Solving a Financial Crisis
Despite Herman Miller’s grounding in the disciplined management of the De Pree family, executives at the company began to lose their way in the early 1990s, and the board of directors became concerned, particularly about a lack of spending discipline and a decline in profitability. The board promoted then president Volkema in 1995 to be CEO, giving him the urgent task of restoring solid financial performance.
Volkema, who stepped down as CEO in 2004 but remains chairman, notes that healthy profitability should have been a cinch when he took over: The industry was growing at a double-digit rate. The company “had really gotten off track,” he says. “We had operating margins that were out of control. We were going to break even in a year when we really should have made a lot of money.”
To rectify the lackluster profitability, he and then CFO Walker took the path many companies started down in the 1990s: focusing on shareholder value. The key lesson that Herman Miller took to heart was that a company doesn’t create shareholder value unless it creates economic value added, or EVA — and it doesn’t create positive EVA unless it generates returns above the cost of capital, enough to pay for debt and equity capital. In much of the industry, that insight resulted in a lot of cutting and restructuring, little more. But at Herman Miller it also involved an effort to get people at every level to make better, more informed financial decisions.
Walker led a program to cascade EVA training down to every employee, very much in the spirit of D.J. De Pree. He wanted everyone at the company to calculate the financial effect of decisions big and small. It didn’t matter if they were involved in buying, selling, building, designing, billing, paying, or financing. Or whether they were charged with controlling quality, reliability, inventory, waste, energy use, scrap, or the kinds of staples people used. They were expected to embed EVA into their thinking. As everyone grasped what it took to create a true economic profit, Walker established a new level of business literacy.
Heather Kerres, who started as a cushion stapler on a chair assembly line, remembers the introduction of EVA. Before that time, she recalls that she and her co-workers sometimes bought things “frivolously.” Afterward, she says, “On the line, we really watched what we spent.” Her assembly line also strived as never before to make chairs perfect the first time, so the company could sell more. They understood they needed to exceed the previous year’s EVA. If they didn’t, they wouldn’t get a bonus.
Walker himself hewed closely to the shareholder value constraint. During the dot-com crash, he and Volkema used EVA to nix one appealing acquisition. The target company, which Walker declines to name, fit nicely with Herman Miller’s product line. It was growing fast, had good margins, and could pump up revenues and earnings handily. But an EVA analysis revealed a different picture. For every spurt of growth, the operation would need a slug of capital. “It was uneconomic,” the CEO says. He walked.
Developing the Performance System
Although the focus on economic profit restored financial discipline to Herman Miller, Volkema faced another crisis at the same time, this one in manufacturing. Ironically, the crisis first emerged in a unit Volkema had himself run some years before. At the company’s Spring Lake, Mich., file cabinet plant, big customers like Hewlett-Packard and AT&T were pulling their orders. So was one of the company’s own business units, an express-delivery division that accounted for some 25 percent of Spring Lake’s volume. A Herman Miller competitor just 60 miles away was offering better quality at lower prices. “We’d reached one of those threshold moments when you have to do something,” says Ray Muscat, operations chief at Spring Lake at the time. “Here’s someone in the family telling you they don’t want your services.”