Turning Japanese
How Japanese manufacturing practices
transformed an oilpatch pump maker
on the Prairies
Text: Pat Roche
How many companies get a national award as one
of the country’s best-managed businesses, and then face insolvency
the same month?
Calgary-based Kudu Industries Inc. found itself in this situation
early in 1998 after the oilpatch went into a downturn. The Financial
Post (then a separate business daily, now part of The National Post)
had chosen the progressing cavity pump (PCP) maker as one of
Canada’s 50 best-managed private companies for 1997.
The honour certainly seemed fitting. Incorporated in February
1989 by petroleum engineer Robert Mills and his oldest son, Ray,
the company had sales of $36 million in 1997.
Despite his company’s incredible growth, the elder Mills believed
Kudu needed to change, and he already had some ideas in mind. At a
social event Robert Mills had met Chuck Harrison, an industrial
technology adviser, or ITA, with the Canadian government. ITAs,
who work for the National Research Council’s Industrial Research
Assistance Program (IRAP), are scattered across the country and
their mission is to help small businesses.
Harrison offered to come to Kudu’s plant in southeast Calgary to
analyze its manufacturing operations. “His report on us was that we
were very inefficient and wasteful,” the privately-held company’s
chairman recalls today. Harrison recommended Kudu institute lean
manufacturing and ISO (more on those later). Mills listened to
Harrison’s assessment, but “I got so much pushback from everybody
else in the company — I just couldn’t get any buy-in for what this
guy was saying.”
And why would anyone believe Kudu was broken? The company
was busier than it had ever been. “Our sales grew at 50% per year, so
it was kind of hard to convince ourselves that we weren’t doing
things right,” recalls Mills. “But … costs were going up faster than
the sales, quality was deteriorating and stock-outs were soaring.”
This time bomb was ticking as Mills travelled to Toronto to
collect the award in February 1998. While there, he listened to a
consultant’s presentation about the barriers to success that a growing
company encounters at various levels of sales. For example, at about
$2 million in sales, a business needs an in-house accountant. Kudu
had successfully managed all the barriers except the $25-million
threshold. The speaker argued that when a company reaches $25
million in sales, it must have written procedures in place or the
business will fail.
A light bulb flashed on in Mills head. “This is the barrier we’re up
against,” he concluded. “We’re stocking out. We can’t deliver on
time. And our quality is lousy. We’re increasing staff to try to
improve the quality and we’re increasing inventory to try to stop the
stock-outs. Nothing was working. The situation just kept getting
worse.”
As possibly the only one in the company who’d been through
several oilpatch ups and downs, Mills was worried about a slowdown
Robert Mills
when oil prices started slipping during the previous autumn. But
customers assured Kudu they weren’t going to change their plans
for the first quarter.
As Mills flew back to Calgary with his award, his worst fears were
already being realized.
Customers who were so confident the previous autumn simulta-
neously cancelled their orders. By around mid-February everything
was shut down. Kudu got caught at the limit of its credit line with
too much inventory. Bankruptcy loomed.
Mills again made his pitch for change, and this time people listened.
His response was to implement the ISO 9001 quality manage-
ment system. ISO 9001 is one of a family of standards maintained by
the International Organization for Standardization. An ISO 9001
company puts in place policies, procedures and work instructions
covering all its key processes. This involves record keeping and
monitoring all processes to ensure they’re effective.
“I always tell people, ‘ISO is not a quality system. ISO is a way of
doing business,’” says Mills. “Once you have the policies, procedures
and work instructions in place, you become consistent. And
reliability is consistency in manufacture. If you do it the same way
every time and according to specifications, the product will be as
reliable as you promise and it will be good quality.”
ISO keeps a company organized. “You track your bad-quality
events. And you track what it costs you,” says Mills. “And the cost of
bad quality is just too much to suffer.
“So even though I say ISO is a way of doing business it does result
in quality.”
Harrison (now deceased) also advocated the “lean manufacturing”
model developed decades ago by Toyota.
Lean manufacturing or lean production — sometimes referred to
simply as “lean” — is characterized by the endless pursuit of waste
elimination. Because goods sitting in inventory cost money instead
of making money, the lean philosophy holds that production should
whenever possible be tied to actual sales, not just hopes of sales.
New Technology Magazine | March 2010 1
 innovators
That means less inventory. Kudu, on the other hand, had been
accumulating more and more inventory due to rising sales and
“stock-outs” — items not in stock. The problem was, it wasn’t
working. “The Japanese say the more inventory you have, the more
likely it is that you will run out of what you need. We proved that
they’re right,” Mills recalls with a laugh.
(In a nutshell, the difference between lean and ISO 9001 is the
latter means you control engineering and production whereas lean
manufacturing is all about efficiency and eliminating waste. ISO
focuses directly on quality, while lean manufacturing indirectly
results in better quality.)
The turnaround
With insolvency looming, people were willing to consider such
counter-intuitive concepts.
Mills set up a three-person advisory board. Besides Harrison, it
included an experienced manufacturer and a financial advisor. “And
they backed him up. They said you got so much inventory it’s going
to kill you.”
Starting around the spring of 1998, Harrison came to Kudu’s
plant every Tuesday to talk about ISO and lean manufacturing. “He
did this for 18 months and we packed the lunchroom with every-
body we could get in there,” says Mills. Employees who were with
the company the longest were asked to come; otherwise, attendance
was voluntary.
Given that this was on the heels of a near-death experience, the
need for change was accepted. As training progressed in the
classroom, actual changes were occurring on the plant floor.
Mills hired a quality assurance manager who had worked in the
aircraft industry. He and Mills agreed they wouldn’t have a cop
system of quality control with one person manufacturing and
another checking quality and measuring performance. Instead,
employees were made responsible for the quality of their own work.
The quality assurance department became a resource for the people
on the plant floor. “When they have a problem, they learned they
could go to quality and get it sorted out,” Mills recalls. “So they
really bought in.”
Kaizen is a Japanese philosophy focusing on continuous improve-
ment. In the context of lean manufacturing, it means quick change. And
in Kudu’s case, the first quick change was in the size of its inventory.
The plant is naturally divided into bays by the roof-support
columns. Each of these rows of columns was filled with pallet racks
stacked two deep, each filled with stock that was gathering dust. “In
our first kaizen blitz,” says Mills, “we backed a truck up to the back
door and started moving stuff and taking it across the road to the
scrap-iron yard.”
But can having less inventory reduce stock-outs? Does this
concept — which seems to require suspension of disbelief — actu-
ally work in the real world?
The answer is in Kudu’s statistics. The company kept track of the
number of times, for example, a customer would order a pump from
one of its field service centres and it would be out of stock.
In 1997, with sales soaring and inventories bursting at the seams,
the number of times items were out of stock literally soared off the
chart. The company stopped counting its 1997 stock-outs after the
tally for that year reached 200-plus.
“But a few years later — with double the sales — we had less than
10 stock-outs in the year,” Mills proudly recalls. And that was with
double the sales and half the inventory.
Customers, he says, are always surprised when they come into one
of Kudu’s field service centres and see how little inventory there is.
2 New Technology Magazine | March 2010
If the service centre managers get their orders in before 6 a.m.
when the plant employees come to work, half the order will be
manufactured that morning and shipped that afternoon by over-
night trucks so it arrives the next morning. The rest arrives the next
day. Mills says speed and flexibility are reasons the company is
successful overseas.
Within months of starting to make operational changes, Kudu
turned the corner financially.
In 1999 — the year after its brush with insolvency — Kudu again
became profitable, says Mills. The timing is amazing because 1999
was when world oil prices sank to about $10 (US) a barrel — and
progressing cavity pumps are used solely for oil production.
(Mills prefers “progressing” cavity pumps over the somewhat
more common “progressive” cavity pumps, which he good-naturedly
calls bad grammar.)
“It was a pretty dramatic turnaround,” he says of the upswing
achieved during a downturn. “And thereafter we built a very strong
balance sheet and kept a strong balance sheet.”
Cheap as China
Around the time of Kudu’s first kaizen blitz, an employee
approached Mills and asked: “When are the layoffs going to start?”
This caught Mills by surprise. “I said, ‘I’m not thinking about
layoffs. Why do you ask?’ And he said, ‘When you finish putting this
new lean manufacturing in place, you aren’t going to need as many
people.’” That was true, but the leaner Kudu wasn’t going to need as
much space either. Reducing inventory was going to free up
one-third of its floor space.
“So I said, ‘I’ll tell you what we’ll do. We’ll start buying machine
tools and we’ll in-source our machining.’ And I called everybody
together in the classroom and said, ‘OK, here’s my promise: Work
with us on lean and I guarantee you there’ll be no layoffs. We’ll buy
machine tools, we’ll bring them in and we’ll train you on how to use
them.’ And so we did — and we wound up hiring more people
instead of laying off.”
Mills says in-sourcing makes it much easier to control quality
because everything is in house. This combines with the efficiencies
of lean manufacturing to make in-house manufacturing cheaper
than outsourcing, Kudu found. A few years ago the company looked
at outsourcing manufacturing to China, but the quotes it got were
no better than the cost of doing it in house.
Unlike iPods or iPhones, it isn’t usually economic to fly dumb
iron, which means long shipping journeys by land and water. To
reduce transportation unit costs, it’s necessary to buy in volume.
“If we outsource castings to India, we’d have to order a
container load of castings. So that’s probably a year, a year and a
half supply. And before we’re through it, the engineers are going
to change the design to something better and we’ll scrap all those
castings,” Mills says, laughing.
And then there’s the quality issue. He says the only way to get
good quality out of India is to have your own quality assurance
inspector on location, which means more expense and communica-
tions challenges. And you still have to order large quantities to
reduce the unit shipping costs.
“We want our suppliers to deliver in small quantities frequently,”
says Mills. “The people who supply our bearings will drop into our
plant twice a day and bring us what we need.”
Meanwhile, he says the other big outsourcing mecca — China — is
notorious for bidding impossibly low to get a contract. The first few
shipments will meet spec, then the quality starts to deteriorate.
But if outsourcing to China and India is unattractive, why is so

much North American and European manufacturing moving to
such places?
Mills says this may be feasible for large-volume manufacturers
where buying container loads wouldn’t be an issue. “But I don’t
think it’s the magic bullet. If you know how to manufacture, our
experience is you can do it as cheaply here even if you’re paying a
top machinist $36 an hour.”
But how can that work if the $36-an-hour machinist’s counterpart
in Asia or Mexico is earning a tiny fraction of that amount? “Lean
manufacturing is very efficient. It’s really that simple,” replies Mills.
At least in the sector where Kudu operates, he believes the enor-
mous cost of poor quality can offset some of the benefit of operating
in low-wage jurisdictions.
“When I went to work in the mines at the end of a shovel, that was labour.
Thinking not required. We don’t have that anymore. So if you don’t let
them think, and don’t listen to them, they’ll park their brains at the door.
And you lose a valuable resource.”
In-sourcing certainly hasn’t impaired Kudu’s growth.
Sales — which were at $36 million a year when the company hit
the wall in early 1998 — have more than doubled, Mills says. He
says Kudu has about 210 employees and equipment in 33 countries.
Like others in the western Canadian oilpatch, Kudu felt the
effects of the downturn last year. In the second and third quarters
sales were “very low,” Mills says. But he also adds: “We’d gotten
sloppy on lean.” With staff turnover, there’d been insufficient
training, and employees weren’t using the Japanese “kanban”
system correctly.
Kanban is a signalling system to trigger a specific action. In this
case, cards signal the need to restock an item. Items are kept in two
bins. People on the plant floor work out of one bin. When it’s empty,
there’s a card with the reorder quantity on it.
The employee goes to a computer and types in the part number
from the card, and the computer reveals the preferred supplier and
the price. He then fills out a purchase order which is sent to the
supplier. The employee resumes work using parts from the second
bin. When the order comes in, the employee counts the number of
parts left.
If there is more than one day’s supply, the employee reduces the
reorder quantity on the card accordingly. If there is less than one day’s
supply, he increases the reorder quantity on the card accordingly.
“That way the inventory floats up and down with activity, and
they’re always ordering enough to carry them until the order comes
in plus one day. That keeps the inventory at a practical minimum,”
explains Mills. “Very simple. Very visual.”
One of the things Kudu strives for in lean manufacturing is to
eliminate paper on the plant floor, and to use visual cues instead.
“We try to have it organized so that everybody can see what they
need to do next, and just do it,” says Mills.
Lessons learned
So how did Mills become so conscious of production processes?
“I started off working in mines when I was 16,” he says. He
points out mining and ore processing is a continuous flow from the
innovators
miners at the rock face, through the mine shaft and through the
mill on the surface.
As Kudu’s chairman, Mills, 71, is retired, and his son, Ray, who is
chief executive, runs day-to-day operations. The older Mills has
time to reflect on lessons learned building a technology business.
One lesson is that good products alone aren’t enough to ensure
success. Companies that supply only technology have no future, he
believes, because anyone can copy hardware. “Anybody can copy our
equipment,” he says. “But nobody can copy our service.” For this
reason he calls Kudu a service company, even though it makes most
of what it sells.
“We service what we sell. We’ll also service what we don’t sell.
When it comes to manufacturing, we happen to manufacture most
of what we sell, but that’s not essential. What’s essential is service.”
But even that isn’t enough.
“If you provide good service and good quality, eventually you will
lose the customer to the supplier that promises to make him
successful,” he says. “That’s what you have to do. We have to make
our customers successful. And once they learn to depend upon you
to make them successful, you got them.”
Another lesson Mills learned is to listen to employees. Most of
Kudu’s innovation, he says, comes from its own people in the field
and on the plant floor. “If you want to be an innovative company,”
he says, “just listen.”
He cites an example.
Suppliers coat the rotors of progressing cavity pumps with
chrome to reduce abrasion. However, chrome doesn’t resist
corrosion. “It will practically melt away in some wells,” he explains.
“Even in the Provost area, we pulled chromed rotors after six weeks
and the chrome was gone.”
So about 12 years ago Mills began looking for a way to spray coat
pump rotors to reduce corrosion. He tried about eight job shops in
the United States and Canada. “They all said they could do it,” he
recalls. “And they all failed.”
Later Kudu hired an employee of a Calgary-based conventional
downhole pump maker that had shut down.
“He came to me one day and said that he could spray the rotors. I
said, ‘Get out of here — I tried expert job shops all over the place,
and they all failed.’ But he insisted he could do it. I knew the guy he
had worked for previously. I called him up and he said, ‘If he says he
can do it, he can do it. He’s the best spray-metal operator in
Western Canada.’”
So the employee found somewhere to borrow the equipment.
“And he showed me that he could spray those rotors — end to end,
peak and valley — and the thickness varied by less than two-thou-
sandths of an inch. A sheet of Xerox paper is almost five thousandths
of an inch,” notes Mills.
So Kudu invested $1.5 million in setting up a commercial process
based on one man’s idea and skill. “And now we are the only
New Technology Magazine | March 2010 3
 innovators
company in the world that can spray progressing cavity pump
rotors,” says Mills. “And that idea came straight off the plant floor.”
Mills says the worker has a production-line mindset because he
worked in car plants in Ontario. He’s always looking for — and
finds — ways to do things faster and better. Kudu first hired him to
weld rotors. Progressing cavity pump rotors over a certain length
must be welded.
On a large-diameter rotor it took 11 hours to make a weld,
and that weld had 90% of the strength of the rotor, which was
quite acceptable. Eventually this employee found faster ways to
weld, and the welds had 110% of the strength of the rotors.
“And now we make that weld in 15 minutes — down from 11
hours,” Mills says.
“There’s no such thing as labour anymore,” he says. “Everybody is
4 New Technology Magazine | March 2010
a knowledge worker.
“When I went to work in the mines at the end of a shovel, that
was labour. Thinking not required,” he recalls. “We don’t have
that anymore. So if you don’t let them think, and don’t listen
to them, they’ll park their brains at the door. And you lose a
valuable resource.”
Meanwhile, the company isn’t finished with lean manufacturing.
“Lean has done a lot for Kudu.” says Mills, “but we have come to
the conclusion that we are not good at lean. Not even yet.”
Laughing, he adds: “Toyota has just come to that conclusion, too
— they’re reinventing themselves.
“So, yeah, we’ve got a long ways to go. So we’ll just continue to
get better and better,” he continues. “It’s not a goal that you achieve,
it’s a journey.” •