in the U.S. and in other parts of Europe; Ferox employees earn the equivalent of $2 an hour, with the company paying an additional 35% of salaries into mandatory government insurance and retirement funds. In addition, Ferox is located in the industrial town of Decin on the Elbe River, just 15 kilometers from the German border and less than two hours by highway from Prague, the Czech capital. With excellent access by rail, road, and water to other parts of Europe and the world, Ferox was seen by MVE as key to its global strategy of growing markets beyond North America. And MVE was more than willing to share technology and know-how with the new member of its family. MVE gave Turecek a list of its goals and objectives for Ferox, including the short-term results the company hoped to achieve. Turecek was given a free hand to accomplish those goals, which he planned to do by eliminating or minimizing the liabilities of Ferox while supporting and enhancing its assets. Turecek's approach to this task could best be described as "hurry up and take your time." He recognized that he couldn't immediately "know everything or everyone," so he began a step-by-step process of collecting information and evaluating his managers. His first priority was, of course, to achieve profitability, so he explained his own goals and objectives for Ferox and then called for reports from each of his department heads. The reports were to include not only the current state of the departments, but also each manager's ideas for meeting the company's new goals. Turecek is soft-spoken and laughs easily, but there is clearly steel in his spine. When many of the reports he received from his managers included wish lists of capital investments, particularly for state-of-the-art equipment, he made it understood that before any investment could be made he would have to be convinced that it would produce a measurable return within two years. If it didn't pay for itself in 24 months, it would be placed lower on the list of priorities. (This rule still applies at Ferox.) At an early meeting to discuss those priorities, there was general disagreement among the managers. Finally, Turecek stood up. "You know what?" he said. "I'm leaving this room. When you all come to an agreement, let me know." This approach was evidence of neither impatience nor tough-guy bravado, but rather keen insight. "These were men who had known each other for years," Turecek explains. "Without my presence they could talk more freely -- colleague to colleague -- and reach an agreement." Which they ultimately did. As a result of his early groundwork, Turecek was able to see his personnel needs more clearly. He began to reduce the size of the payroll through layoffs, transfers, and attrition of whitecollar employees. There had been, for example, five people in the human-resources department. "One person did nothing but compensation policy," he remembers. "I said to him, 'Fine, you come up with compensation policy. What do you do the rest of the year?'" Human resources is now a department of one. By consolidating and delegating functions, Turecek created a much flatter, matrix-style organization that requires fewer resources to sustain it and functions much more efficiently. Ferox currently employs 460 people, and his is planning even further reductions. Two of Turecek's early changes have had profound effects on productivity and profitability. He stabilized the company's core business on six lines of cryogenic equipment, rather than producing a wider range of products, and he restructured the business along the six product lines, rather than by department. Turecek created cross-functional teams of employees (notably not including managers) for each product line. The teams consist of engineers and designers; representatives of manufacturing, procurement, finance, sales, and marketing; and sometimes even suppliers -- all the disciplines related to the successful creation and sale of the product in question. Team leaders are elected by each group and serve as direct liaisons with Turecek. "I believe it is necessary to get buy-in, so I sit down with each team, and together we determine the goals and objectives for the coming months or year," he says. "This is a very interactive process. For example, the margins on our standard tanks were below 10%. So I sat down with the team to determine how to raise our margins to the neighborhood of 25%." Out of these meetings came a tank redesign that allowed for more efficient manufacturing, as well as new, high-quality, just-in-time suppliers and a number of other productivity improvements. Within one year Ferox was producing a new line of standard tanks that met exacting customer specifications, right down to the preferred brands of instrumentation to attach to each tank. Cross-functional teams also helped devise a new layout for the plant, consolidating far-flung operations into more compact and more logical manufacturing and assembly lines. The total area of the Ferox plant is an absurdly large 1.3 million sq ft, a reflection of the company's size at its peak in the former Czechoslovakia, when it employed some 1,700 people. (Like all state-owned manufacturers of the time, Ferox was self-sufficient, in that every function needed to keep the plant operating -- including cooks, gardeners, doctors, and dentists -- was maintained in-house.) With the new manufacturing layout in place, Turecek was able to sell, lease, or rent nearly 1 million sq ft of space, realizing over $800,000 income in the first year and resulting in an annual savings for the company of more than $500,000. Inventories of both parts and finished products were reduced substantially. Quality issues were addressed through continuous monitoring of the cost of rework and scrap, and a special committee of top management was created to find both corrective and preventive solutions. In effect, the committee uses a customer complaint or suggestion as the stimulus to develop techniques that ensure no such problems occur again. Turecek himself also maintains his own regular regimen of problem identification. "I believe in managing by walking around," he says. "If I see a problem, I write it down in my notebook, then call a meeting with the people who should be responsible for fixing it." Turecek was mildly surprised at how employees blossomed in the cross-functional teams. At the same time, he found little evidence of initiative, and virtually none of the employees would volunteer to raise the level of goals he had suggested. "I think the Czech people have become too cautious over the years." he says, noting that they suffered terrible hardships over the past five decades. "They have become afraid that if they raise a goal and then are not able to achieve it, the boss will be mad at them. So they want to settle for less." He sums up this point of view by loosely translating a Czech saying: "It's stupid, but it's for sure." In other words, the bird in the hand, no matter how scrawny, is worth a dozen in the bush. Nevertheless, he understood that if he could get his employees to accept one fundamental premise -- that productivity gains and higher margins would translate into a steady supply of work and greater remuneration for all -- they would perform very well. "I think they welcomed the opportunity to express themselves in team meetings, because for so many years they had always been told what to do," he says. "It was perhaps the first time someone had asked for their opinions. They felt appreciated, and they enjoyed accepting responsibility. Yes, you have to push people to commit. But once they commit, they deliver." Communication is the key to Turecek's approach. He meets regularly with managers, teams, union leaders, and other employees, making himself available to respond to questions or problems. He also stresses the positive rewards that come from meeting objectives, rather than the negative repercussions of failure. "I don't believe in managing by punishment or just giving orders," he says. "I believe you motivate employees by giving them the opportunity to do more and then rewarding them for their efforts." Perhaps Turecek's most effective means of motivation was the implementation of group incentives -- that is, bonuses consisting of a set percentage of salary for achieving specific performance criteria within each cross-functional team. Depending on whether the improvements are in cost reduction, productivity, quality, or in other measures, bonuses can range from 1% of salary all the way up to 15%. A small existing bonus system had been in place when Turecek arrived at Ferox, but it was based solely on the profitability of the company as a whole. He believes he gets better buy-in and a more personal commitment from his employees when bonuses are based on the specific work of the teams. "There is much less motivation for greater productivity or faster output when a bonus is based solely on company profit," he says. "It is harder for the employees to see that their own efforts have an impact." One positive side effect of the bonus system is that absenteeism has become virtually nonexistent. Turecek simply does not allow it. To participate in the bonus plans, employees must make up any hours they may have been off the job by working extra shifts or on weekends during peak demand times. Turecek employed much the same system when he was first sent to the Czech Republic by Stanley Works to take charge of Tona Inc., a hand-tool maker that had been acquired by the Connecticut company. While at Tona he read in the business section of Hospodarske Noviny, a national Czech newspaper, that MVE was acquiring Ferox. He offered his services and was soon hired as managing director. Turecek sees the irony in his position, because when he fled Czechoslovakia in 1979 with his wife, two children, and little more than two suitcases, he never thought he would return to run a Czech company. He is now a Canadian citizen -- a foreigner in his native land. MVE gave Turecek a free hand in turning Ferox around, and that freedom was unaffected when MVE was itself acquired in April 1999 by Chart Industries Inc., Cleveland, which manufactures standard and custom-built industrial-process equipment primarily for low-temperature and cryogenic applications. In fact, the potential inherent in Ferox was a key reason for the Chart acquisition, notes Chart President and COO James Sadowski. "We have very high expectations for Ferox," says Sadowski. "We think it can be the largest and lowest-cost market-focused operation in Europe." Adds Ron Stark, now president of Chart Cryogenic Storage Systems Div.: "With proper manufacturing and engineering support, I'm confident we'll be moving more products to Ferox. They can deliver Western European quality with all the advantages of an Eastern European company." Turecek is sanguine about the position of Ferox within Chart. "I believe the acquisition by Chart means the future for Ferox is very secure," he says. "We will manufacture for other Chart family members and participate in many new product areas. We anticipate more business, which means lower costs and higher profits." Currently, Turecek is training a successor to take the reins of Ferox in a year or two. He will choose from among three managers with whom he works closely. When he sees that both the company and its future managing director are ready to stand on their own, he will move on. With his experience in the Czech Republic it seems likely he will be offered another management position at a troubled Czech company. But he would prefer to return to the U.S. and assume the title of CEO rather than managing director. The possibilities are limitless, however, because no matter what corner of the world Turecek finds himself in, there will always be a company that needs to be turned around and brought out of the red.

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