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Supply Chain Management of Flowserve Corporation
Supply Chain Management of Flowserve Corporation - January 6th, 2011
Flowserve Corporation is a global leader in the design, manufacture, marketing, and maintenance of fluid-handling equipment. Formed in 1997 through the merger of Durco International and BW/IP, Inc., Flowserve operates in 29 countries through three distinct divisions. Flowserve sells its flow management equipment--which includes engineered pumps, precision mechanical seals, valves, and a range of services&mdash′imarily to the petroleum, chemical, and power industries. The company's growth strategy focuses mainly on acquisitions and alliances, although it faces formidable competitors as the industrial flow management industry undergoes a wave of consolidation. Flowserve's many brands include Durco (pumps), Valtek (valves), and GASPAC (seals).
Flowserve was created in July 1997 when two rival companies--Durco International and BW/IP, Inc.--merged to form a new corporate entity. At the time it joined forces with BW/IP, Ohio-based Durco International (which was known as the Duriron Company until shortly before the merger) had enjoyed ten years of record growth. Launched in 1913 as a foundry, Duriron had been producing chemical fluid handling equipment for more than 80 years. By the 1980s, the company had built a solid reputation for making the specialized equipment needed to move fluids in the chemical process market.
In the 1990s, Duriron embarked on a massive reorganizing effort. With more than 85 percent of its sales derived from the chemical industry, the company was buffeted by the 'peaks and valleys' of that cyclical business, according to the Plain Dealer. Seeking to enter new segments of the fluid management industry, Duriron began to forge alliances and acquire companies that operated outside its chemical niche. This strategy proved successful, and by 1995, the chemical industry provided only about half of Duriron's business.
Equally important to Duriron's agenda in the 1990s was its expansion into international markets. Since most American industries were well established, few major chemical, petroleum, or other processors needed to invest significantly in costly new pumps and valves. But in less developed countries (and especially in the Middle East, Latin America, and Asia), the demand for flow management equipment was huge, as entire process industries were being created virtually from scratch. Recognizing that its future hinged on these new markets, Duriron embarked on another spate of acquisitions to gain entry. Duriron's strategy was successful. Between 1985 and 1995, international sales as a portion of the company's total revenue rose from 15 percent to about 33 percent.
Although Duriron's 1996 sales reached $605.5 million (a gain of nearly 13.7 percent from 1995), the company was falling behind in the rapidly consolidating flow management industry, as its competitors grew dramatically larger through mergers and takeovers. Duriron's ability to expand through further acquisitions of its own was particularly limited by its comparative lack of operating capital. To remain a major force in the industry, Durco (as Duriron had rechristened itself in 1997) would need to find new ways to grow.
BW/IP's Growth and Development in the 1980s and 1990s
Like Durco, BW/IP was a leader in the manufacture of industrial pumps, although its strength was in the production of specialized pumps for the petroleum and power industries. But the petroleum industry--like the chemical process industry Durco served--was cyclical. In addition, because petroleum industry revenues had flattened in the late 1980s and early 1990s, BW/IP's growth had slowed as well. To protect itself from the vagaries of the petroleum industry, therefore, BW/IP sought to enter new markets.
Like Durco, BW/IP sought to use targeted acquisitions to achieve its goals. In 1996, for example, BW/IP acquired the Anchor/Darling Valve Company, which was an American manufacturer of high-specification, custom-engineered valves for the power and marine industries. A few months later, BW/IP purchased Stork Popmen B.V. This Dutch company manufactured pumps for the petroleum industry and offered BW/IP access to lucrative European markets. As a result of these efforts, BW/IP's sales rose nine percent in 1996, to $492 million. Nevertheless, again paralleling Durco, BW/IP was hindered by its lack of capital. Many of its key customers in the petroleum industry were true global companies, who required products and services across the world--a reach that BW/IP simply did not have.
Durco, too, was limited in its efforts to achieve a global presence. As Bernard Rethore, BW/IP's president, chairman, and chief executive officer (CEO), would later explain to the Wall Street Transcript, both companies 'recognized that to serve our customers in the chemical, petroleum, and power markets on a world basis we needed to have a larger footprint, a greater scope as a company. As BW/IP and Durco, we couldn't do that because each company was too small.' In late 1996, executives from the two companies began informal discussion about the potential for joining forces. The advantages of a merger became more apparent after ITT Industries Inc. paid $815 million to acquire Goulds Pumps Inc. in April 1997, thereby becoming the world's largest pump manufacturer. The industry 'was consolidating and turning cut throat,' an executive at another industrial pump company told Business Week. Faced with the prospect of being left hopelessly behind, BW/IP and Durco pledged to merge.
Flowserve Is Born in 1997
The union of the two companies was a merger of equals, effectuated by a stock-for-stock exchange in July 1997. BW/IP's Rethore was selected as the new company's chairman and chief executive, and William Jordan (the president, chairman, and CEO of Durco) served as the president and chief operating officer (COO) of the new corporate entity. To reflect that the merger had created a new company with a broader range of products and services, BW/IP and Durco elected to take a new name. They settled on Flowserve because it 'symbolizes the fact that ... we will adopt an expanded vision of serving all the flow control needs of our customers in the 21st century,' Rethore proclaimed in a press release. After closing BW/IP's headquarters in Long Beach, California, and Durco's in Cleveland, Ohio, Flowserve opened global corporate headquarters in Irving, Texas.
Almost immediately after the merger, Flowserve launched a $92 million integration program that consisted of 45 distinct projects. Although BW/IP and Durco each had carved out areas of focus in the wider flow management industry, there was a considerable degree of overlap. To eliminate these redundancies, Flowserve merged the two companies' pump, valve, and seal businesses into three streamlined divisions--the Rotating Equipment Division, the Flow Control Division, and the Fluid Sealing Division.
The new company also decided to focus on certain core areas, which necessitated shedding extraneous operations. To this end, Flowserve sold its Metal Fab Machine Corp. to Senior Engineering Group PLC for $19 million in November 1997. Moreover, as part of a cost-cutting program, Flowserve shuttered its high-cost pump manufacturing plant in Charleroi, Belgium and transferred production to two factories in The Netherlands. It also opened a valve production factory in 1997 in Bangalore, India, so that it could reduce labor and materials costs.
In addition to honing its existing operations, Flowserve also sought to enter a different--and lucrative--sector of the flow management industry: service and repair. Whereas the pump and valve business was subject to the cyclical downturns of the petroleum and chemical markets, the service and repair of existing equipment was not. In 1997, Flowserve formed the ServiceRepair Division, which focused on tending to the flow management equipment it had already installed. Flowserve would 'go beyond just manufacturing,' Rethore told the Wall Street Transcript and would provide 'cradle-to-grave' service on its equipment.
By the close of 1997, the merger looked to be an unequivocal success. Sales for the year surpassed $1.15 billion, with nearly half of the total generated by operations outside the United States. With 44 manufacturing facilities and 88 service and quick response centers, the company was better positioned to provide a broader array of goods and services to a wide range of customers. Flowserve's net profit for 1997 was $51.6 million.
Investors and industry analysts had high expectations for Flowserve in 1998. The company's sales were balanced, with about one-third of total sales derived from the petroleum industry, one-third from the chemical sector, and one-third from power and other industries. As these markets tended to follow different cycles, Flowserve appeared to be less vulnerable to downturns than BW/IP and Durco had been on their own.
Troubles in 1998
In early 1998, however, both the petroleum and chemical markets softened simultaneously, as the Asian economic crisis of 1997 spread around the globe. By the end of 1998, oil prices (when adjusted for inflation) were at their lowest level in the United States since the Great Depression of the 1930s. The chemical market was plagued by overcapacity, and prices there also dropped, reaching global all-time lows. As a result, the industries involved in these sectors postponed orders for new equipment.
Despite this untimely confluence of events, the company continued to integrate its operations. In 1998, Flowserve inaugurated its Flowserver initiative, a multiyear program intended to coordinate the myriad businesses within the company. Flowserver was predicted to have a $120 million price tag, with an expected completion date of 2001. The centerpiece of Flowserver was the establishment of an integrated information technology system that would consolidate computing and coordinate planning.
Flowserve also increased its efforts to enter new markets. The company made five important acquisitions in 1998, all of which expanded its global reach. In May, Flowserve purchased the Valtek Engineering Division of Roll-Royce plc. With annual sales of about $20 million, this unit was the British licensee for a number of Valtek control valve products. The acquisition strengthened Flowserve's position in Europe, the Middle East, and Africa. In October, Flowserve bought the remaining 49 percent ownership interest in Durametallic Asia, a fluid sealing manufacturer, from its joint venture partner, the Sanmar Group. In December, Flowserve purchased a mechanical seal business that operated in Australia and New Zealand from an Australian licensee and distributor, BTR Engineering Limited. During the year, Flowserve also acquired ARS Lokeren NV of Belgium and ZAR Beheer BV of The Netherlands. These European valve repair companies bolstered Flowserve's position in the profitable market for repairing flow management equipment.
Flowserve pursued the service end of the market in other ways in 1998 as well. Early in the year, the company consolidated its two most service-oriented divisions--ServiceRepair and Fluid Sealing--into a new division called Flow Solutions. This new unit was to be the centerpiece of Flowserve's drive to capture a greater share of the service market. As the company announced in a press release, 'service and repair [will] be a fundamental part of Flowserve's growth strategy.' To improve on its network of service centers, the company built new facilities in locations such as Antwerp, Belgium, and Wilmington, North Carolina. By the end of 1998, Flowserve presided over 85 service centers in 23 countries.
Despite its many activities during 1998, however, Flowserve's sales and profits dropped as a result of the economic conditions afflicting its primary customers. Annual sales fell to $1.08 billion, while net earnings slid to $48.9 million. The company attributed the six percent drop in profits primarily to fallout from Asia's recession. Nevertheless, Rethore emphasized to the Dayton Daily News that the company had 'dealt effectively with the negative impacts on [its] business of global economic turmoil, dramatically lower oil prices, and weakened chemical markets.'
Retrenchment and Growth To Close Out the Century
In 1999 and 2000, Flowserve continued its two-pronged strategy of integrating the sprawling businesses of BW/IP and Durco into a cohesive framework on the one hand and gaining a larger presence in international markets on the other. Flowserve had new leadership to aid it in its mission. President and COO Jordan had left the company in October 1998 and was replaced by C. Scott Greer in July of the following year. Rethore remained chairman and CEO, although he planned to relinquish his duties as chief executive after Greer became more familiar with Flowserve's operations.
In November 1999, Flowserve made an important acquisition when it purchased Houston, Texas-based Innovative Valve Technologies Inc. for $15.7 million and the assumption of $84 million in debt. With 63 operating locations and annual revenues of more than $154 million, Innovative was a leader in maintenance, repair, and replacement services for valves, piping, and other flow management systems. 'Through this acquisition, we will significantly expand our technical service and repair capabilities,' Greer explained to Petroleum Finance Week. In addition to strengthening Flowserve's place in the service sector, the acquisition also positioned the company more strongly in critical emerging markets in the Middle East.
Flowserve also won two major contracts in 1999: one to provide flow management equipment to Suncor Energy's Millennium Project and one for AEC Pipelines' oil sands pipeline expansion. Although the petroleum industry had curtailed a number of projects, oil sands exploration (the extraction of oil from tar sands) continued because of the comparatively low costs involved and the high quality of the crude oil produced. The contracts were worth a total of $10 million.
Despite these considerable advances, Flowserve's 1999 sales were hindered by the continued overall weakness of the petroleum and chemical markets. Sales dropped two percent to $1.06 billion, and profit fell to $12.2 million. Faced with these difficulties, as well as with the continued need to eliminate certain redundancies that had persisted since the merger, Flowserve announced early in 2000 that it would close ten facilities and lay off nine percent of its work force (about 600 people).
Nevertheless, Flowserve continued to view expansion as the key to its future success. With the stated goal of becoming a $2.5 billion company by 2004, Flowserve made the largest acquisition in its history to that point, when it agreed to buy the Ingersoll-Dressler pump unit of the Ingersoll-Rand Co. in February 2000. Once approved by federal regulators, the $775 million purchase would result in the second largest pump company in the world. 'This type of acquisition has such a high level of hard synergies that we'll be able to take out excess capacity in the industry,' Greer told the Dow Jones News Service. Also in February 2000, Flowserve announced that it had won a contract to provide $20 million worth of pumps for the Athabasca Oil Sands Project. One of its largest pump contracts ever, the deal held great promise for the company.
In light of developments such as these, Rethore was optimistic about Flowserve's future prospects. 'As our markets recover, and they will, as we acquire successfully and well, and we will, and as we build further the internal operational excellence of this company, as we will, I believe our increasing success will be rewarded,' he told the Wall Street Transcript.
Principal Operating Units: Cookeville Valve; Flow Control; Fluid Sealing; Rotating Equipment.
Principal Competitors: IDEX Corporation; Roper Industries, Inc.; ITEQ, Inc.
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