Chapter 11 Mini Case Study

Peerless Laser Processors

By Jack R. Meredith, Marianne M. Hill and James M. Comer

(Adopted from: Project Management: managerial Approach, 2011 by Jack R. Meredith, Samuel J.
Mantel)

Owner and President Ted Montague was sitting at his desk on the second floor of the small
Groveport, Ohio plant that housed Peerless Saw Company and its new subsidiary, peerless Laser
Processors, Inc. As the the scanned over the eight-page contract to purchase their third laser system at a
1200- watt computerized carbon dioxide (co2) laser cutter, he couldnt help but reflect to a similar
situation he faced three years ago In this same office. Conditions were significantly different then. It was
amazing. Ted reflected how fast things had changed in saw blade market, especially on peerless, which
had jumped from an underdog to the technology leader, Market data and financial statements
describing the firm and its market environment.

History of Peerless Saw Company

Peerless saw company was formed 1931, during the Great Depressions, in Columbus, Ohio to
provide handsaw blades to Ford Motor Company. It survived the Depression and by 1971, with its
nonunionized labor force, it was known for its quality handsaw and circular saw blades.

But conditions inside the firm had reached the crisis point. The OPEC oil embargo provided the last
straw, creating havoc in the saw blade market as in many other markets at the time as firms rushed to
stockpile scarce resources and critical materials, creating artificial shortages for everyone. At that point
Ted Montague had appeared and, with the help of external funding, bought the firm from the original
owners. Teds previous business experience was in food processing, and he had some concern about
taking charge of a metal products company. But Ted found 40 employees, 13 in the offices and 27
(divided among two shifts) on the shop floor, to be very helpful, particularly since they now had an
owner who was interested in building the business back up.

Peerless survived the embargo, and the 1974 recession as well, so that by early 1976 Ted felt
comfortable with his knowledge of the business. At that point he had a feel for what he believed were
the more serious problems of the business and hired 30-year old grinding machine and vertical milling
machines. Committed to staying in business Ted arranged for capital financing to design and build a new
facility and replace some of the aging equipment. In 1977 the firm moved into new quarters in
Groveport, not far from Columbus, with 7000 additional square feet of floor space. He also ordered
seven new grinders from Germany and five new vertical mills. In order to determine what bottlenecks
and inefficiencies existed on the shop floor. Ted also devised and installed a cost tracking system.
Laser Cutting Technology
By 1978, the competion had grown quite strong. In addition to the growing number of direct
domestic competitors, foreign firms were mounting devastating attack on the more common saw blade
models, offering equivalent quality off the shelf for lower prices. Futhermore, many users were now
tipping their own blades, or even cutting then themselves, further reducing the salable market. Sales
were down while costs continued to increase and the remaining equipment continued t increase and
the remaining equipment continued to increase and the remaining equipment continued to age and fail.

Ted and Con looked into new technologies for saw blade cutting. They felt that Computer Numerical
Control (CNC) machining couldnt be adapted to their needs, and laser cutting had high setup times, was
underpowered, and exhibited a poor cut texture. (Ted remarked that It looked as though an alligator
had chewed on it.)

By early 1981, advances in laser cutting technology had received a considerable amount of publicity, so
Ted and Con signed up to attend a seminar on the subject sponsored by Coherent, one of the leaders in
industrial laser techno logy. Unfortunately, at the last minute they were unable to attend the seminar
and had to cancel their reservations.

Ted was under pressure from all sides to replace their worn-out punch presses. No longer able to delay,
he had contracts made up to purchase three state-of-the-art, quick change, and Minster punch presses.
As he sat at his desk on the second floor of the Groveport building, scanning the Minster, Inc. contracts
one last time before signing, Con came in with a small piece of sheet steel that had thin, smooth cuts
through it.

It seems that a salesperson had been given Ted and Cons names from the seminar registration list and
decided to pay them a call. He brought a small piece of metal with him that had been cut with a laser
and showed it to con. This was what Con brought into Teds office. Impressed with the sample, Ted put
the contracts aside and talked to the salesperson. Following their talk, Ted made arrangements to fly
out to Coherents headquarters in Palo Alto, California, for a demonstration.

In July 1981, Ted and Con made the trip to Palo Alto and were impressed with the significant
improvements made in laser cutting technology since 1978. Setups were faster, the power was higher,
and the cuts were much cleaner. Following this trip, they arranged to attend the Hanover Fair in
Germany in September to see the latest European technology. There they were guaranteed that the
newer, higher powered lasers could even cut one-quarter-inch steel sheets.

In November, Ted and Con returned to Palo Alto, making their own tests with the equipment. Satisfied,
Ted signed a contract for a 700-watt laser cutter, one of the largest then available, at a price close to
$400,000, although the cutter couldnt be delivered until September 1982.

In addition to the risk of the laser technology, another serious problem now faced Ted and Con
obtaining adequate software for the laser cutter. Ted and Con wanted a package that would allow off-
line programming of the machine. Furthermore, they wanted it to be menu driven, operable by their
current high school educated workers (rather than by engineers, as most laser required) and to have
pattern search capability.
 Coherent Inc. was simply not in the off-line software business. Since Ted and Con did not want
to learn to write their own software for the cutter, Coherent suggested a seminar for them to attend for
they might find the contract they needed.

Con attended the session but was shocked at the horror stories the other attendees were
telling. Nevertheless, someone suggested that the contact Battelle Laboratories in Columbus for help.
Fearing their high class price but with no other alternative, Ted and Con made arrangements to talk with
the Battelle people.

The meeting in March 1982, gave Ted and Con tremendous hope. Ted laid out the specifications
for the software and surprisingly, it appeared that what they wanted could possibly be done. The price
would be expensive, however-around $100,000- and would require seven months to complete. In the
next seven months Con worked closely with Battelle, constantly redesigning and respecifying the
software to improve its capabilities and avoid unsolvable problems and snags.

Finally, in September 1982, a 2 inch-high print out of Fortran code, programmed into a DEC PDP-
II computer was delivered and matched via an RS-232 interface with the recently delivered laser cutter.
But when the system was turned on, nothing happened. As Ted remarked, Disaster City. The software
problems were solved within a day but the laser cutter had to be completely rebuilt on site. For almost
100 days the bugs had to be worked out of the system it was just awful.

The months of debugging finally resulted in a working system by December 1982. Meanwhile,
Ted and the machine operator, Steve, spent out four hours every Friday morning in training at Battelle
to train how to use the system. Con and another operator did the same on Friday afternoon. Con and
Ted later remarked that the hardest part of the training was learning to find the keys on the keyboard.

Initially, Ted and Con thought that they might have enough business to keep the laser busy
during one shift per day. As it turned out, running the system was considerably more operator
dependent than they had expected for a computerized system. Though anyone in the shop could learn
how to use the system, finessing and overriding it (skipping routines, tricking it into doing a certain
routine) when necessary to get a job done. Ted describe this as a a painful learning curve. Thus, only
an experienced operator could get the volume of work through the system that was theoretically
possible. Nevertheless, once thoroughly familiar with the system, one operator could easily handle two
cutters at the same time, and probably even three.

Within the next 17 months, Peerless put 40000 saw patterns on the system and started running
the cutter for two full shifts. Due to increased demand they added another laser cutter, using the same
compute system, and by November 1983 were running both cutters throughout two full shifts.

Market Place and Competitive Effects

As of 1984, Peerless saw a number of improvements in their operations, and some significant
changes in their market as well. In 1979 they had a 14-week delivery lead time. Part of the reason for
this was that 25 percent of their orders had to be renegotiated with the customer because the old
tooling couldnt handle the job. This slowed down the work tremendously. With the laser cutter this has
been reduced to just three weeks, heat treating being the bottleneck (two full weeks).

Though they werent making any blades that could not be made in 1979, their product mix
changed considerably. In 1979 thy made primarily 8-, 10- , 12-, and 14- inch saw blades. With the new
capabilities of the laser cutter they were now making a much wider variety of blades and more complex
blades as well. As a matter of fact, they were producing the more difficult blades now, and at a less cost.

For example, with the laser cutter, it took one-seventh the amount of time to cut a blade as it did
previously, and one-eight the number of machine operators. The resulting average cost saving was 5 to
10 percent per blade, reaching a maximum of 45 percent savings (on labor, material, and variable
overhead) on some individual blades. Although cost savings allowed peerless to cut prices on their
blades, more significantly, they had an improved product faster lead times, and more production
capability.

Production capability was particular importance. Peerless found that the ability to do things for
customers that simply couldnt be done before changed the way customers ordered their blades.
Because of the new capability, they were now seeing fewer repeat orders (although the batch size
remained about the same) and considerably more creativity on the part of their customers. Orders
now came to them as The same pattern as last time to expect . Customers were using peerless new
capability to incrementally improve their saw blades, trying to increase capacity, or productivity or
quality by even 1 or percent, based on their previous experimentation. Peerless had discovered, almost
by accident, a significant competitive advantage.

Ted was intrigued with the way the laser cutter had revived Peerless. He stated that, based on
payback or return on investment (ROI) criteria, he could not have justified the investment in the laser
cutter beforehand. But more significantly, if he were to go through the figures now, after the
tremendous success of the laser cutter, he still would not be able to justify the cutter on payback or ROI
grounds. The point was, the new technology had changed the market Peerless was selling to, although
the customers remained largely the same. The laser cutter in fact created its own market, one that
simply could not exist prior to this technology. It filled a need that even the customers did not know
existed.

Despite the increased speed of the laser cutter, it was not necessary to lay anyone off, though some
employees jobs changed significantly. The laser system was purposely packaged so that the existing
employees could work with it and contribute to its success, even though they may have had only high
school education.

Ted continued to push the concept of a small, high- quality, technologically advanced business staying
ahead of the same foreign competition that was wreaking havoc on the major corporations in America.

Ted summarized the benefits the new technology brought as:

1. Decreased product cost

2. Increased product quality
3. Ability to use a sophisticated technology
 4. Ability to do what couldnt be done before, more responsive to the market
5. An inspiration to visiting customers
6. A positive image for the firm
7. Adds pizzazz and mystique to the firm
8. Allows entry into new fields

Peerless in 1984 in September 1984

Ted created a new division, Peerless Laser Processors, Inc. to handle general laser cutting of other types
of parts besides saw blades. By then, Peerless had logged 10,000 hours on the laser cutters and had
placed 6000 patterns on the system, adding new ones at the rate of 300 a month. Due to continuing
customer requests that had never originally been considered, or even dreamed of, the software has
been under constant revision and improvement by Battelle. Ted noted that, even though the need for
revisions is expected to continue, it would neither pay to hire a software programmer nor would the job
be interesting enough to keep one for long.

Ted and Con felt that generic computer-assisted design/ computer-aided manufacturing (CAD/CAM)
systems available today would not help their situation. The unneeded capabilities tend to slow down the
system, and in their new business the main competitive factor, given other constants such as quality, is:
How fast can you do the job?

Peerless also hired two additional sales representatives, with one now in the field and two in the office
at all times. They also hired an engineer to develop new applications on a full-time basis for Peerless
Laser Processing. As Con noted, The problem is recognizing new applications while still doing your own
work. They discovered, for example, that they could now make their own shuttles for their double disk
grinders instead of purchasing them.

Peerless now has five U.S. competitors in the laser cutting business. Of course, Germany and Japan,
among others, are still major competitors using the older technology. For the future, Ted sees the lasers
becoming more powerful and having better control. He sees applications growing exponentially, and
lasers doing welding and general fabrication of parts as well. He sees other technologies becoming
competitive also, such as water jet and electro discharge machining (EDM)

For Peerless, Teds immediate goal is to attain a two week lead time for sawblades and even better
customer service, possibly including an inventory function in their service offerings. For the long run,
Teds goal is to become a showcase operation, offering the best in technology and quality in the
world.

As Ted put it: A company is like a tree. It only succeeds if it continues to grow, and youve got to grow
wherever theres an opportunity. There are a maximum number of sawblades needed in the world, but
no cap on what else the technology can do. Were only limited by our own imagination and creativeness
and desire to make technology do things. Thats our only restriction. What it fundamentally comes down
to is this: Is a railroad a railroad or a transportation company? Are we a sawblade company or are we a
company that fabricates metals into what anyone wants?