Business; Strategic Management

CASE: Ohio Nail Manufacturing

Introduction
It was 1:30pm. Ed Heath, ONM’s chief executive looked up from his desk to see his long-time colleague Mike Hesletine, the company’s CFO, sitting patiently in front of him. Dave Owen, the company’s director of manufacturing was seated to Heseltine’s left; to his right was Bill Rodgers, the sales and marketing director and Shirley Williams, legal counsel. It was a big decision and he had been lost in thought. Buying Ohio Bolt was something of a risk given Wall Street’s aversion to diversification, albeit into a related set of activities. A plan that OMN would purchase Harrisburg Rebar, which ONM had proposed the previous year, had met with unanimous disapproval from the board. However, for the Ohio Bolt bid, he had managed to secure their approval, since some Wall Street analysts considered nails and nuts and bolts as part of a single industry, albeit a view not universally shared on the Street. All that was needed was to finalize the financing. Heath needed to tell the bank whether or not to proceed with the issue of the 20 year callable bonds before 2pm. If they went ahead, interest payments on the company’s debt would double, which would leave little margin for operational error and less to spend on R&D. It was a big decision. Although he had been sure about the acquisition when they began looking for ways to expand the company two years ago, he was having some last minute doubts.
History
ONM, originally The Ohio Nail Manufacturing, Inc., was founded in 1937 by Tony Benn and Harry Wilson. Together they built the company until Benn retired in 1953. Wilson continued at the helm until his death at the age of eighty four. In 1975, Jim Callahan, who had been CFO under Wilson, took over the running of the company. Under Callahan’s stewardship, ONM acquired Milgram, a manufacturer of hand tools and Huller & White which produced small power tools. This period of diversification came to a fairly abrupt end in the 1980s when, in response to pressure from institutional investors, Callahan’s successor, Ed Heath reversed this policy and beginning divesting, paring the company’s activities back to its core activity of nail manufacturing and spinning off most of the businesses that it has acquired over the preceding twenty years, including Huller and White and Milgram. The 90s saw a period of steady growth despite the difficult economic climate at the beginning of the decade and the company believes it is well placed to take advantage of the emerging trends in its industry in the new millennium.
Success had come easily to Heath. After studying economics and law at Harvard, he decided to join Zenon as their junior counsel. After three years in the New York head office, he took a posting running the South African subsidiary. His success in South African brought him international experience and a large network of influential political allies. In 1993 he left Zenon to join CRT, a strategy consulting firm, where he spent just eighteen months before being asked by ONM’s board to bring the company back from the brink of disaster. The markets were taking an increasingly dim view of the unrelated diversification that Heath’s predecessor had undertaken. Heath’s task was to re-focus the company and return it to a level of profitability at least as good as its two main competitors, Akron Fasteners and Bedford Inc., behind whom it had increasingly lagged over the last seven years. While ONM still had its original six nail making plants built in the 1970s, Akron and Bedford had both recently added new capacity which was also more efficient that ONM’s plants, which was reflected in their profitability.

Industry
The nail industry has revenues of $2 billion. Generally, there is little to distinguish one nail from another; although they come in different lengths and diameters, and nails are nails. Where sizable contracts are involved, for example large construction firms buying in bulk, bids are generally sought from two or three competing firms with sufficient capacity to meet large orders. Table 1 presents summary financial information for the largest six firms in the industry. ONM ranks third in the industry in sales and profitability.

Table 1 – The Nail Industry
Sales ($m) Net Profit ($k) Plants
Ohio Nail Manufacturing 60 3,600 6
Akron Fasteners 100 10,000 10
Bedford Inc. 80 6,400 8
Cheviot Nails 50 2,500 5
Derby Nail Company 30 900 3
East End Enterprises 20 400 2
Production technology
Production of nails relies on a single, relatively simple production technology; all firms make nails in pretty much the same way. Minimum efficient scale typically requires annual output at least one hundred tons of nails; total industry volume is about the thousand tons per year. While most firms have only one plant, a handful has several. For example, Akron Fasteners has ten plants, Bedford has eight and Cheviot operates five. The manufacture of nails starts with just two commodity inputs; steel wire and zinc. Wire is purchased from any one of over one hundred different suppliers. While there are fewer sources of zinc, most nail makers have plenty of suppliers from whom to choose. ONM uses a just-in-time (JIT) manufacturing strategy. Rolls of wire are delivered by ONM’s suppliers in trucks that roll up to the loading dock once a day. ONM’s inventory holding is practically zero and it depends on its suppliers to maintain this flow of raw materials. The rolls of wire are unloaded by fork-lift and a gantry crane delivers them to the beginning of one of the five production lines in the plant. Each line is dedicated to a different gauge (thickness) but the output from each line can be changed to cut nails of differing lengths. Changing the length requires stopping the line for less than a minute, while if a line were required to produce a different gauge of nail, it would have to be stopped for up to an hour; hence the dedicated line for each gauge.
Though most of the process is automated, manual labor is needed to set up the wire feed into the drawing machines that gradually thin the wire to the appropriate gauge. At the end of the wire drawing process, the wire is automatically cut into different lengths. The newly cut wire, already sharpened at one end by the angle of the cutter, falls into a hopper from where they are taken, ten at a time, into a head press. The press forms the head and ribs the top of the shank. The unfinished nails are passed by conveyor-belt from the press into the galvanizing tank where they are coated with zinc to prevent rusting. After galvanization, they are placed into boxes of different sizes from 100 nails to a box to boxes of 20lbs typically used by contractors and construction firms. Boxes are taken by hand from the end of the line and stacked onto pallets, shrink wrapped and labeled ready for shipping. It takes about a half day for wire to pass from the spool at one end of the line and appear as a finished nail at the other; most of that time is in the galvanization process. Only fifteen people work on each line. The process is largely automated with engineers monitoring the setup of the machines. Recently, statistical quality control has been introduced and engineers now spend over half their time recording setup data and sampling output along the production line. Each Friday afternoon, teams meet in quality circles to consider ways in which the manufacturing process might be improved.
While nails were ONM’s original product, it is considering adding nuts and bolts to its product line. If the acquisition of Ohio Bolt goes through, nuts and bolts will account for well over 50% of the company’s revenues. Bolt manufacture is more complex than making nails. Bolts begin life as steel bar. The bar stock is fed into a former where a die grip compresses the stock, leaving room for the punch to compress the free end forming the head. The raw bolt is trimmed from the stock and proceeds to a cold rolling process where it is rolled between dies to form the exterior contours of the bolt. Cold rolling is preferred to machining because there is no wasted material. The bolts are then moved to a galvanizing tank, after which they are boxed for shipping.
Table 2 – The Nut and Bolt Industry
Sales ($m) Net Profit ($m) Plants
Ohio Bolt 112 13 3
Bass Bolts 150 23 4
Charrington 75 6 2
Adnams 74 5.5 2
Theakston Thread and Die 76 6.5 2
Ohio Bolt it the second largest bolt maker in the US. With sales of $112m, its acquisition would more than triple ONM’s sales. The five largest firms in the industry are shown in Table 2.
Bolts are similar to nails in one respect, in that economies of scale are important. The equipment needed to make bolts is more expensive that that used in making nails. In bolt manufacturing, a minimally efficient plant produces about 750 tons of bolts a year; total industry output is about 10,500 tons a year. Ohio Bolt has three plants, its original plant in Cincinnati serving the rust belt, one in Pittsburgh, PA serving most of the east coast, and one in just outside Hawthorne, California, supplying firms on the west coast.
The nut and bolt industry has faced increasing pressure from Chinese imports that have grown from 2% in 2000 to 15% by 2019. However, the trend is thought likely not to continue both because of trade restrictions imposed by the US government and rising costs in China which make overseas production less attractive.
Products and markets
Nails are used by two market segments; building contractors and consumers. Large contractors buy from national wholesale suppliers like Grainger and if they are large enough, directly from the manufacturers. Consumers and small contractors buy from retail chains which are themselves supplied by the national wholesalers, with the exception of the big box stores like Lowes and Home Depot which often negotiate directly with the manufacturers. The largest four wholesalers account for over four fifths of the market. There are typically only one or two wholesale distributers serving each region, with just two national wholesalers.
About 30% of bolt industry’s production goes to two major market segments of about equal size, the automotive industry and large scale civil engineering firms. The civil engineering firms comprises a large number of relatively small regional firms while the auto industry in the US comprises six firms, Chrysler, GM, Ford, Toyota, Honda and VW (other manufacturers import finished products from outside the US). Another 20% are sold to the aerospace and defense industries, companies such as Boeing, Lockheed, Northrop Grumman, Raytheon, General Dynamics and United Technologies. The remaining 50% is split between wholesale/retail and other manufacturing and engineering firms, through the same channels as described earlier for nails,.
Recent trends
In the last 3 years, innovations in production equipment have significantly reduced the MES for bolt production; plants of 25 tons / year are now viable. The new tools allow companies to switch from minute to minute between different sizes of bolt and between Whitworth, BSF and UNC . In last 2 years several new firms have sprung up, two started by ex-employees of ONM who had been let go during Heath’s restructuring. Ohio Bolt was currently leading the industry in the acquisition of the new production technology and was hiring graduates from the local ITT training institute to run the new machines. Its first such purchase, a new multi-die rolling machine, delivered 18 months ago was proving to be a very valuable acquisition, reducing units costs by a factor of two.
Although bolts are typically made of steel, the automotive industry has been looking at aluminum fastening technologies to address with the demands for increasing fuel efficiency. This is of concern to the steel bolt industry because of the relatively high cost of re-tooling for aluminum. Although the machine tools manufactured in the last three years can be used on aluminum, older equipment must be replaced.
The critical choice facing ONM’s management is whether to buy Ohio Bolt, a traditional manufacturer of steel bolts, or wait to see how the industry evolves. Not only was there the issue of the new bolt making technology, several companies who already supplied the auto makers with aluminum fasteners were apparently considering entering the steel bolt industry in order to supply the auto makers with a full range of products.
While in the aerospace firms and defense contractors had historically been very profitable, in large part due to the “cost-plus” basis on which government contracts had generally been awarded, recently things had changed. The Pentagon’s newfound focus on competitive bidding in place of cost plus contracts was exerting significant downward pressure on the defense contractors’ prices.
The civil aviation market which was highly consolidated (essentially comprising just two major firms, Boeing and Airbus) and which supplied airlines all over the world, was also under pressure with a decline in passenger volumes, causing airlines to postpone deliveries of planes they had ordered and sale back future orders.
Both Boeing and Airbus are now designing planes that make increasing use of composite materials such as carbon fiber. Both Boeing’s 787 “Dreamliner” and the Airbus A350 XWB have airframes comprising more than 50% carbon fiber according to Hexel, a major supplier of composites. Composite materials such as carbon fiber, which are stronger and lighter than steel or aluminum, are typically joined using chemical welding processes.
Heseltine needed an answer for the consortium of banks that were involved in the bond issue. Heath in turned and looked long and hard at the faces of his team. They had discussed the issue for several days. Everything was ready. Now all they needed was for Heath to give the final go-ahead. But was this really the right direction in which to take the company?

Sample Solution

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