When Jim McNerney
came to 3M (MMM) from General Electric (GE) in December, 2000, his mandate was to boost the profitability of the sprawling conglomerate. Six Sigma was one of the main tools McNerney used to achieve that end, and the "process excellence" program that GE made famous seemed to work wonders. 3M's stock price, buoyed by an industrial rebound, soared and operating margins crept into the low 20s.
Yet the current 3M chief executive, George Buckley
, who took the reins in December, 2005, has a different mandate. He wants to kick-start top-line growth. To do that, he's making 3M much more acquisitive, and he's also removing some of the stringent focus on Six Sigma, particularly in areas such as basic research. That move already may have had a psychic payoff, as workers at the science-centric company seem newly energized about Buckley's more flexible growth agenda.
The big risk comes in the more tangible measurements, such as profit margins. Buckley knows he can't simply undo the profitability and productivity improvements that McNerney won. His challenge is to figure out how to loosen up the organization, but still keep costs under control. How's he going to do it? "Did Jim take all the money trees?" Buckley asks. His answer, clearly, is no. The big money tree Buckley is eyeing is the company's convoluted supply chain, where he hopes to wring wasted money out of the system.
EXPANSION AND CONTRACTION Buckley plans to spend $1.5 billion on 18 new plants or major expansions around the world, including 11 outside the U.S., with four new factories in China alone. The thinking is that the new factories will add much needed capacity—especially abroad, where 3M pulls in more than 60% of its revenues, and where it expects to get up to 75% over the next several years.
Despite a vast, complicated network of 64 international subsidiary companies, just 35% of 3M's manufacturing capacity is overseas. In Buckley's view, the plant expansions won't just add capacity—they are an opportunity to make the whole logistics chain more efficient by shortening supply lines and bringing production closer to local markets.
How did things get that way at 3M? For a long time, one of the tenets of the 3M catechism was "make a little, sell a little." Once a project was green-lighted, it might receive funding, but the developer or scientist would have to make small quantities of the product in an ad hoc manner by using idle spots of time at factories throughout the 3M system. It was a way to minimize the financial risk of a new product, and it served the company quite well—when its infrastructure and sales were centered mainly in the U.S.
KEEPING INVENTORY MOVING Now, "make a little, sell a little" means that a typical product might be extruded in Canada, machined in France, packaged in Mexico, and sold in Japan. That's costly, and it means that half of 3M products spend 100 days traveling through the supply line, according to Buckley, even before it has to jump any local bureaucratic hurdles.
The net result is that 3M has a lot of money tied up in inventory around the world that's just sitting on boats, in trucks, and in warehouses. In the fourth quarter of 2006, for instance, sales rose about $500 million. But working capital went up $450 million and receivables increased $250 million, Buckley says. If that trend continues, "You'd be borrowing money to grow," he says.
Buckley expects over the next two years to free $1 billion in working capital and to achieve another "hundreds of millions" in cost savings from the more efficient supply chain. "Working capital as a percent of sales is a big metric for CEOs these days," says Jack Kelly, an analyst at Goldman Sachs (GS), "because if you can reduce working capital, you can increase your cash flow." As Buckley explains, "This is the money tree." By Brian Hindo