Continuous improvement efforts that started in 1997, coupled with a re-engineered supply chain, helped Master Lock reverse a declining business and reassert itself in the U.S. marketplace with double digit sales growth. In the process, Master Lock replaced its rigid vertical integration with a model that includes offshore product outsourcing, flexible assembly operations in Mexico and a new central distribution center.

The company identified several primary goals for its re-engineering project and met them all, says Greg McCormack, vice president of operations for Milwaukee-based Master Lock. "One of our key objectives when we started this project was to provide products faster and more economically to our customers, and we are doing that," he says. "The acceleration of product through the supply chain has increased considerably, and our lead times have come down significantly. On an historical basis, we have been able to cut our manufacturing backlog almost in half-and that's not a result of lower sales-it's because we have faster speed through the supply chain."

The new outsourcing competency enables the company to take innovative product ideas, such as its new line of steering wheel/airbag locks, and work with vendors to more quickly and economically bring those products and ideas to market. "We didn't have a competency in new products, for the most part, but our network in Asia and the assembly operation at Nogales, Mexico, allow us to now get those new products to market much faster."

Another critical goal was to more quickly respond to changes in market conditions with flexible manufacturing and distribution, McCormack explains. "We have a common cellular manufacturing approach in Mexico that allows us to shift labor back and forth from one focused factory to another. Now, as volumes and forecasts change, we can blend our manufacturing labor across those changes while keeping costs in hand."

Flexibility also is built into the new distribution center at Louisville, Ky., which is operated by GENCO. At the Louisville facility, orders are turned within 24 to 48 hours 98 percent of the time, compared with an average four- to five-day turn at Master Lock's former operation in Milwaukee. This improvement gives Master Lock a considerable edge in the retail market, says Mark Gams, vice president of logistics. "The sales cycle for a major customer selling hardware is over the weekend-they sell most of their stuff from Thursday night through Sunday," he points out. "Our re-engineered supply chain enables that customer to count up what was sold over the weekend, order it from us on Monday, and have it replenished before the following Thursday, which sets them up for another weekend of sales. That's a powerful competitive mallet."

And Master Lock needed a powerful competitive weapon. In 1996, the 75-year-old company owned by Fortune Brands, served three market segments in the U.S. and Canada: commercial customers, retail outlets and locker lock customers. Approximately 95 percent of its product line was manufactured and assembled with union labor in a 750,000-square-foot facility that also housed the company's distribution center and was adjacent to the company headquarters. The remaining 5 percent-mostly low-end brass and cable lock products-were acquired from Asian vendors.

"In mid-1996, it became apparent to us as a company that we had some significant issues in our retail business," recalls McCormack. "We were supplying a line of very similar products to our mass merchant retail customers, but were steadily losing market. We had a fairly stagnant product line, a high cost base that put us at a huge disadvantage compared to the imports, and there was very little differentiation between our products and the knock-offs coming into the market from Asia." Many of the company's products were becoming commoditized, and the value differential between Master Lock products and the competition was not widening, he adds. Consequently, consumers were finding it hard to differentiate between products.

The picture was bleak because there weren't a lot of short-term options, McCormack points out. The company had focused most of its effort within the Milwaukee facility on trying to take out costs by investing in high-speed capital equipment and automation, but that was a pretty expensive proposition for commodity products that were being knocked off by a flood of Asian imports.

Master Lock responded not with any type of comprehensive review, but with a significant price cut across a majority of product lines just to try to get to a more level playing field with the imports. The price cuts, which took effect in the first quarter of 1997, triggered further reactive moves to minimize the erosion of margins and profitability. "There was immediate pressure to change the source of supply across many of the product lines to try to get the margins back up, and we began to explore the outsourcing of a lot of our commodity product lines that were being produced in Milwaukee," says McCormack. "We also decided to look at establishing manufacturing operations in Mexico."

The company early in 1997 initiated talks with the United Auto Workers, which ran the union shop in Milwaukee, and launched two project teams, one to look at outsourcing, the other to focus on Mexican manufacturing and assembly. Accordingly, a three-person outsourcing team used the internet, worked with sister companies, attended trade shows and backtracked competitors' products to locate potential suppliers in Asia. A separate team focused its sights on the maquiladora industry and initiated talks with government representatives in Mexico.

While the one team explored the operational aspects of establishing an operation south of the border, other senior managers focused on which functions were leading candidates for any such move. One of the first decisions was that manufacturing would stay put.

"Our parts manufacturing in Milwaukee was fairly automated, so we didn't see a huge advantage in moving parts manufacturing," says McCormack. Master Lock continuously had invested in parts manufacturing equipment, and the Milwaukee facility had high-speed presses, die-casting operations and automated equipment for making lock bodies and for bending and forming and machining shackles. "Almost every component that we made -including all of our key and cylinder manufacturing operations-was produced through some kind of automated work center, and we thought that level of automation provided a pretty competitive base."

	"Where we didn't have a competency, we looked at outsourcing that product or moving it to where we would have an assembly competency in Mexico." Mark Gams of Master Lock

Assembly was a different matter altogether, particularly given the nature of the union shop and the fact that a large chunk of the company's labor expense was incurred in assembly. The planners decided the logical decision would be to outsource from Asia the low-end products competing with import knock-offs, and then move some of the company's higher quality and larger volume locks that required manual assembly to Mexico, where they would be put together with parts manufactured in Milwaukee. One product line, the Master Lock 1500 combination lock, was manufactured and assembled with high-tech automated equipment in Milwaukee, and that operation would remain in place.

But these were all reactive measures, McCormack acknowledges. "In 1997, we didn't really have a clear plan." In the first quarter of 1997, Master Lock proceeded to outsource a range of lower-end products to offshore suppliers and entered negotiations with the UAW plant leadership to talk about outsourcing and Mexican assembly and the impact on head count in Milwaukee.

The entire process received a boost the second quarter of 1997 with the arrival of a new company president, David Campbell. He embraced the effort and became one of the key drivers of the re-engineering process over the following months. Convinced of the wisdom of Mexican assembly and with the support of Campbell, the management team proceeded to enlist the aid of Cornerstone Design Ltd., an engineering firm based in nearby Racine, Wis., to help implement flexible cellular assembly operations in Nogales. Together, the companies established a "launch center" for the Nogales venture.

"The launch center really was kind of a laboratory for our engineers where they could work with Cornerstone's specialists to re-engineer the way we assembled product into the cellular manufacturing format, which was new to us," explains McCormack. "Working together at the launch center, we designed the processes, selected the equipment, built the manufacturing cells, tested the cells, fine-tuned the methods, then packed them up and shipped them into Mexico and set them up down there." The proficiency of the staff under Jose Saralegui, director of Mexican operations, allowed for the acceleration of the migration plan for cells and products from the original plan time line. The Mexican management team essentially took over ownership of the process and converted it to one of pulling additional cells and product to Mexico.

Master Lock initially leased a building in Nogales for the purpose of establishing a small assembly operation primarily as a learning experience "just to get used to the way the assembly operation was going to work in Mexico," says McCormack. The first lock was assembled in Nogales in March 1998.

As the management team, armed with its initial findings from the fledgling Nogales operation, began in mid-1998 to draw up the first large-scale capital plan to move a significant portion of its higher-end assembly business to Nogales, warning bells started to ring.

Multiple Businesses
"We came to the realization that we had a lot more to do than just move some product around the supply chain," says McCormack. "The truth of it was that we had several different businesses within one business, and we decided we had better have a strategy for how we wanted to operate these individual businesses. And once we understand how we wanted to operate those businesses, we needed to set up a supply chain that could support those businesses."

Consequently, in September 1998, Master Lock brought in the consulting firm Bain & Company to help structure and conduct a formal project study to re-engineer the company's supply chain. Although Master Lock had a Canadian business unit and a growing European presence in addition to its commercial, retail and locker businesses in the U.S., the company decided initially to focus on its U.S. activities in order to get the biggest bang for the buck at the start.

Early in the study, Master Lock decided to approach its U.S. activities as three separate business units. "We looked at the needs of the three businesses independently and looked at the growth plans for each business," recalls McCormack. "We then went through a core competency evaluation. We determined what we thought we did well, where we had scale, what product components we wanted to continue to produce ourselves, and identified the products where we lacked scale and didn't see real growth potential in the product line."

The next step was to bucket the products -to decide whether Master Lock would buy them complete from offshore vendors or assemble them in Mexico. "During this process, we defined the competencies we had in our business from a supply standpoint," explains Gams. "Where we didn't have a competency, we looked at outsourcing that product or moving it to where we would have an assembly competency in Mexico." The areas where the company had both a competency and scale were definite no-brainers for continuing to perform those operations, he says. For example, Master Lock probably is the largest lock-cylinder manufacturer in the world, and that manufacturing process is highly automated, which provides a competitive edge regardless of the origin of the competition. As a result, the cylinder locks, which generally are higher-end products, were prime candidates for assembly in Mexico.

The company then needed to decide how to structure the factory in Mexico to support those product lines to be assembled there, a challenge handed over to the specialists at the launch center in Racine. The ultimate design for Nogales, as configured in the re-engineering project, called for three focused factories within one facility. When the Nogales assembly activity first started in 1998, workers there were assigned fewer than 10 SKUs and shipped 2,000 to 3,000 locks a day, while Master Lock managers studied the learning curve. "We then took what we learned and put together a plan for shipping 150,000 locks a day with more than 4,000 SKUs," says McCormack.

The Bain-assisted study also encompassed packaging and distribution. Throughout 1998 the company continued to shift product assembly operations to Nogales, but finished products were being returned to the Milwaukee distribution center for outbound shipping to customers. However, Milwaukee wasn't going to cut it in the long-term as a central distribution point. For starters, Milwaukee was limited both in space and flexibility, so it was a given that Master Lock would need a larger distribution facility.

"Our business from a complexity standpoint steadily was increasing," says McCormack. "Our sales and marketing specialists really went on an effort in 1997 and 1998 to differentiate our product in packaging and color and types of products. This accelerated the proliferation of different end items, which caused us to have more requirements on distribution capacity. We needed to change our distribution strategy to match that trend."

Although a considerable share of the products to be assembled in Nogales could be shipped directly to the customer base, Master Lock needed a centrally located distribution center to warehouse, package, pick and ship the rest of its products. Working with Bain, Master Lock did a study showing the weighted average mile to its customer base and found that with a single distribution center model, the ideal location was the Cincinnati/Louisville/Lexington corridor along the Ohio River. After assessing a number of available sites, Master Lock ultimately selected a parcel on the outskirts of Louisville offered on a long-term lease by ProLogis.

On the basis of core competency, Master Lock decided to bring in a third-party logistics company to quickly get its new distribution center operational without having to staff it with an army of Master Lock employees. The company already had a systems relationship with GENCO that dated back to late 1995 when Master Lock replaced its old order management, accounts receivable and inventory systems with an open-system Oracle database with Oracle applications. They selected the software product from Alpha & Omega, a company eventually purchased by GENCO.

"We already knew those people from the systems project, so when it became time for us to look at 3PL assistance in Louisville, we included them when we issued our RFQ," says Gams. "We were interested in a quick start-up capability, because there was some question as to how quickly the union negotiations were going to come to conclusion, and we didn't have a competency in running a non-union distribution center environment." GENCO had these competencies and obviously was familiar with its own DOMS information system, which together helped provide an edge over Exel and GATX, the other two primary contenders for the 3PL contract.

The re-engineering study project was completed by the end of 1998-in less than three months. "This effort wasn't just a theoretical approach to moving stuff around," notes Gams. "The study included the plan, the capital requirements to support the plan, and the return on investment expected from that capital expenditure." In the end, the project was justified on the basis of a three-year payback.

Master Lock then proceeded to establish a small distribution center in Mississauga, about 20 miles from Toronto, at the beginning of 1999 and used that facility for two purposes. One objective was the obvious: to provide distribution capability for its Canadian customers, an action driven by the Canadian business unit and their sales and marketing strategy in response to customer requirements. But Master Lock also wanted to use this site as a model for establishing and operating a remote distribution center and then take the lessons learned from that project and deploy the knowledge when they launched their Louisville venture, dubbed "Operation Bluegrass."

Union Agreement
Master Lock signed a 10-year lease for the Louisville facility in March 1999 when the building was a shell, began receiving product in August, and was shipping product on Sept. 23.

The rapid pace of developments at this point intensified the need to reach peace with the UAW. Negotiations came to fruition in the fall of 1999, and the parties settled on a five-year agreement that would allow the Milwaukee parts operation to be sized down from roughly 1,100 hourly employees to 400 in manufacturing.

Where Milwaukee once covered 750,000 square feet with manufacturing and distribution operations, the company now uses 380 employees and roughly 300,000 square feet for parts manufacturing as well as the automated production of one type of lock, which is shipped directly to Louisville for packaging and distribution. The parts and components manufactured in Milwaukee move in truckload quantities by truck/rail intermodal service to Nogales.

The Nogales building has 150,000 square feet that house three separate "factories." A make-to-stock factory assembles products for retail sales, which then are shipped to Louisville, where they are packaged to retailer specifications. The demand pull for this factory is replenishing inventory in Louisville.

The other two Nogales factories are for make-to-order products. One factory concentrates on commercial customers. As an order comes into the order management system through Master Lock's customer service center in Milwaukee, that order automatically is dropped down to Nogales, where the products are assembled according to the customer's specifications and shipped directly to the customer from Nogales.

The other factory makes locks for lockers, a highly seasonal business where commercial customers such as school systems require certain commonalities between the individual locks, such as a common master key.

The game plan produced in the Bain study called for shipping approximately 40 percent of the Nogales production volume directly to end customers, with Louisville distributing the remaining 60 percent. Products move outbound from Nogales direct to customers per customer specifications. Replenishment products moving to Louisville for packaging and distribution ride on a cost-effective backhaul basis via Danny Hermann Trucking. This arrangement leverages the fact that another of Hermann's primary accounts creates a lot of empties in the Nogales area. Outbound from the Louisville distribution center, shipments move either FedEx Ground or in small LTL quantities.

Finished products now are sourced from eight to 10 vendors, most in China. Master Lock has a global sourcing group in Milwaukee as well as a business manager and quality-control team in Asia to work with its suppliers. Products move by ocean carrier to Long Beach, then by rail intermodal to Louisville.

When the company completed the Bain study at the end of 1998, 15 percent of its product in terms of units shipped came from offshore, with 85 percent made in the U.S. "Today, roughly 48 percent of our products come from offshore, and 52 percent is manufactured in a combination of Milwaukee and Nogales," says McCormack.

Master Lock embraces a postponement strategy for packaging. "This enables us to accommodate some of the differentiation that our marketing people were throwing at us while keeping inventory at acceptable levels," says Gams. With the explosion of colors that now characterize many Master Lock products, packaging at the point closest to final distribution makes more sense than trying to anticipate which locks will be the hot sellers this fall among the 7th graders of the nation, Gams points out. The Louisville distribution center has a variety of packaging equipment that can pack different product combinations together and enclose them in clamshells for retail display.

"With our packaging capability in Louisville, we can quickly turn bulk products into the end items and configurations our customers request while maintaining lower inventory levels," he explains. "As an outcome of a strategy that relies more on outsourcing, there are higher levels of inventory associated with the longer lead time from the Asian vendors. The postponement strategy really attempts to manage the trade-offs between higher unit-cost of packaging in the U.S. versus lower unit-packaging costs in China on the one hand, with the higher associated inventory carrying costs."

The Louisville distribution center has 212,000 square feet of space and can expand an additional 90,000 square feet. Less than 10,000 square feet is used for administration space; the remainder is apportioned 2:1 distribution to manufacturing/packaging. Tom Contratto, a Master Lock employee, manages the distribution center for Master Lock, and Mike Ducat, another Master Lock employee, is responsible for the manufacturing side of the postponement operation.

On the quality control side of the equation, Cathy Hanrahan is the on-site quality supervisor in Louisville, and she reports to Susan Ehren, Master Lock's corporate quality manager. Ehren, who established the quality control operation in Nogales and maintains a quality control team on site, is upgrading quality control efforts throughout the organization. She conducts weekly teleconference sessions that include participants from Nogales, Louisville, Hong Kong and Milwaukee to dissect the week's metrics, identify problems and/or opportunities and formulate corrective or exploitative strategies. GENCO employees staff the rest of the Louisville distribution center.

"Our business model is in play and running, but it's not absolutely where we want it to be," says McCormack. "We're dedicated to the process of continuous improvement." Although Campbell moved onto a new role within Fortune Brands, John Heppner became Master Lock's chief operating officer in December 1999 and continued the organizational focus of leveraging the company's improved operational performance to increase customer satisfaction and provide additional competitive advantage.

McCormack cites four areas of concentration going forward. For starters, Master Lock will continue to advance its postponement strategy as the company "sees huge advantages in inventory reduction and more speed to the customer demand through packing more to order."

An ongoing focus on e-business systems also will help control inventories better, facilitate master production scheduling in a more consistent manner across sites and vendors, and improve the order management process. "Our order management process is one area where we want closer links via the web with both our commercial customers on make-to-order products and with our retailers in terms of doing more vendor-managed inventory programs," he says. "We have the supply chain to do it; now we need to work on the systems to help us get there."

On the human resources front, there has been a shift of competencies as the Master Lock supply chain has become more global and increasingly sophisticated. "We used to run a lot of things by word of mouth; now we communicate with e-mails and are dealing with more seasoned professionals on the logistics side of the business," says McCormack. "Our big focus in this area is on lining up folks to help manage our order fills and to improve the acceleration of product through our chain."

Master Lock needs to re-examine the supply chain for its Canadian business unit as well. "Right now sourced goods from Asia to replenish Canada are routed through the Louisville distribution center, and it's not the most efficient product flow," McCormack acknowledges. Master Lock intends to further advance some of the Canadian procurement from Asia on a direct basis and needs to beef up that unit's systems capability relative to invoice payment and other functions. "But that's going to happen down the road a bit," he adds. "We're trying to target our greatest opportunities first."

Finally, quality control continues to be a primary focus in the continuous improvement process. Gams and McCormack want to capitalize on Ehren's superior quality control program in Nogales and expand that knowledge to Louisville, Milwaukee and eventually to the company's Asian vendors. The aim is to constantly improve the quality of the processes and systems so new and increasingly complex products can be brought to market with fewer problems.

"Our top management continues to push the envelope on new products and differentiating those products in the marketplace, and now we have a supply chain that can support those initiatives and get those products to market much faster than ever before," says Gams. "And we're winning because of that. We have regained almost all of our lost market share-and then some-among the mass merchants in our retail business over the last three years."