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Manufacturer Goes Small in Era of ‘Too Big to Fail’

April 28, 2010 at 12:00 AM EST
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As part of his ongoing series of reports making sense of the economy, Paul Solman revisits a Missouri manufacturer that has proven small enough to succeed in the era of "too big to fail."
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JUDY WOODRUFF: Next: As the Senate debates whether some banks and other financial institutions are too big to fail, “NewsHour” economics correspondent Paul Solman takes a second look at a company that has some interesting lessons about being small enough to succeed.

It’s part of his ongoing reporting on Making Sense of financial news.

PAUL SOLMAN: When we first visited SRC, the Springfield ReManufacturing Company, back in 1990, it was thriving refurbishing old truck engines.

MAN: We tear them down and then we rebuild them.

PAUL SOLMAN: SRC was an unlikely Rust Belt success story, given that Japan was supposedly number one in those days, the U.S. dead in the water when it came to manufacturing.

The company, in Springfield, Missouri, attributed its success to what it called the great game of business: Everyone was on the same team, was taught to read the financials, and, thus, how to keep score.

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WOMAN: They want us to know exactly what we’re putting out every month.

PAUL SOLMAN: Finally, the company was owned lock, stock and crankshaft by its workers, so everyone had a stake in the game’s outcome.

CEO Jack Stack, who founded SRC

JACK STACK, CEO, SRC Holdings Corporation: I feel they’re motivated for one reason. They have got an income statement. They all know it. That’s their — that’s their motivation. It’s a unifying factor. It’s their report card.

PAUL SOLMAN: So, 20 years later, and with China now ascendant, renewing concerns that America may again be consigned to the dustheap of manufacturing history, we wanted to know, how’s the company doing?

Today’s SRC, it turns out, is SRC Holdings, with investments in almost 60 related companies, employing some 1,200 people, many still re-manufacturing cars, tractors, boats. But there’s also a home furnishings firm, a warehousing operation, a business that teaches folks how to do business the SRC way.

In an era of too big to fail, SRC’s motto would seem to be: small enough to succeed.

JACK STACK: Most of us came from very, very large factories.

PAUL SOLMAN: Jack Stack is still CEO.

JACK STACK: It’s very, very hard to get passion in the organization over 250, over 400 people. You lose the touch that you really need in terms of building the teamwork that you want.

PAUL SOLMAN: So, every time SRC got near that size, another division was hived off as its own firm, most in Springfield, some beyond.

From SRC came SRC Electrical. It makes starters and alternators. A new offshoot from it will soon make electronics. Now this small-is-beautiful strategy may not be for everyone, but Stack says it preserves solidarity, flexibility, entrepreneurship, and it has created more opportunities for advancement at SRC.

JACK STACK: And once we taught people business and how to understand it and how to be able to run a business, we really prepped them. And, so, we saw the opportunity of being able to move them into their own businesses to make room for other people to be able to come up to the organization, because it wasn’t only about jobs. It was about opportunities.

PAUL SOLMAN: Stacks son Tim runs SRC Logistics.

TIM STACK, SRC Logistics: There’s a lot of opportunity that we have under this 400,000-square-foot building. It’s just, where do we start?

PAUL SOLMAN: This is the so-called skunk works, an incubator for new SRC businesses. It collects old parts and devises new uses for them. SRC hopes to turn ideas ginned up here into new companies.

So, what’s that, a truck engine?

TIM STACK: Yes, it can be used in trucks. It could be put in power units to power houses. It can be put in airboats. We have seen wood chippers.

PAUL SOLMAN: Of course, not every recycling idea pans out — auto floor mats, for example. Well, what exactly were you thinking when you bought thousands of these, it looks like?

TIM STACK: We were thinking we could make some pretty good money on it. Otherwise, we wouldn’t have done it.

TIM STACK: But, in reality, they turned out to still be here. But we have been talking to companies about chopping these up into little pieces and using them for playgrounds or turf where people put fields, artificial turf.

PAUL SOLMAN: SRC has come to believe that only by keeping its units small and managers empowered can it foster this sort of innovation, which actually saved some of its key companies during the recent crisis in its key industry: automotive.

JACK STACK: Automotive got murdered. And our client was General Motors, so we have 200-and-some people that are just virtually out of work.

PAUL SOLMAN: But this spinoff was small enough to re-manufacture itself.

MAN: This is our 5.7-liter General Motors engine that we converted for natural gas application.

PAUL SOLMAN: Natural gas engines became backup electricity units for irrigation, oil drilling. The old engines found new customers, like the U.S. Postal Service — result, no layoffs during the crisis.

And now workers are doing 50-hour weeks, the company hiring again, by following the familiar formula: Learn the financials. Share the proceeds. Stay small.

And that’s what it teaches to others, like Juliet Mee, who owns this massage training center in Springfield.

JULIET MEE, director, Professional Massage Training Center, Inc.: I had no idea about how important the numbers were in my business.

PAUL SOLMAN: Once a math-phobic masseuse, the newly confident Mee has since stabilized the school, even spun off companies to clean linens, hers and others, manage benefits for her staff and those at other small firms.

JULIET MEE: We will start with some simple compressions on your back.

PAUL SOLMAN: Uh-huh.

The school took a pounding during the downturn, but the fact that the staff was aware of the failing financials, she says, made survival possible.

JULIET MEE: At the end of last year, our employees knew that some bills had to be paid that the cash was not there for. And they loaned me personally enough money, so that I could put that money into the company and pay those bills.

PAUL SOLMAN: So, they gave you this bridge loan when they themselves must have been under financial stress, because they want to keep the company going, keep their jobs going, and they trust you?

JULIET MEE: Because they knew the need was real, and they knew that the cash wasn’t going to come in from any other source.

PAUL SOLMAN: Not easy for folks who only make about $30,000 a year. With business now in better shape, the topic of a recent staff huddle: whether to take a bonus for the first time in 18 months.

WOMAN: Our income needs to be at $500,000.

PAUL SOLMAN: It turns out they missed that target by $500 bucks, so it went to a staff vote.

JULIET MEE: No bonus. No bonus. No bonus.

PAUL SOLMAN: They voted 14-6 against giving themselves bonuses.

JULIET MEE: We’re in this thing together. My employees have kicked it in because they know I’m telling them the truth.

PAUL SOLMAN: Meghan Chambers was a reluctant open-book convert. In 2004, she opened the Springfield Clothing Boutique Staxx. Although the store had great P.R. and soaring sales, three years after opening, she ran out of cash.

MEGHAN CHAMBERS, owner, Staxx: All my money was tied in my inventory. It was a difficult time. I wasn’t sleeping at night. I wasn’t eating. This was going to go down, and it was such a good thing. And why was it going to go down? I didn’t understand it.

JACK STACK: My daughter has style, OK? If you went to her store, she’s got incredible style, but she hates numbers.

PAUL SOLMAN: Before she married, Meghan Chambers was Meghan Stack, the only one of Jack’s children not playing the game of open-book management, the family’s dirty little secret, since her parents had bankrolled the store.

JACK STACK: I bleed open-book management, OK? I believe that you have to have style, but you have to have — you have to have that financial acumen to — to be able to put the two together.

MEGHAN CHAMBERS: Finally, I went into a meeting with him, like, tears, you know, just like, all right, I’m ready, like, what do you I have to do?

PAUL SOLMAN: The father would continue to support the store with a $50,000 loan, if the daughter opened up her books.

JACK STACK: And then she had to sign a commitment with her investor that she…

PAUL SOLMAN: … you.

JACK STACK: Yes — that she would — she would teach everybody financials, and her investor would then audit whether or not everybody understood the numbers.

MEGHAN CHAMBERS: Obviously, with the variance of our margin and the expenses being a little bit higher than expected…

PAUL SOLMAN: The Staxx staff started talking stats at their monthly meetings. Results? A focus on higher margins and turning inventory faster.

MEGHAN CHAMBERS: We were successful at it as soon as those books were opened. I mean, it was growth from that moment. From that month I implemented it, we started to grow.

PAUL SOLMAN: Just as our interview was wrapping up, an unexpected visitor.

You’re not here to terrorize your daughter by making her even more self-conscious?

JACK STACK: She doesn’t listen to me.

MEGHAN CHAMBERS: It is very true, in that I definitely could market it, and I could sell it, and I could do everything else, but, when it came to running it and the numbers, it was something I did shy away from.

PAUL SOLMAN: Not anymore.

Now the proprietor envisions a Staxx spinoff or two, and maybe even some day passing SRC’s open-book management onto the next generation, her new baby daughter, who, with the right help, is also arguably small enough to succeed.