Weiser’s Radical Surgery : ‘Vertical Disintegration’ Cuts Into Jobs but May Save Company

The decision, after months of study and debate, was made by a small group of men meeting in Detroit on July 21.

More than a year of efforts to turn the company had proven ineffective. Radical surgery was the only answer.

And so the top officials of Masco and its Weiser Lock subsidiary endorsed a massive reorganization for Weiser.

The firm announced 10 days ago that it will phase out its main Huntington Beach facility and move to a new and much smaller plant in an area where labor and other costs are lower; reduce the number and variety of products it makes, and start using outside subcontractors to supply many of the components it now makes itself.

The decision to retool Weiser into a smaller, more flexible manufacturing concern at the cost of the jobs of hundreds of loyal longtime employees was a difficult one to make, said Weiser President James Connors--the man who five years ago inaugurated the same sort of corporate reorganization as president of the Sunbeam Appliance Co.

‘Vertical Disintegration’

The alternative, however, he said, was to maintain the status quo until Wesier eventually went out of business.

The Weiser experience, traumatic as it has been for company officials and employees, provides a case study in what is happening to traditional manufacturing operations in much of the United States as they learn to compete in a global economy.

If Weiser’s situation presents a classic example of the problems manufacturers face, its blueprint for change illustrates the new philosophy that is remaking the face of American industry: that smaller is better.

Weiser’s reorganization plan “is a perfect example of the vertical disintegration of industry,” said Allen J. Scott, professor of urban and economic geography at UCLA.

Vertical disintegration, he said, is the process of going from “big is better” to “less is more.”

More Reliance on Others

Whereas manufacturers like Weiser once strove to make everything used in their products as a means of ensuring control over quality and supply, many of them are now turning to outside contractors. In doing so, Scott said, they are better able to respond to rapidly changing market conditions.

It is easier and less costly to change suppliers when someone comes up with a better, less expensive way to make a widget than to have to retool your entire company-owned widget factory and retrain your employees, Scott and other industrial specialists argue.

“Weiser is competing with firms in Asia that are almost certainly vertically disintegrated,” Scott said. “Those competitors are involved in extensive subcontracting networks, which is very efficient and flexible.”

Weiser was founded in 1904 in South Gate as a small foundry. It made custom locks for area builders and occasionally created period locks and door hardware for movie sets. In 1941, as raw materials became harder to obtain because of the expanding war effort, the company filed for bankruptcy.

Brothers Fred and Frank Russell bought the business in a bankruptcy sale and, with six employees, they began producing aircraft parts during the war. The company returned to lock making after the war, concentrating on residential locks until 1962, when it introduced a line of commercial locks under the Falcon Lock name.

The Russells sold the company to Norris Industries in 1967. By 1978, the year Wesier moved to Huntington Beach, the company had 30% of the country’s residential lock business. It was acquired by Masco, a hardware and housing products conglomerate, in 1985.

Frank Russell remained to run Weiser under Norris, and it was under his leadership, said Weiser marketing director Bob Pacelli, that the full integration of all manufacturing operations took place.

“The basic Russell philosophy was that if it wasn’t made at Weiser, it wasn’t any good,” Pacelli said.

Thus, every part of every Weiser lock, including the smallest screws and molded plastic fittings, are made at the same plant, by Weiser employees on machines Weiser owns and maintains.

“It was a good philosophy in the 1960s, but in 1988, in this incredibly more competitive climate, it no longer works,” Connors said. “If we were going to remain totally vertically integrated, we would have to spend millions of dollars every year on new, state-of-the-art machinery. . . . Most of our machines are 20 and 30 years old, and they are slower and costlier to maintain.”

The high cost of maintaining that older machinery and the work force to operate it was compounded by other financial problems. A labor shortage and the high cost of housing in Southern California pushed up wages, and environmental controls affected the cost of Weiser’s plating and lacquer-coating operations.

“We also have tremendously high medical insurance costs and (worker) compensation insurance costs in California,” Connors said. “And the cost of a lot of our raw materials has gone up dramatically in the past 12 months alone. So we have had this buildup of costs from inside and outside to cope with.”

“You have to look at several trends over the past 10 years,” Connors added. “It is a combination of these things that brought us to this decision. I don’t think we have any other choice.”

Ten years ago the lock market went flat as housing construction unexpectedly leveled off across the country. “And at the same time--and this is the linchpin of our problem,” Connors said, “imports started increasing dramatically. They are up from about 8% in 1979 to 29% of the market in 1986, and while I don’t have the exact figure, they are at least that high again for 1987.”

So concerned is the industry about foreign competition, especially from Taiwan, that the Builders Hardware Manufacturers Assn. is preparing a lawsuit alleging illegal dumping by Taiwanese lock makers.

Richard Hudnut, a consultant for the association in New York, said that a marketing firm hired by the trade group’s attorneys recently traveled to Taiwan to price residential door locks being sold there, then looked at the prices of those same Taiwanese brands in U.S. stores. “They found that these consistently were sold for 15% to 20% less in this country than in Taiwan, where they were made,” Hudnut said.

Market Share Shrunk

The wholesale value of Taiwanese lock imports to the United States, Hudnut said, has climbed from $1.3 million in 1980 to $43.6 million in 1987, or about 9% of the total domestic market. Weiser’s share of the $500-million residential lock market in the United States, according to Connors and marketing director Pacelli, has shrunk to about 22%.

“So we have a static market with a lesser share of it for domestic lock makers, and then we have the fact that the imports are significantly lower priced,” Connors said. “All of this has just put more and more pressure on our bottom line.”

Facing all of that, Connors said, company officials “realized over the last couple of years that something had to be done.” Initially--indeed, until just a few months ago--the efforts all were aimed at relieving the various cost pressures so that the Huntington Beach operation could continue.

“First, we added an operation in Mexicali to take some of the most labor-intensive operations out of here so we could lower overall labor costs,” Connors said.

It has taken longer than expected to get the Mexican operation on line, however, Connors said, and further studies by Weiser showed that it would not save enough money to justify keeping the Huntington Beach plant.

Nor, he said, will the other changes the company has made in the past year--including cutting the prices in its commercial lock line, basing salesmen’s compensation more heavily on commissions, reducing marketing expenditures, revising the employee health insurance plan, reducing the sales force, applying a near-freeze on wage increases and temporarily laying off about 60 manufacturing workers.

Many of those changes were instituted last year under Phil Pryne, president of Weiser for the past 10 years. Pryne was named president of the Masco hardware group late last year, and Connors was hired away from Sunbeam to replace him.

Connors--an engineer with a wealth of consumer goods and retailing experience as well as a background in management and corporate reorganization--was charged with one task, he says. “My charter was to improve the Weiser division’s financial results.”

Situation ‘Too Permanent’

At Sunbeam, Connors returned a company losing more than $20 million a year to profitability. To do so, he cut the number of manufacturing plants from seven to two, slashed 2,200 people from the manufacturing payroll, cut the size of the headquarters staff by 40%, began subcontracting for many supplies and services, streamlined the product development process and oversaw development of the very successful Oskar food processor.

But after a few months at Weiser, Connors saw that the fixes he and Pryne had made just were not working.

“The situation was too permanent for any other short-term fixes, so in March I asked A.T. Kearney, the management consulting people, to come in. I told them what had been done and asked them to take a really fundamental look at where we were going and to recommend steps to improve the financial results,” he said.

“They identified 20 different courses of action, revolving around changes in the product line and the manufacturing configuration. Their final recommendation is essentially the program we began to implement last Friday.”

PERILS OF A U.S. LOCK MAKER With the number of U.S. housing starts relatively flat for the last decade, the market for residential locks hasn’t been growing--and imports are taking an increasing share of that market. Housing Units Completed in U.S. In millions Foreign Imports of Residential locks As a share of domestic market 1978: Imports: 7% 1986: Imports: 29% Source: Weiser Lock Co.