Friday, February 3, 2012

Strategic Planning Analogy #435: We’re In This Together

Back between December 3, 2006 and March 6, 2007, Menu Foods was manufacturing dog and cat food using imported wheat gluten from China. This wheat gluten was a thickening agent used in the manufacturing of the gravy for the dog and cat food.

Unfortunately, this wheat gluten was not pure wheat gluten. It included melamine, a chemical to make the gluten appear to have more protein. It also included cyanuric acid, a disinfectant. This tainted gluten started causing dogs and cats to die from kidney failure.

As a result, Menu Foods needed to issue a recall on these cat and dog food products. Since Menu Foods was a contract manufacturer for other brands, they had to list all of those brands in their recall notice.

As it turns out, Menu Foods was manufacturing pet food products for nearly every private label (store) brand in North America, including Wal-Mart, Kroger and Safeway. In fact, 17 of the top 20 retailers were selling their store brand pet product using items made by Menu Foods.

Some of the premier name-brand manufactures also put their labels on products made by Menu Foods, including Iams, Eukanuba, and Nutro. In total, the recall encompassed dog food products under 51 brand names and cat food under 42 brand names.

Many consumers were shocked to discover that the majority of the brands of pet food they had to choose from were coming out of the same factory. People started asking themselves, “Why should I care about what brand of pet food I choose if most of the brands come from the same factory?” Many switched to the few brands which did not use Menu Foods and they never went back.

And what about the brand “Menu Foods”? If you go on the internet, you’ll find that its brand name is now “Simmons Foods.” Menu Foods is never mentioned. I guess that Menu Foods was a brand name that lost its value. Apparently, people still cared about that brand (and not favorably).

We live in a world where outsourcing is a way of life. It seems like there is nothing immune from outsourcing. The story talks about outsourcing of manufacturing. But companies also outsource functions like distribution, sales, customer service, installation, human resources, payroll and just about anything else.

Outsourcing can look great on a computer spreadsheet full of numbers. However, the more of your business you outsource, the less control you have over all the inputs to that spreadsheet. If one of your partners fails to deliver as desired, your carefully created spreadsheet becomes worthless. All it took was a poor choice in outsourcing of wheat gluten at Menu Foods to create a public relations disaster for dozens of pet food brands who outsourced to Menu.

Outsourcing increases our dependence upon the decisions of others. Yet in most companies, strategic planning focuses almost exclusively on one’s own company’s actions. Unless our planning takes a broader perspective to include those in our outsourcing family, we will not be properly planning for our future. We will be increasing the likelihood of falling victim to a Menu Foods type of disaster.

The question then becomes, “How do I properly conduct strategic planning in an outsourced world?” The principles basically come down to three words—control, communication, and contingencies.

1. Control
In an outsourced world, you no longer own very much of the process. However, just because you do not “own” the process does not mean you cannot “control” the process. The beauty is that as long as you have control, you do not need to own.

Look at Apple. Apple does not own the manufacturer of the ipod, but it tightly controls the design and the expectations around the output from the manufacturer. Apple does not own the rights to the music, but it tightly controls how the music is presented, how it is accessed, and what the prices will be. Apple made sure that each part of the entire music system worked exactly how it wanted to work, whether it owned it or not. As a result, the strategy worked brilliantly.

In developing a strategic plan in an outsourced world, one of the most important tasks is to determine the key elements of success. What is the position you are trying to own in the marketplace? What is your point of distinction/superiority which will cause people to prefer you over the alternatives? Which elements reinforce this position?

Once you make that determination, the next step is to build into your strategic plan a way to control those elements throughout your entire network, whether you own them or not. For example, if quality is important, then find ways to control the quality throughout the entire network.

Control can be achieved in a number of ways. You can place high expectations in the contracts with your partners on these critical elements with severe penalties if not met. You can demand the ability to inspect their premises for compliance. You can limit your choice of partners only to those with a shared vision (rather than just basing the decision on lowest price).

For example, Sears wanted its Kenmore appliances to be known for innovation. Therefore, Sears set up its contractual arrangement with Whirlpool (who makes a large percentage of Kenmore’s appliances) as follows: Any new innovation developed by Whirlpool must be exclusive to Kenmore for a period of time before it can appear on a Whirlpool appliance. This helped Sears to control its innovation reputation, even when it did not create the innovation.

2. Communication
If you want all of your outsourced partners to support your strategy, then it would help to let your partners in on what that strategy is. These are not just partners in your business, they are partners in your strategy. Therefore, they need to be a part of your strategy communication.

Who do you invite to your strategy sessions? How many of your outsourced partners are present? Are they part of the discussion? Do they get to participate on any of the implementation teams?

Once the strategy is formulated, do you communicate it with your partners? Do they know what is most critical to your success?

A lot of business decisions revolve around making trade-offs. You cannot do it all, so you have to decide what you will focus less on in order to be able to focus more on something else. Your partners make trade-off decisions all the time. If they do not know what is most critical to your strategy, then they might make the wrong trade-offs.

For example, Eukanuba and Iams base their reputation on high quality and health for their pet foods. They associate themselves with veterinarians in order to show how concerned they are with health. They are able to charge a premium price because of that reputation. Menu Foods made a trade-off away from quality and health in order to get the lowest price on wheat gluten. This was the wrong trade-off for Eukanuba and Iams.

The more you communicate with your partners, the more likely everyone will make decisions which support, rather than harm, your strategy.

3. Contingencies
If the automotive industry learned anything from 2011’s tsunami in Japan and flooding in Thailand, it was the need for contingencies. Too much of the outsourcing system rested in just a handful of suppliers. When the tsunami and the flooding wiped out those few suppliers, the whole automotive network came to a screeching halt.

For example, Xirallic is the additive in automotive paint which gives the paint a metallic shimmer. All the major automotive companies use this additive in some of their paints. However, there was only one factory in the world which made this additive. And that factory was wiped out by the Japanese tsunami. It was estimated that car production worldwide was reduced by 600,000 vehicles shortly after the tsunami just because of a lack of Xirallic.

To keep these network shutdowns from happening, one needs to incorporate contingencies into the strategic plan. For example, I worked with a retailer who built about 90% of its stores with fixturing from one company and 10% with fixturing from another company. Why? Just in case anything happened to that company who supplied the 90%, there was a relationship and a plan with an alternative—a built in contingency that was part of the plan.

And if you are the supplier, you may want to consider a plan to diversify some of your manufacturing to multiple locations in order have an alternative if major disasters strike.

Yes, just-in-time and lean manufacturing have benefits, but in the extreme this plan can hurt in times of emergency. Incorporate a little more flexibility into the plan to help avoid the disasters felt by the auto industry in 2011.

Outsourcing can provide many benefits. It can give you access to better expertise, greater speed and lower costs than if you tried to do everything yourself. However, the more one outsources, the less direct control one has over the outcomes of the network. Therefore, if one wants to achieve strategic success in an outsourced world, one needs to proactively consider the entire network as part of its planning process. In particular, strategic plans should consider:

a) How to increase control over the critical elements throughout the network.
b) How to communicate with the partners so that everyone understands the plan and how they fit into the plan (and what is expected).
c) How to place contingencies into the plan to help avoid disaster when partners cannot live up to their expectations.

Many automakers (particularly those based in Japan) posted severe profit drops in 2011 because of the impact of the tsunami and the flood. If all you do in your negotiations with outsource partners is beat them up to get the absolute lowest price, you may save a tiny bit of money, but turn around and lose all of that (and more) when the network falls apart. Take a broader, more strategic approach with your network. It can save you from big losses (like in the automotive industry) or big embarrassments (like in the pet food industry).

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