Adams, Inc.

Armstrong, MA

Adams, Inc. designs and manufacturers coated fabrics for the automobile, luggage, and furniture industries. Adams provides fabrics that cover interior panels and seats of some of the finest automobiles, the most exclusive luggage and the most expensive furniture made in the USA. Samuel Adams, the president and son of the founder of the company, started in the firm as a salesperson on house accounts. Even though his duties have since changed, Sam has continued to sell to some customers; in fact, at present he still does all the sales work with the two largest customers whose purchases are now $12,950,000 annually. The family-owned firm has competed successfully for years in the fabric coating industry with very large companies. Under Samuel Adams supervision, the company's sales have grown and profits are at such an all-time high that he is thinking about a political career. With some satisfaction, he contemplates reducing his operating responsibilities, changing his position to chairman of the board of directors, and beginning an effort toward a higher post in the state legislature. Occasionally Mr. Adams muses: "Why not another Adams as the governor of the Commonwealth of Massachusetts?

Marketing

The resin coated fabric industry produces a wide variety of coated fabric products. At the high end of the product line are upholstery for vehicles and fine furniture and coverings for luggage, brief cases and purses. A the lower end of the product line are covers for engines, equipment, appliances and wall coverings, shower curtains, ribbons, etc. Some producers provide yard goods sold by on-line and department stores. Major producers in the industry include large companies that specialize in organic and polymer chemistry and a large number of smaller producers who purchase their resin in bulk from a major supplier and concentrate their efforts on the production process of coating fabrics at the lowest possible cost. Adams, Inc., although considered a smaller producer, has developed their own special resin coatings.

Adams, Inc. buyers want their color, finish, and durability needs met carefully. Successful selling depends also on pre-consultation with designers about the various fabrics needed in the customer's line. Frequently an Adams, Inc. salesperson works for several days, at various intervals, with a customer's designer. Adams, Inc. is also expected to furnish samples rapidlyeven of new materialswhen new items are being considered for a customer's line. Automobile manufacturers generally place large orders. Quality furniture and luggage manufacturers tend to place small orders and to repeat them frequently if sales of the item for which the coated fabric is used catch on. A customer's pressure for a low price is related to the number of yards of coated fabric bought and to the ultimate price line at which the product is offered to the great consuming public. Adams, Inc. succeeds by marketing a high-quality product to a large number of discriminating customers who desire fast and accurate service. Individual orders are often small, but they are repeated eight to ten times a year.

Robert Earl, the sales manager, came to Adams, Inc. four years ago after a fifteen-year career as salesperson and product manager with eight different coatings and textile producers. His first move was to add a person who specialized in sales to the furniture industry. Earlier, Adams, Inc. had sold only through manufacturer's representatives whose total compensation was a 6% commission. Half of the manufacturer's representatives have now been replaced by six sales-persons that specialize by industry. They are guaranteed an annual salary of $30,000 and are then paid by commission at an increasing rate when their sales exceed $1,000,000 annually (i.e., 1% of sales from $1,000,000 to $1,999,999; 2% of sales from $2,000,000 to $2,999,999; 3% of sales from $3,000,000 to $3,999,000; 4% of sales from $4,000,000 to $4,999,999: and 5% of sales of $5,000,000 and more. Sam Adams approved the changes in sales representatives and their compensation as being consonant with his belief in putting great trust in his senior managers and in allowing them all the responsibility they are willing to take. Robert Earl had come highly recommended by some old family friends of the Adams.

Mr. Earl commented that he attempted to give some direction to the selling effort. "In the past, for the most part, we took any order that came along. We did well because of the quality of our products. I don't reject orders that come in, of course, but I believe that it is also possible to define certain industry groups that will naturally want to buy what a small firm like this can best sell, that is fast delivery, a short order cycle, design help, and a quality product. It did not take any particular marketing skill to figure this out, just a look at those customers whose buying characteristics and buying decision-making fitted our demonstrated skills. "I did this on my own. Sam does not question what you are doing and lets you alone so long as you keep him informed. On any scheduling problems with new orders I talk directly with him. Leroy Gauthier, the plant manager, listens to Sam but runs around the factory so much that I have found it difficult to reach him, let alone work out a decision with him."

Manufacturing

Adams, Inc. coats the cloth, purchased from textile producers, with a resinous liquid. The mixture can be sprayed on, as is common practice in the industry, but Adams, Inc. uses a calendering process to carefully control the amount of liquid applied, its spread-rate, and its penetration. The production process is fairly simple. The fabric is bleached, stretched, and then run between calendars (large steel rollers) to dry it and smooth it before coating. Resin, in combination with color pigments and solvents, is applied on the coating machine as the cloth is pulled through to a drying oven at the end of the coater. The coated fabric is later finished by stamping or by rolling it on embossing machines to impart a grain, a raised surface (such as pigskin texture), or any other finish desired. Until recently, each of these three processes-bleaching and smoothing, coating, and then finishing-has been done in batches on separate pieces of equipment.

Coating is the crucial production department. Resin ingredients are prepared and applied under closely controlled conditions. Tensile strength of the resin has to be related closely to the speed of coating machines. Both temperature and the concentration of chemicals have to be held within exact tolerances. Stains left by the rollers or rips in the fabric cause spoilage losses or reduce fabric quality. Close attention by the plant workers to the fabric belt as it is calendered and rolled is required for a satisfactory product. The process is dangerous to unskilled or careless employees. Machinery is heavy and runs at high speeds. Chemical odors are strong and cannot all be removed in the present building even by the best of ventilating and solvent extraction processes. While the equipment is kept in the best of repair, the rest of the plant is old and facilities are rundown.

Worker turnover is high. Skilled workers can be hired from the manufacturing and chemical plants in the area. When absolutely necessary, inexperienced workers are employed and trained at some cost in lost productivity or rapid turnover. Last year, the AFL Union was voted in to replace a local craft union. After one month, the company settled a strike for higher wages for 85% of the union's demand.

Leroy Gauthier, the plant manager, rose through the ranks. He knows the process and the equipment and he demands careful attention to plant activities by his supervisors who spend most of their time closely overseeing production runs to minimize spoilage and waste. Gauthier also spends at least half of his time touring the plant, checking on the status of individual orders and questioning various machine operators. He knows most of the two hundred plant employees by sight, but few by name. Hiring, firing, and discipline are entirely the responsibility of the various supervisorssubject to negotiation on some disciplinary matters with union stewards.

Research and Development

Research and development is directed by Jack Wong who earned a PhD from MIT years ago and has since followed the old tradition of experimentation. He has six assistants with university training in chemistry, but they basically "engineer" his suggestions. Professional conflicts arise occasionally because Dr. Wong diverges in some instances from currently accepted laboratory and analysis techniques, but his methods are often quite ingenious. Research at Adams, Inc. is really "mixing and brewing" and relies but little on modern quantitative polymer theory. Dr. Wong firmly believes in using "art" and experience in his formulations. However, if manufacturing difficulties arise, he will modify his processes, and he constantly checks the application of his new product ideas to make sure they work out in the plant.

The present resin mixture resulted from "rational" trial and error that converged on the successful mixture. Knowing the desired properties of the finished compound and the characteristics of the component chemicals, Dr. Wong exhausted many combinations of reactants, allowing for fine differences among different brands of the same product. The result is a resin mixture that has advantages over its competitors' products. The coating is less likely to crack, has better tensile strength, absorbs dye more easily, and can be applied at lower temperatures. It is a quality product demanded for more expensive applications, yet its production cost is not much higher than that of common resins. Dr. Wong has also adapted other processes to resin manufacturing. For example, the dyeing process used at Adams, Inc. came from an industrial magazine article about coloring fabrics in the garment industry.

Dr. Wong has over thirty years of experience in working with different resins and finding a replacement for him will be difficult, but nevertheless he plans to retire sometime in the not too distance future. "I'll be seventy years old soon, and threescore and ten is enough for anyone." Any replacement as director of R&D would probably be accustomed to using more sophisticated equipment; new methods might be incompatible with the existing staff of technical people, who must then be retrained. The greatest incompatibility to a modern researcher would be the responsibility for watching after the production process: any new person may be surprised with the autonomy given in order to perform the development activities.

Engineering

Quincy Adams, the presidents brother, has a bachelor of science in mechanical engineering from the University of Massachusetts and is responsible for process development, that is, the improvement of equipment used in manufacturing. Quincy worked for the company, part-time, to carry out some recommendations made by his consulting firm. He devotes his time to machine design and outside consulting work. His dream is to a complete factory redesign now in process. The goal of this change would be to develop a factory that will result in longer production runs (i.e., more yards per hour) and produce fewer defects while utilizing less labor.

On Quincy's recommendation, a wall was knocked out and the factory floor space was extended by about a third. The result was a longer, more efficient linear series of rollers that made each run easier to mount, process, and finish. This improvement was beneficial since Adams, Inc. depends on a manufacturing process that has little down-time and that can handle many small orders in a very short time. Increases in roller speed have reduced the crucial turnaround time, but on the very oldest equipment, it has also led to increased defects as tension overcomes the fabric's tensile strength. Workers cannot follow the process at very high speeds. Even at lower rates a marred roller that leaves a mark with each revolution is difficult to detect. Now a pilot model of a new coating machine is under test to prove out its design characteristics of a 50% reduction in labor hours and a 10% increase in fabric output. Discretionary settings have been reduced substantially, mechanical handling has been substituted for manual, and tension controlling devices have been added to reduce tearing.

Engineers seldom stay with the company more than three years. As one said, "I learned a great deal from Quincy about both mechanical engineering and consulting and put up with him to get this knowledge. In a weak moment he once told me that company policy was to kick the worker when he didn't produce and to reward him as little as possible when he did. Of course, that was only Quincy's idea of it. I don't know how Gauthier carries out company policy."

Quincy Adams said: "We have efficient competitors. Although their manufacturing cost is, as a

percent of sales, about the same as ours, their average length of run is 48,000 yards, while ours is more like 12,000. The number of items they carry in inventory is one-fourth our number. But dollar totals are about the same. If we used their methods we could drop our manufacturing cost to 55 percent of sales. Then we could really afford to drop our prices, and be more competitive with them, and shoot up the volume. This would give us a hefty return on the new equipment we need.

"For a near term investment of $12,000,000 over two and one-half years, I calculate that we can cut our unionized labor force by 30 percent and thus reduce our labor cost by $1,400,000 annually. After that, another investment of $3,000,000 per year for five years will eventually allow us to cut our labor force to 50 percent of what it is now and save another $800,000 per year. This is investment in machinery the only kind of investment we really need.

"We need to do this because the AFL union is now really at our throat. The last contract we signed jumped wage costs 25 percent over two years. They are surely going to ask for more next time. The only way to fight them is to get them out of the plant. Our policy should be to triple the length of each run, reduce the number of employees and pay them enough so that they won't quit to work at other local companies. Just give me seven years and twenty-seven million dollars."

General Management

Samuel Adams believes in getting expert outside advice. One consulting firm recommended the recent plant expansion. Another firm recommended increased coordination among the managerial group and attempts at cooperation through dinner meetings and general discussion. Dinners were held for awhile and then discontinued when Quincy Adams had to be out of town on a consulting job. Meetings led by Leroy Gauthier for the plant supervisors were discontinued when the bleaching, coating, and finishing supervisors argued at length over technical matters.

Samuel Adams spends 20% of his time with two customers and, at times, assists individual salespersons with difficult relationships with other customers or accompanies them on visits to celebrate unusually large orders. But the balance of his work is mainly on financial matters. He analyzes cash balances and cash flows each day with the treasurer. He looks at actual and predicted budget comparisons for previous and succeeding months. He, the treasurer (Charles Brown), and the purchasing agent (Roy Clayton) check the investment in inventory each month-both in total dollars and by reviewing summary tally sheets prepared from the detailed records.

With Roy Clayton, Sam reviews individual purchase orders amounting to more than $2,000 and analyzes alternative sources of supply for new items. Samuel Adams says: "Charles Brown and Roy Clayton are perfectly competent executives. They can perform all the duties asked of' them, and do careful work. I spend time with them to keep myself informed. I need the data to press for increased revenues and decreased costs. In my view, a chief executive's major role is to establish the rate of return on investment and the rate of sales growth that he wants and then to push continuously for these. Secondly, I need it to keep the family happy.

"Quincy Adams is the only family member in the firm. I was lucky to attract him away from his full-time consulting business with the help of a special stock option arrangement. No one member or one branch of the family has a controlling stock interest, but they all have a personal interest. One or two of them are in the investment business and are convinced they know as much about resin coated fabrics as anyone else. A few of the others I would call professional Monday morning quarterbacks; this is not something I have not told them directly. While a few nephews, cousins, uncles, and aunts have asked for jobs here, I have refused to hire them-except for Quincy. I can't see that they would be any more competent than the people we already have, and none of them seems to want to start in the coating room.

"Judge our managerial methods by our results. Look at our balance sheet (Exhibit 1) and income statements (Exhibit 2) Sales are now $45,000,000 a year, whereas they were $9,000,000 ten years ago. We compare well with any of the companies. After taxes, we net out 9% of sales, which is better than the 6% our competitors net. A dividend payout ratio of 60% takes better than adequate care of the three branches of the family. I think you will have to agree that I can begin to satisfy all those impulses I have had toward politics in recent years. I'll give up my sales work and that will free up a lot of time. Robert Earl can handle all our marketing effort. School board membership, chairman of local welfare organizations, and two terms in the state legislature has not been enough. I've traveled this state-and the country-widely over the past two decades, and have gotten to know a fair number of people. I think I can contribute politically."

New Opportunity

A month ago Robert Earl learned that a European manufacturer was looking for U.S. firms to produce and sell a poromeric leather that an European manufacturer has developed and introduced successfully in some regions of the European Common Market. Sam Adams in his characteristic manner encouraged Robert Earl to "follow up on any idea that looks promising." Robert Earl has assembled the following information, and he now feels ready to report back to Sam Adams.

The European manufacturer is seeking two U.S. licensees for its product. To date, this artificial leather has been used primarily for shoe uppers and to a lesser extent for lightweight shoe innersoles. It can be given the appearance of any kind of leather; it is more durable, and it has some of the same "breathing" characteristics of leather. Poromeric leather (of which Corfam was the first sold on any scale in the U.S.) is not an animal product but a synthetic leather made by coating a non-woven substrate with either a polyurethane or vinyl finish. In the case of Corfam, the substrate had three layers, including one of a woven polyester. When sales did not reach the expected volume, Corfam sold its process and remaining inventory to a Polish company.

The proposal by the European firm is that each licensee should manufacture the substrate (one layer of nonwoven material) and coat it with polyurethane in its own plants and then sell the product primarily to shoe manufacturers, using a specialized salesforce. The European company wants the U.S. affiliate to carry out the entire process for both quality control and production process for security reasons. The European developer seeks two U.S. licensees because a tariff of $.12 per pound plus 15% ad valorem effectively rules out, at present, exports to the U.S. from Western European and Eastern European manufacturers. European technology is widely thought to be about 2 years ahead of U.S. technology in its development stage. The European firm expects to continue its development work and would keep U.S. licensees fully advised of any process and product advances as a part of the licensing agreement. The license fee would average about 2% of net sales.

Current U.S. efforts to manufacture an acceptable leather substitute have failed on the three desirable properties of the substrate (strength, absorbability, breathability). The European firm claims that it has exported one million square yards of its substrate to U.S. coating firms and has had good acceptance from them. Preliminary checks by Robert Earl with three of his present competitors (the coating firms) have substantiated this claim. Several market studies by the European manufacturer indicate the information shown in Exhibit 3. The market study was carried out using an assumed U.S. price of $23.50 per square yard as contrasted with the shoe upper leather price of $47.50 per square yard.

Robert Earl is enthusiastic about seeking a license. His arguments are: (a) the firm would have an early entry into a rapidly expanding market and thus could capture a major market share; (b) the proposed selling price makes the synthetic leather highly competitive; (c) none of the big companies are currently interested in the product (the Corfam plant had been built to produce 100 million square yards annually, but its total sales in two years were only 35 million square yards); and (d) the proposed product would have only two layers and thus would tend to stretch and adapt itself to the wearer's foot, whereas Corfam did not.

In a short conversation Robert had with Samuel and Quincy Adams about the proposal, Quincy said, "It's not worth serious attention. I'm having enough difficulty getting money for the new plant, so why bother with something in addition? We don't have the extra $10,000,000 for the initial poromeric leather plant and equipment investment."

Charles Brown said, "Well, we can probably finance the investment by borrowing since, based on preliminary figures. It promises a rate of return close to one-half of we are now earning. But what is the risk? What will our competition do? Will sales of our present products be affected? If sales turn out to be half the amount predicted, will the fixed overhead bankrupt the rest of the company, since the pattern of costs of this venture will be about average for the industry?"

Questions

1. What has been Adams strategy in the coating business? Has it been successful?

2. Do you recommend the offer of poromeric leather license be accepted. Explain. What changes will be necessary for Adams if it takes the license? Explain.

3. Do you agree with Quincy Adams idea to further automate the plant? Expalin.

4. Would you recommend to Samuel Adams that he now pursue the path he has indicated for his political ambitions? Explain.

5. What are your recommendations to Samuel Adams? Support

Exhibit 1

Current Balance Sheet

(In $1,000)

Current Year

________________________________________________________________________________

Assets Liabilities and Owners Equity

Cash $ 4,800 Accounts Payable $ 2,500

Receivables, Net 7,500 Accruals 2,000

Marketable Securities 4,000 Long-Term Debt 2,000

Inventory 7,200 Common Stock &

Plant & Equipment 10,500 Retained Earnings 27,500

Total Assets 34,000 Total Liabilities and Equity 34,000

________________________________________________________________________________

Exhibit 2

Income Statements

(In $1,000)

Current Year 10 Years Ago

________________________________________________________________________________

Net Sales $ 45,000 $ 9,000

Manufacturing 29,250 6,210

Research and Development 4,050 810

Selling 3,150 810

Administration 2,500 500

Gross Profits 6,050 670

Taxes 2,000 220

Net Profits 4,050 450

________________________________________________________________________________

Exhibit 3

U.S. Actual Sales and Potential Sales

of Leather and Leather Substitutes

For Shoe Uppers and Innersoles

(In millions of square yards)

Current 5 years 10 years

Product year hence hence

Leather shoe uppers 75 58 35

Non-leather shoe uppers 5 20 35

Leather shoe innersoles 75 n.a. n.a.

Non-leather shoe innersoles 1 15 20