Al Dunlap at Sunbeam

Al Dunlap at Sunbeam

Al Dunlap was a ruthless man. He would go into corporations and “trim the fat” by laying off thousands of employees and shutting down factories. In the eyes of some it was crucial that he conducted business in this way as it instantly generated profits for the shareholders by driving stock prices up. It is my understanding that with Sunbeam, Dunlap was just applying a very large band aid to a growing problem without really solving any of the company’s issues.

Dunlap was hired at Sunbeam and given a stock option package that was directly tied to his performance. Everything Dunlap did was to increase stock prices that would grow his investment into the company, but that was all for not towards the end of his career at Sunbeam as stock prices plummeted from fifty-three dollars a share to just sixteen the day he was fired. Leading up to his firing, he had initiated several processes that he labeled as cost cutting majors and he also acquired three other failing brands to add to Sunbeams already stretched product line.

Sunbeam was aging out as new competitors came in and dominated the market. Their facilities were older, and machinery and tooling needed improvements. The business lacked information systems to connect one department to another. Turnover was high in the factories and the board of directors was ranked one of the worst by Chief Executive magazine in 1994. It is for these reasons that Dunlap was hired and when he came on as CEO he made huge changes by laying off around thirty-five percent of the company and shutting down factories all over the US to move operations to Mexico where labor and fees would be substantially less.

The philosophy of Dunlap had more to do with creating shareholder wealth rather than keeping stakeholders happy. In his opinion, stakeholders had no claim to the business, because their money wasn’t tied to the stocks like the shareholders. I disagree with these claims on the basis that to have a properly working facility, you need employees who feel valued. Dunlap’s approach to creating value was distorted. He felt that by saving a portion of the firm instead of losing the whole thing that employees should be grateful.

“He puts his money where his mouth is” was a saying known about Dunlap. When hired on at Sunbeam he invested $5 million in Sunbeam stock for the first year of his tenure. And demanded that others on the board make substantial investments as well. Their performance should be tied to the stock options as that was the true test to see how well the company was doing. If the company performed poorly, then the board was paid less, but during great success there was nearly unlimited potential. Dunlap made about $1.5 million from his initial purchase in Sunbeam shares, but he boasts that he took no bonus packages from the company.

It is my belief that Dunlap was a phony. He had quick fixes to boost earnings that raised stock prices and then he would sell the company’s off to another conglomerate. He didn’t look at the long term in truly fixing the problems and instead did everything he could to cut costs fast and create an image of company wealth. With Sunbeam however, he found himself stuck in failing stock prices and the inability to further grow the business.

To evaluate Dunlap’s problems at Sunbeams I will look at the three downfalls affecting the company.

1. Changes to inventory procedures
2. Lack of a research and development team for new products.
3. Acquisition of failing firms.

Changes to Inventory Procedures

To boost sales, Dunlap initiated a buy early and ship later policy for their outdoor living division. The stores buying the outdoor living pieces would order in the winter months a discounted rate for it being the offseason of outdoor products and Sunbeam would hold onto these products until the store was ready to take them. This led to increased inventory, holding costs, and an unfair advantage of reporting revenues as the product had not actually been turned over to the customer yet. Their financial statements appeared they were making a profit, but at the expense of holding inventory for long periods of time.

Lack of Research and Development Team

Typically, it took Sunbeam sixteen to eighteen months to complete a new product line. Dunlap wanted to speed this process up to about six months. The problem here is that Sunbeam lacked an efficient and well-staffed research and development team. It is unrealistic to believe that that not only could he reduce the lead time for a new product, but for Dunlap’s proposal of sales to double in a year it was just simply not going to happen without having the proper teams in place to develop new products and complete them in such a short amount of time.