A Six Minute Read

If there was a Hall of Fame for closeout presentations, this one would be a top-seller in the gift shop.

The group that manufactured one of the planet’s most recognizable consumer products was overwhelmed by complexity, and was looking for ways to improve logistics across three different factories. The consultants’ research uncovered root causes far beyond the control of the plants:

• Product line extensions and proprietary packaging concepts were regularly introduced by a Sales department that insisted its top customers – Wal-Mart, Target, Kroger – demanded “brand news”. In reality, of the 180 SKUs that had been introduced the prior year, 75 percent of them were not sold by the company’s top 32 customers
• Of the 375 corporate accounts, the bottom 190 accounted for less than 1.25 percent of sales
• Half of all revenue came from seven accounts
• Half of all revenue came from just 19 of over 900 SKUs (one SKU generated 18 percent of revenue)
• Production costs were calculated and allocated using formulas unknown by the plants’ Accounting departments, and by only a handful at corporate
• Production managers were measured on daily operating costs, while Sales and Marketing were incented on “Gross Sales Volume” across the entire portfolio of SKUs
• New products were approved – and existing products maintained – based on meeting a specific calculated threshold:
• Executives in every functional area admitted that the calculation’s inputs were either subjective or unverifiable
• The metric was impossible to determine once a product went into production
• If the threshold was not met during development, Marketing voted whether to launch the product anyway

During the report-back, the Vice President of Marketing stopped the consultants dead in their tracks:

“Other than the fact that we don’t track our individual product performance, we can’t determine our customer profitability, and our manufacturing costs are calculated in a black box, you would have to agree that we’re doing everything right?”

It’s probably obvious, but interest in our recommendations was nil. Even the manufacturing team – those that hired us to uncover these issues – ran away as if we were the Knights of Ni.

Any objective reading should give lie to that VP’s conclusion, and in fact by getting such core basics wrong they could get nothing right. Why were they so recalcitrant? What prompted their abject refusal to respond to our intervention?

Modifying behavior is always a challenge, which makes Change initiatives difficult to implement: even attempts to improve are, by definition, changes. “Change Management” techniques and models provide excellent guidance for preparing an organization to implement an operational shift. This presupposes that some, specific “Change” is in the works.

In this case, we weren’t anywhere ready to build “awareness” for an upcoming change. First, we had to get leaders to agree that adjustment was needed. Ultimately, this effort was doomed before it even got off the ground.

Upon reflection, we identified at least four reasons this organization wasn’t ready for Change:

No One Really Felt Any Pain

Sales and Marketing made all product decisions, and their incentive system wasn’t designed with the entire enterprise in mind.  Selling one unit each of 100 SKUs had the same reward same as selling 100 units of a single SKU, so there was no consequence for adding ill-advised products – even though that could mean 100 new recipes; 100 new packaging designs to approve, produce, and inventor; 100 additional shut-downs, and so on. Creating new SKUs felt satisfying because it allowed for more direct conversation with buyers – even those whose orders were rounding errors compared to the “Big Seven”.

Sure, the folks in the plants weren’t happy with this complexity they faced, but it wasn’t really “painful”. They were producing a product loved worldwide for an iconic brand. So what if it took more time to find the pallet of special packaging than it took to run the job? The machines were at capacity and orders never cancelled.

The accounting system was inscrutable, and thus un-auditable. We determined that it cost more to process an order for one of the “Bottom 50 percent” than the revenue it generated, but as long as there was revenue, the charts stayed green.

Without any real, meaningful consequences to discourage bad decisions – the system actually encouraged bad decisions – there is no felt need to adjust. And if the prospect of change is going to screw up what feels like a good thing, well, who’s going to sign up for that?

No Pain? No Gain, Either

We modeled for the client what a less diverse product portfolio would look like – the reduction in administrative and production costs, the increase in capacity fueled by cutting changeover times, a more efficient distribution system. Prudent managers should always be skeptical of consultant projections, but they flat-out rejected ours.

People were making their bonus, the owners had more in their checking account at the end of the period than at the beginning, so they couldn’t envision the alternative.

Linking a Change effort to the organization’s economics is typically a key piece to building relevance. The desire to change frequently links back to pain avoidance or clear personal gain.

The Best Offense Is a Good Defense

The Marketing executive’s comments bear this out. To acknowledge a need for change can feel like an admission of failure. Just as the Pirahã people of the Amazon don’t have words for discrete numbers, Sales and Marketing literally could not describe how, much less comprehend, that their actions were bad. The manufacturing team, by raising their hand for help, was confessing that they couldn’t keep up with the folks upstairs. And the finance guys looked at that pile of cash and said, how is this not success?

Successful Change efforts are sometimes chartered in the face of failing performance, and sometimes just to improve on an already-acceptable process. Challenging the status quo – up to and including eliminating beloved products – ought to be encouraged; a culture that equates questioning the current state with accusations of failure will continue to struggle.

Change Is Democratic – And No One Likes Democracy

Consultants are frequently greeted by clients who are defensive, protective, and fearful of change. The ones that can be most difficult to manage, however, are those that openly welcome the intervention – as long as it’s someone else who is changing. “Thank goodness you’re here,” they say, “those guys sure need your help.”

To unspool these issues, we saw no way forward that did not involve cross-functional teams, working together. Compromising. This group would have none of it. Although they prided themselves on their “open floorplan” and officeless corporate headquarters, they functioned in silos that would be the envy of any Nebraskan. To fix their issues, they would have had to collaborate, find common ground, and each area would have had to make some kind of tradeoff. That prospect was terrifying.

It’s easy to paint this company as an extreme example, every implementation I’ve been involved in has seen at least one key stakeholder withholding participation. By not recognizing that everyone needs to play together to effect change – by allowing one participant, in effect, to black ball the entire process – it becomes close to impossible to move forward.

Often, to build the case for “Change” – even in an organization that celebrates “continuous improvement” – leaders (and consultants) attempt to build a burning platform, to claim that catastrophe looms unless something is done. But Chicken Little-ing it, if not completely true, builds cynicism.

Much of Change Management focuses on understanding people’s readiness and communicating to them “where they’re at.”  But before implementing, even before defining, the Change, organizations need to identify the areas of concern – and accept that they really are a concern.

In a way, that question from the Marketing VP saved us a lot of heartache: We knew then that pursuing a project would lack urgency and sponsorship, and would ultimately frustrate our team and damage our reputation. Instead, we stopped at the first mini-mart and loaded up on their competitors’ products, snacking the whole way to the airport.

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