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The World According to Kirscht
The president of Donnelly Custom Manufacturing on how to maintain company focus through economic uncertainty and the impending ‘regulatory cliff.’
March 2013

People who know Ron Kirscht and his company, Donnelly Custom Manufacturing, invariably describe the operation with one word: focus.

“How Short Run is Done.” is emblazoned on Donnelly’s walls, on its collateral materials, the website and well into the psyches of every one of the 235 employees that work for this $31 million manufacturer. Keeping this focus on the greater complexities and higher margins of short run manufacturing has kept Donnelly profitably growing through the volatile economy.

We met Kirscht in a conference room in Donnelly’s Alexandria-based plant for a wide-ranging conversation about the company, the state of his industry, and the relationship between manufacturers and those who govern them. Particularly about those who govern them.

Ron Kirscht grew up thinking he would follow in his father’s footsteps running the family dairy farm in Monticello, but his father advised him there would be a brighter future by going to college. He got an accounting degree from St. Cloud State, became a CPA and worked for Coopers & Lybrand, where he focused on privately owned manufacturers. After working his way through several local manufacturing firms, in 1991 he met Stan Donnelly, a St. Paul-based entrepreneur who had founded Donnelly Manufacturing in Alexandria, which at the time had grown to be a solid company with 60 employees. Kirscht moved with his wife, Julie, and their four preschool sons to Alexandria to be VP of operations. In early 2000, he was named president.

An accountant, really? You carry yourself more like an entrepreneurial engineer.
I’m not an engineer, but I understand mathematics and mechanics – cause and effect. Accounting gives you a conceptual framework to run a company, as opposed to one that is run by entrepreneurial energy.

Accounting has its own metrics. It is a process for thinking and reasoning. I had experience in financial accounting, but also cost and inventory accounting, so that provides a template to help graft underlying causes to business results and understanding costs, what’s fixed, what’s variable – where are you investing in the future versus where you’re simply incurring expenses.

I saw many companies as an auditor. I’d visit maybe 15 different entities over the course of a year. You see organizations and interact with people in different functional areas. You learn about the process flows and the interconnectedness of various functions. But you also learn about people and business cultures. It is good basic training for general business leadership and corporate governance.

Short run manufacturing seems to have served your company quite well. Was it always in the plan, or did it evolve?
When Stan (Donnelly) founded the business in 1984, he focused on short run, close tolerance parts. His vision was that it was an underserved market. Once we established a beachhead and became a profitable entity, he thought we’d migrate towards long run, because that’s what molders did to minimize mold changeovers which are traditionally view as a pain, a headache. But by the time we had gotten critical mass, we realized short-run, custom manufacturing was a vibrant and viable niche business. It had great potential and great customers with an ongoing renewal of engineering activity. We were also starting to see consumer products were increasingly being outsourced overseas.

Our customers tend to be leading industrial OEM companies. They typically range from $250 million to $8 billion in sales. A lot of them have global footprints that we support.

People who know Donnelly and your management style remark that “focus” is one of the symbols of your company brand. Is there a secret to how you accomplish that?
Dr. (W. Edwards) Deming talked about constancy of purpose. We deal with large and sophisticated industrial OEMs. We can’t be a general purpose molder; we need to be committed to a niche offering. Training is an underpinning of what we do and who we are in building the confidence, competence and commitment requisite for people to succeed in their jobs and for us to succeed as a company.

The constancy of purpose comes from the concept that we’re practical people. We don’t want to over think things. Form follows function. If there is a fit, there’s a future. We constantly change and add pillars and systems to improve ourselves, but they always support the same premise that we’re going to set the standards for how short run is done, and in the process create value for our customers.

Constancy and clarity of purpose literally build pride. It may not always be exciting on a day-to-day basis, but over time it is very compelling and fulfilling. We have a change-ready culture, but we don’t abuse it. When we put something in place it’s going to be in place for a long, long time. People understand that and they commit to it.

We look at the same critical success factors and we approach them in the same way. We don’t have people who are winking and nodding, saying that’s what the old man is saying, but here’s how we’re really going to do it.

Competing agendas are wasteful. For us, it distills down to: we know who we are; we know that our discipline of market leadership is in customer intimacy. We know that we set the standards in short run. Our mission statement is simple: to deliver good products on time. We have four stated values: treat others as the way you want to be treated, do your best, work as a team, and don’t be afraid to ask for help.

We keep perfecting things, but we don’t keep uprooting them. It’s not like we’re Total Quality Management today, or 6 Sigma tomorrow, and Lean the next. We don’t believe in gurus. We try to deepen our understanding and utilize the insights we gain from experience to improve ourselves. That’s how we get better.

One of the attributes that makes short run manufacturing less vulnerable to foreign competition is its intricate nature. What are the challenges of managing complexity?
Complexity in our industry is measured by how many presses you have. How many different materials do you process? How many different molds? The simplest in our industry would be one mold, one machine, one material. Everything after that increases the complexity factor. The average complexity factor for the top 25 percent of companies in our industry with $30 million or more in sales is about 3 million. Our complexity factor is at 48 million. Because we mold 3,000 different active parts from 2,600 molds out of 500 different materials using 33 injection molding machines.

We meet that challenge by taking a process approach with things like our War Room. The war is against waste: wasted materials and time. Waste undermines our mission to deliver good parts on time. The final waste, one that you can’t readily measure but you know is there, is the waste of people’s belief systems in the organization. If you take out the things that drive waste and create late deliveries and quality issues, then you’ve supported and confirmed the belief of the people in your organization. It’s a test of leadership. If your high-end processes are well conceived and aligned, your people proven and committed, you overcome complexity with precision.

You sometimes characterize the economy in terms of aeronautical flight.
What you want is lift and thrust so you can maintain or gain altitude. Having some agility in the air is good, too. 

More and more what I see coming out of Washington, D.C., and frankly St. Paul, is not lift and thrust. It is weight and drag, in the form of higher taxes and expanded regulation. Everybody wants to tax the rich – and they want to define the rich as someone who makes more than they do. We’re putting too much weight and drag on our economy.

What about it makes you most nervous as a manufacturer?
Our economic prospects are muted by uncertainty. Economic uncertainty, taxes, and the regulatory avalanche that is coming upon us, all repress entrepreneurship, investment and the creation of capital.

People are sitting on the sidelines. Not because they are greedy or stupid, but because the level of uncertainty makes them question the timing of investment, especially for brick and mortar or capital equipment.

A lot of businesses are thinking; let’s try to wring out what we can with what we have. They say, I can be wrong if I should have been expanding, but if things go unfavorably in the economy, I don’t want to be wrong, having just taken out a mortgage on the building or borrowing on an expansion and finding myself long on debt and low on cash.

The one thing that could tempt you into taking on a mortgage or making a significant investment in capital equipment is that interest rates are very, very low. I would say artificially low.

During the recession a lot of manufacturers speculated that a new wave of regulations would constrain banking relationships for manufacturers. Were those fears well-founded?
As a result of TARP, the big banks – the big banks -- have an unfair competitive advantage over community banks. They probably have a 20 to 40 basis point advantage. That’s a bit of a challenge for community banks.

But those relationships are still good. Our approach is to keep them informed, project well, and don’t hold back. You always want to give them your best shot. Relationships are so important in banking. We never surprise our bankers. When we see that things are getting better or tougher, we always tell them before it happens, so that we have a track record of being open, honest and right.

We heard a lot of folks talk about uncertainties about the “fiscal cliff” in Washington earlier this year. You talk about a “regulatory cliff” that may be even more insidious. What do you mean by that? 
The regulatory cliff deals with the avalanche of new regulations that government is churning out. The Code of Federal Regulations has grown by leaps and bounds – and compliance is a pressing, albeit unreported challenge for business. Between OSHA, the EPA and the National Labor Relations Board, it seems that there are lot of pinch points and sharp edges for business people to navigate. And then there is the Affordable Care Act and Dodd-Frank, massive pieces of legislation that have been enacted but for which the rules are still being written.

We make it hard to do business in America. Right now regulations and laws appear to be more about concentrating power, money and control rather than improving opportunity, outcomes and conditions.

Look at energy. Everyone is tripping all over themselves to “invest” in alternative energies. But some of the government subsidies that go toward wind and solar are not only bad for the taxpayer; they are bad for those industries. They are not market solutions; they are political solutions.

What’s happened to the price of grain? What impact has that had on people who are using grains for dairy farming or for beef or hogs? The inputs have gone up. What’s happened to food prices? They’ve gone up. How does that help people who are living on the margins financially?

Energy drives our economy. The focus should be on making it affordable, available, and abundant. Right now the push on regulation is not about that. We hear that America has 5 percent of the world’s population but we use 24 percent of the world’s energy. But I would argue that we are disproportionately efficient in our use of energy. We produce over 30 percent of the global output. We are more efficient in our use of energy for manufacturing and delivering goods and services relative to the world norm.

The funny thing is that we’re driving business out of the United States to other countries, where their use of energy to covert to products is often far less efficient. If we really cared about the globe, the world, we’d say pushing manufacturing out of the United States is generally bad for the world, for the air, for the water, for the climate, for the people. It is antithetical to the stated goal of environmental stewardship.

What’s your sense of how Minnesota’s state policies are affecting the prospects for manufacturing?
There is a steady drain in capital and intellect in the State of Minnesota. It is slowly and silently bleeding away –and it is not being recovered. I think we are squandering terrific advantages that we have had as a state. There is a dynamic, vibrant base of entrepreneurs and inventors and people that are bold in taking steps and starting businesses with an idea and hard work. That’s slipping away. Politicians will generally deny this, but I posit they are vested in their denials.

The State of Minnesota has lost its way. I know there is an annual hue and cry to throw money at education, but if you look at the reality, education is not underfunded, but is underperforming.

We keep this reflexive attitude towards education every year with renewed calls for more spending. I know at a national level, that the U.S. funding of the education system, relative to history, is at a very high level, but the results are slowly eroding. We’re not getting what we’re paying for. I think there are some systemic and institutional issues driving that. We don’t want to confront them so we can’t fix it. We use more spending as a means to score political points and assuage our sense that there is profound problem we cannot commit ourselves to understand and solve.

Given all this, what’s the outlook for manufacturing?
Small and mid-sized companies are generally more focused, nimble and agile. They can adapt more quickly. The titanic hit the iceberg because it was a big ship with an undersized rudder and couldn’t turn in time. From that standpoint, as long as people keep their heads on a swivel and keep focusing on the objective and not solely problems, there are opportunities – even when there are tough days in the global economic arena.

There are always opportunities for companies that get outside the organization and think about what’s happening, to understand the external forces impacting them and the needs of the their customers, and strive to imagine what kinds of opportunities this will create. Generally, success isn’t based upon what is – it’s about what you make of what is.