Kaizen and private equity

The current issue of Businessweek has an interesting profile of a Monomoy Capital Partners, a private equity firm with about $700 million in investments (My Week at Private Equity Boot Camp, Apr 26). Private equity deals are not the normal focus of this blog, but the article highlights an intriguing aspect of how Monomoy goes about deals. To take over a company and then be able to spin it off for a profit requires some combination of cleaning up balance sheets, rethinking the acquisition’s strategy, or straightening out the firm’s operations. As  the article tells it, Monomoy’s approach to the latter is (from an operational perspective) is encouraging.

To buy a company and sell it at a profit requires a complex skill set: financing, restructuring, negotiating new leases and labor contracts, and, of course, “operations,” the term private equity uses for “making things.” Improving operations can mean parachuting in a consultant or a former chief executive officer as an adviser. Monomoy goes further. It occupies a plant floor like heavy infantry, with yellow tape, label makers, and overwhelming force.

In part, Monomoy does this through a series of two-week “boot camps.” Four times a year, the firm pulls about 20 managers from the manufacturers in its portfolio and sends them to one of its plants to suggest—and carry out—efficiencies.  …

Monomoy has adopted Toyota’s system. Five of the seven people in Stewart’s operations group spent time on the line at the Toyota plant in Georgetown, among them Mike Bray, also in the training room. Bray, tall and goateed, runs the boot camps for Monomoy. He uses the word “kaizen” as a transitive verb and as a noun with an indefinite article, as in “We’re going to kaizen this” and “We ran a kaizen on it.”

Monomoy certainly appears to be drinking the Kool-Aid on applying the Toyota Production System to its acquisitions. All of the partners and several of the firm’s non-operations employees have participated in boot camps at its holdings, and they have supposedly even held one of these kaizen events at their Manhattan headquarters (tripling the number of prospective deals they can consider).

The outcomes for their acquisitions seem strong. The article focuses on a plant belonging to Heat Transfer Products Group, a maker of  industrial refrigeration equipment. Since  Monomoy took over the business in 2010, they have consolidated plants and shed some employees but also grown sales by 19%. It has been able to support that growth by making the plant more efficient.

Stewart explains that since buying HTPG, Monomoy has moved roughly 15 tractor-trailer loads of machines and inventory off the floor and consolidated into the same space an entire plant from Yuma, Ariz. Copper tubing and sheet metal had been stacked between stations; you can now see clear across the plant’s 200,000 square feet. Before Monomoy, stations had “pushed” parts forward, simply making them at will and keeping them to be used down the line as needed. The plant now “pulls” product, starting with the day’s orders from customers and building components on demand. Excess inventory wastes capital and hides problems, says Stewart. I will hear that often this week.

Farrister nods again as Stewart speaks. She doesn’t nod like an employee. She nods like a believer. “It’s the best thing that’s happened to this plant,” she says. At her station, a boot camp team removed the clutter, ran time studies, created more space to work, defined a precise job for everyone, and improved productivity from two units per shift to five units a shift. “People are nicer now,” she says. “It used to be so stressful. You’re searching for parts, trying to get sheet metal, everyone’s at each other’s throat. It’s not as stressful now.”

It should be noted that this is a unionized workforce.

All together, this is an encouraging story. The positive spin on private equity is that they can actually strengthen acquisitions by making hard choices and strengthening management. Looking hard at a firm’s operations and systematically applying TPS are ways to create value. There, however, is a caveat to all this that the article hints at. As Monomoy implements TPS, it is largely externally driven. Monomoy’s experts descend for a few weeks and make all sorts of changes. These may or may not have last effects.

There seems to be less emphasis on developing a local culture that assures that there is no backsliding from the revised processes. Further, there seems little attempt to let the local plant do things for themselves. That is, there is not a permanent culture of kaizen that keeps eking out gains. Rather, it seems the goal is the keep things going until the next time Monomoy’s expert parachute in to shake things up.