Turning around a business — twice

I had adopted a passive approach to career planning all my life. I relied on my employer to be fair to me, and it always seemed to work. I had never been in the same position for more than three years in my career with a company, and every move was a step up the corporate ladder and provided me new learning and experiences. I had been the head of the largest division of the company in India for almost three years, when I was offered the position of MD Indonesia towards the end of 2000. The position also involved overall oversight for Malaysia/Singapore and Australia/New Zealand businesses, which had their own GMs. As this was an expat position, it considerably improved my salary and perks, and this was an additional attraction. So I accepted the offer.

As preparation for taking on the new assignment, I went to the UK headquarters in early 2001, where I was further briefed on the nature of the assignment. Indonesia, after the Asian financial crisis of 1997, was one of the lowest cost countries in the world, as the currency had dropped to one fourth its earlier value versus the dollar. Many global apparel and footwear brands were shifting their sourcing operations to Indonesia and some other Asian countries. My company produced a range of vital intermediary raw materials for apparel and footwear manufacture. We too were in the process of shifting some of our manufacturing plants from Europe to Indonesia. Apart from meeting local demand, these plants would also manufacture products for transfer to group companies in Europe for sale there. The importance of Indonesia within the company was therefore expected to increase. The number of employees in Indonesia was to increase from 1000 in 2000, to 1750 in 2001, most of the increase coming in the East Java unit.

We had high market share in all countries where we operated, (except China), based on excellent logistics and supply chain capabilities, backed by reliable quality and efficient after sales service. The advent of computers in the 1980s was used to create in house capabilities to analyze the vast data at our disposal (we sold directly to customers and hence had thousands of customers in each country placing orders on a weekly or even daily basis). The nature of the business was such that the company sold thousands of unique items. Prior estimation of demand at item level, and speedily catering to orders was the key to success.

We were a profitable company, and in the 1990s, we began to attract the attention of a Private Equity (PE) group, which found its low debt, high cash flow, and strong position in the growing Asian markets, a very attractive buy. The company also had the reputation of a paternalistic philosophy of management, so managers enjoyed a good work life balance, and barring financial misconduct, were rarely fired. This was considered an acceptance of mediocrity by the PE, hence an opportunity for improving results. They acquired about 10% shares, and got a position on the board of the company. By 2001 they started exerting pressure to further improve the company’s results.

The biggest challenge identified by the company in Indonesia was the quality of supervisory and managerial manpower, and one key objective given to me was to develop a strategy to replace the existing very large number of expats with locals, as done by India successfully in the 70s and 80s. The company had two plants in Indonesia, located in the west and east parts of Java, near the main cities of Jakarta and Surabaya respectively. Most of the company’s customers were located in west Java, and our plant there produced finished goods for supply to their factories, which produced for global apparel and footwear brands, or for local brands. The east Java unit produced finished and semi finished goods mainly for export to group units in Europe and Asia.

I was excited by the challenge, and based on my past experience in India, quite confident of success. I had worked with people of all nationalities, and got along fine with them, so I did not expect too many problems in handling the multinational management team in Indonesia.

On arrival in Jakarta in April 2001, I had a series of meetings with the senior management team. Everything looked good. After the collapse of the local currency, the company had started pricing its products in US dollars. This led to windfall gains as local inputs like power and labor had become very cheap, and since most of the customers were exporting their production and getting their revenue in dollars, they were agreeable to pay us in US dollars. As of April 2001, Indonesia looked well set to achieve its EBIT plan for the year.

I informed the team that while we were increasing the expat presence in 2001 and 2002 to a maximum of 15, our objective as a team was to train and develop a local management team to completely take over the local management in the shortest possible time. The plans we made and implemented in this endeavor are the subject of a case study, published by the Organisation Behaviour and Human Resource Management department of IIM Bangalore.

While matters moved in the right direction on human resources in Indonesia, I became increasingly concerned about the business operations themselves. The company monitored OTD (On Time Delivery) very closely, as this was the most important success factor in any market. Hundreds of thousands of items were demanded by customers, and we could not stock them all in advance for fear of dormancy. We had classified them into predictable and unpredictable categories. Items which were historically demanded regularly were classified as predictable, and ready stocks were always maintained in these. Typically these were also the large volume items, so while they accounted for only 20% of items, they accounted for 50% of sales by volume. The remaining 80% items were unpredictable and only made to order (MTO). The company promised door delivery to customers within 2 days for the made to stock items (MTS), and within 5–7 days for the made to order items, taking into account time required to produce, pack, and physically deliver the goods at the customer’s factory. As per reports generated, Indonesia had been reporting OTD for 90% of orders, which was in line with company performance globally. But when I talked to our customers, their perception was that actually only 20% of orders were being delivered on time, and 80% were late.

After investigations, the Logistics chief, who had also moved from India at the same time, reported that the warehouse had been reporting the incorrect figure of OTD, by changing the due date in the system to the date of actual delivery. When they were asked to put the correct due dates as per company’s commitment, the OTD% dropped from 90% to 20%.

We analysed reasons for late delivery. Normally this should happen only in MTO items, due to queues in the factory at peak demand times, or non availability of raw materials, or rejection at QA (Quality Assurance), necessitating reprocessing or fresh production. But here it seemed that nearly all MTO were being shipped late, and even many of the MTS items were late. Investigation showed that often MTS items were out of stock and hence were being made after order was received. Since the unit was sitting on 42 days inventory of finished goods against a norm of 14 days, it was inexplicable why this was happening. Further investigations revealed that the 42 days inventory consisted of a huge pile of unsaleable goods appearing in the books as regular stocks. Goods were unsaleable because these were i) rejections by QA, ii) goods returned by customers for various reasons, and iii) discontinued items which should have been written off and sold as scrap every month but had not been done for some years. After segregating unsaleable stocks, it was found that the unit had accumulated 30 days stocks (one month’s sales) as dead stock, and writing off this stock would knock off 50% of the annual reported profit of the unit.

We then investigated the reason for the high rejects leading to dead stocks, when the Right First Time (RFT) being reported by the unit was 95%. As I feared, even the RFT figure being reported by the factory was inflated, and goods rejected for quality were being entered in the system as passed. Actual rejection rates were an astounding 50%. Not only were all these goods having to be produced afresh, resulting in delayed delivery, additional costs, and dead stocks, this practice had seriously corrupted the entire manufacturing database of the unit, as an incorrect recipe was shown to result in a correct outcome, so next time an order came for the same item, the system recommended the incorrect recipe for undertaking production, resulting in another rejection. Basically the factory was running on trial and error, and had bypassed the computerised systems completely. Stopping the practice of wrong reporting of RFT dropped the RFT % to 50%. The entire database had to be scrapped, and built up anew, which took years.

I brought these shocking instances to the notice of my new boss CD, Regional Chief Executive (RCE) of Asia Pacific region, based in Hong Kong, and asked for guidance on the issue of write off of dead stocks. He told me that the PE group had now acquired 30% shareholding in the company, and had multiple Directors on the Board, who were pressurising the management to improve results. Hence this was not the right time to take any write off and report bad results. Instead the unit should reprocess the unsaleable goods to make them saleable, and also try to dispose off the goods without incurring a loss (i.e. at least book value). He also arranged for the replacement of the Manufacturing chief in West Java, who had been there for three years. He was replaced by another expat. The unit had outsourced the Internal Audit function to one of the prestigious international firms some years ago, this was now reversed and in future the company’s in house Internal Audit team based in India would conduct the audits.

My team did their best to implement both the suggestions to minimise the loss on dead stocks. But it soon became obvious that neither suggestion was practical. Neither the goods could be sold off except at throwaway prices, nor could they be reprocessed without incurring huge cost in terms of capacity, manpower and materials. However, as demanded by CD, the unit did not book any loss on this score in its 2001 results.

The year 2002 saw a gradual improvement in the OTD % from 10% to 75%, in line with the improvement in RFT from 50% to 80%. However as both these metrics were being reported much higher in the past, Indonesia now figured as the worst performer among units globally. I had also started slowly writing off the unsalable inventory every month, so even the financial results did not look as good as before.

Meanwhile the global CEO, under pressure from the PE, created a new position of COO (Chief Operating Officer), and appointed CD into this position, in addition to him continuing as the RCE of Asia Pacific. All RCEs now reported to him, as did all the MDs of Asia Pacific. He now shifted base to London.

During a visit to Indonesia in mid-2002, CD lambasted the management committee, which now consisted of people who had been in Indonesia for just about one year, for underperformance.

I made the mistake of arguing vehemently with him in public, as I felt this was unfair to my colleagues, who were doing a good job, and were not responsible for the legacy issues. Later on I realized that CD probably understood the situation very well, but was only trying to expedite the performance improvement by applying heavy pressure, that being his style. The incident damaged my relationship with CD, which had never been particularly warm to begin with.

The year 2002 ended with the unit achieving a highly ambitious sales growth target, but not the EBIT, as the unit had written off one third of the dead stock. Indonesia was given a budget with another big growth in sales and EBIT for 2003, despite huge dead stocks still to be written off. The way budgets were made was that H.O. would decide the target, and the unit made the plans to achieve it. Thereafter performance would be evaluated against the “agreed plan”.

The year 2003 started badly for Indonesia. Bomb blasts in night clubs in October 2002 on the tourist island of Bali, which caused over 100 deaths of foreign tourists, had led to a scare, and western brands diverted their orders to other safer Asian countries. This was followed by bomb blasts in an American hotel and outside the Australian embassy. Many of our customers in West Java closed down, and this happened even as capacity was being increased in Indonesia. We temporarily relocated the expats to Singapore, though some of us stayed on in Indonesia. Even worse was in store, as a SARS epidemic (Severe Acute Respiratory Syndrome), broke out in SE Asia, and raged for six months (March to August). As a result western brands were reluctant to come to this area and diverted orders to other countries. The drop in local demand led to underutilization of the West Java unit.

Group companies, who were expected to lift the bulk of output from the East Java unit, also reduced their orders considerably. This was attributed to slow demand in Europe, and the failure of two big global brands, who were expected to nominate our products in their production, failing to do so. The East Java unit had 1000 local employees and 10 expats, and was also underutilized considerably.

The combined effect of the above factors was a drop in sales and therefore EBIT of Indonesia, in a year where there was heavy pressure to increase both.

In May 2003, the PE group acquired 100% of the equity of the company in a leveraged buyout, and took the company private, the first time it had been delisted from the LSE in over a century. The CEO left the company, and an external and internal search was launched to replace him. CD “threw his hat in the ring” for the position quite publicly, and clearly the COO position put him in pole position among the internal candidates.

During the annual global conference in London that year, CD took me aside for a private discussion, along with the global HR Director. The essence of his comments was that Indonesia after a brilliant performance in late 1990s, had undergone a turnaround for the worse since 2001. It had failed to achieve profit targets for 2002 and looked headed for another disaster in 2003. He was convinced that this was because of my management style, which he said did not exhibit ambition and aggression to quickly improve results.

My detailed response was:

• Financial results in 2002 represented part corrections of past overstated profits. Operational results had improved considerably from previous years, and were getting better each month, approaching world class levels. Financial results would continue to look bad till 2004 by which time all the legacy issues would be resolved.
• The primary objective set for the unit was the creation of a world class Indonesian team, and this had been substantially achieved. In fact the unit could start reducing expats in Indonesia at the rate of 5 each in 2003, 2004, and 2005. This itself would reduce costs and increase EBIT considerably.
• The decision to shift plants from Europe to Indonesia to mainly ship the output to Europe had adversely affected the unit’s results. Much of the plant and machinery transferred was in bad condition, poorly maintained, and obviously not used for some years. Indonesia had to spend time, money, and resources to get these into working order. And then Europe did not lift goods as per their commitment for whatever reasons. In retrospect this decision was wrong and needed to be reversed for Indonesia results to improve. At current levels of utilization, it was impossible to show better results.
• I could present a plan that would restore the profitability of Indonesia, but it would involve rationalizing the manufacturing, downsizing the operations, and reducing costs.
• As far as management styles was concerned, the 360 degree feedback from my team had put me right at the top. My humility did not mean lack of ambition.

CD was not convinced and instead wanted a plan to somehow increase sales to utilize the enlarged capacity. He said I might be more suitable for a declining, small market, like Australia or Colombia, and I should consider transferring there in 2004. In a subsequent Asia MDs meeting in Singapore, CD declared that once he became the CEO he would fire non performing MDs, a comment which I felt was directed at me!

I realized that my days in the company were probably numbered, but I was not unduly worried. I knew I could find alternate employment in India, though not immediately. We owned a house in Bangalore, and our habits were not extravagant. I had enough savings to manage. Meanwhile it was business as usual.

In October 2003, the company announced the appointment of a new CEO, recruited from outside, effective Jan 2004. The position of COO was abolished, and CD reverted back to his position of RCE Asia Pacific. Indonesia and a few other units in SE Asia were transferred from Asia Pacific to South Asia region, leaving Asia Pacific a relatively small region consisting of China and NE Asia. In November 2003, CD announced his resignation, and he was released in December.

For me, this meant that my old boss in India during 98–00 was once again my immediate boss. I explained to him the saga of my stint in Indonesia since 2001, some of which he was already aware of, as I had been in touch with him at the annual global conferences in London. He told me that I was not out of the woods yet. A quick turnaround plan was required to dramatically improve financial results in the shortest possible time. As an indication, he wanted a plan to double the 2000 EBIT of Indonesia by 2007, instead of by 2005 set earlier. Since EBIT in 2003 and even 2004 was likely to be lower than in 2000, this meant a dramatic turnaround 2005 onwards.

I presented the following plan:

• Consolidate finished goods production in West Java. This would enable us get the best machinery, and the most talented supervisors and managers of both places into one site. Also lead to net reduction in workforce of about 250 people.
• Acknowledge that the European group orders for semi finished goods were not going to come, and get rid of the associated machinery, and reduce another 500 people.
• This would enable us to reduce expats by mid-2005 and replace with locals already in place, vastly reducing costs.
• Write off the remaining dormant inventory of 1999–00 still in the system in 2004, and start 2005 with a clean slate.

I estimated it would take a year to implement the plan, and it took six months to get the plan approved by the new CEO, as the Board had to agree to the substantial write off of inventory and machinery involved, as well as the statutory payments to the retrenched employees.

The period July 2004 to June 2005 was tense, as the plan was executed. Fortunately the East Java plant chief managed the situation well, and unions and government cooperated. To make space for the manufacturing expansion in west Java, we moved the warehouse out of the factory complex, to a rented space nearby. By mid-2005 the plan execution was complete, and I was left with just two expats. It was a good year for sales in Indonesia after two bad years, and by 2006 with full year benefits of the restructuring in place, the unit was back on top of the charts, and was awarded the Most Improved Business Award at the annual London conference.

Next year, the company rolled out SAP in Indonesia, and the implementation was very smooth. The unit was nominated for the Best Business Award based on 2007 performance, in the 2008 conference.

In a span of six years, I had turned around the results of Indonesia twice! From a star to a sinking unit in 2002–04, and then back to a star in 2005–07. Such is life.

More twists in the tale came in subsequent years. In 2009, the recession caused by the global financial crisis hit Indonesia disproportionately hard, and our sales dropped by double digit percentage for the first time in my life. Visits to customers seemed to indicate that we were not losing share, but orders had just evaporated. Indonesia was clearly a swing supplier for most brands. To be switched on and off depending on demand.

As suddenly as it had all started, the crisis ended in 2010. The market rebounded extra ordinarily. Several years’ growth got compressed into one. To accommodate further capacity expansion, we moved the head office away from the factory. We also expanded outsourcing of semi finished goods for exports to group companies, and for our own processing too. I was happy that the jobs that we had reduced in our unit in Indonesia were made up by increase at our suppliers.

The PE group at this stage planned to exit and relist the company on the stock exchange. To achieve this, they appointed a new CEO, and the COO position was created again. Both were recruited from outside. A new region of SE Asian countries was created, and Indonesia was part of that region, the third region for Indonesia in my stint.

Towards the end of 2010, I was close to 55, the retirement age as per my first appointment letter in India, (although later this had changed to 60). I did not need to work for money any more, and had spent ten years in Jakarta, which seemed a lot. A friend had asked me to join his new negotiation training venture in Bangalore, and I seriously considered his offer. Finally I decided to just wait and see how the new setup in SE Asia worked for me, and ultimately I ended up spending five more years in Jakarta.

As I flew back to Bangalore, happy to be returning to my home and country, I reflected on the different management styles I had seen. When I joined, the company invested enormous effort in the management trainee recruitment process, with multiple rounds of discussions and interviews with top management, and also with a professional psychiatrist. They wanted to get the right fit for their requirement, and had a tremendous training program for new recruits. Once on the job, they trusted the manager completely to do his/her best. Even if results were not great, they accepted it as long as the right processes had been followed. They provided encouragement, and where necessary, advice. The imminent take over by the private equity group made results the primary focus, and a more impatient style of management emerged. More than encouragement, it was felt that pressure and fear would lead to better results. Actually both approaches have been known to work, but in different situations, and with different individuals. One has to have the wisdom to decide what works best in a particular situation.

Another experience was that even when a company knows that a decision has gone wrong, it is extremely reluctant to reverse it. It prefers to spend a lot of effort to make a success of it, instead of cutting its losses and changing course promptly. Sometimes it takes a change in management to bring about a rethink.

And finally, although India naturally remains my favourite country, particularly its food and music, Indonesia is a close second. I learnt a lot from these patient, smiling, ever helpful people, who adopt foreigners as their own. They live in a part of the world which is prone to natural disasters — earthquakes, volcanoes, hurricanes, landslides. I pray for their welfare and happiness.