Dr Mike McDonagh explores how crisis-driven management at Tradtech led to costly missteps, strained morale, and ultimately a leadership shake-up, due to the difference between approaches to sales and supply.
Over five decades of working I have observed many different directors, with different management styles. All aspire to be calm under pressure and to recognise when urgent action is required. The temptation, when problems arise, is to remove the pressure from an immediate threat to the exclusion of dealing with other, essential, activities. This story exemplifies the type of crisis management that may do more harm than good if the corrective measures are based on a reaction to a particular threat, rather than a response to the total business requirement. This behaviour often results in creating the next crisis, along with poor staff morale due to the frustration of frequently changing priorities, resulting in low success rates.
In this story, a battery manufacturing company (Tradtech) is suffering from low profitability. A new managing director, Anthony, in place for just under two years, had been appointed to improve the company’s profits. On this day he had called a management meeting to set priorities for a cost reduction programme. With the programme already agreed and costed, the priorities and time schedules were established. All departments were covered, with individual plans of action for each department director.
For the sales director Klaus, prices were set for existing customers, new higher margin business was identified, and specific new businesses were targeted. The battery production cost-saving programme was headed by Jan and Robert, the production and engineering directors respectively. The new lower cost battery design and processes were under the control of the technical director Geoff, whilst the new product tooling design and installation of machinery and tooling for the new processes and products were under the wing of the engineering director Robert. Financial improvements, including product cost reductions and lower stock levels with supplier JIT agreements, were to be implemented by Gustav, the finance director. He was also responsible for deciding the selling price and preparing the financial projections. Staff training to improve efficiency and lower overhead costs was also in the schedule.
At this point, Geoff was in the middle of the new product tests. The results were needed for the tooling designs of the company supplying battery components. Unfortunately, the supplier had a single window of opportunity to make the tooling and they needed the designs within the next week, otherwise there would be a three-month delay. Geoff suggested that he look at the materials supplied when the batteries were made and the quality checks carried out at the time. Also to make a site visit to check if any there were any different working practices by the customer since the batteries had been provided. This would be completed by the end of the week and the current tests would be finished by then. In this way the cost saving project would not be compromised.
Anthony explained that the customer was pressing for an immediate return of the batteries and to have new ones dispatched within a week as they were losing money due to these faulty batteries. They also threatened to sue for consequential business losses. The MD maintained that this did not allow Tradtech the time to investigate the site or the cause of battery failure. They needed to take immediate action, and to save time Anthony ordered new batteries to be made immediately to prevent a potentially crippling financial claim. Jan pointed out that the production line for this battery type was down, being modified for the new product. In addition, there was no guarantee that this batch would not fail if the cause was not first identified. Geoff interjected that the cause may be due some additional operational demands; in fact, it could even have been the original customer specification that was wrong. Klaus offered to check the specification requirements as well as the quality checks and product test results for the order. All department heads recommended a site visit to ensure it was not a customer driven fault.
However, Anthony had been assured by the customer that they had not changed their working patterns since the batteries were purchased. He further pointed out that after all these checks were completed, the replacement batteries would take four weeks to deliver. Fearing a customer backlash and a risk of losing 10% of the company’s turnover, plus the crippling warranty costs, the MD ordered the replacements to be made. He then ordered the production director to restore the production line back to its original condition. Jan complained that it would take a couple of days and that the external contractors, who were currently on site to install the new tooling, would need to be taken out for 10 days to allow this warranty production. The MD’s response was firm: “Do it!” He then ordered Geoff to immediately test the returned warranty cells. Geoff pointed out that the testing would take five days, and again attempted to argue the case for a site visit to determine if the customer was at fault. He was cut short and instructed to start the testing that day.
The following week was a rollercoaster. Jan restored the original production line after dismissing the contractors. He started production of the replacement batteries before the test results were completed. Unfortunately, when the tests were completed, the results were ambiguous. The negative plate active material was soft and that of the positive plate was sulphated. The capacity was 20% lower than the catalogue rating, an indication that the battery was nearing the end of its life. The MD asked Geoff to give a breakdown of the possible causes of failure. Geoff explained these as consistent undercharging or leaving FLTs idle for days without charging, i.e. customer fault. For a product-related cause, he explained that a higher internal resistance (IR) would increase the charging voltage and reduce the charging efficiency. This higher IR could be attributed to incorrect plate curing or bad plate/terminal welding in assembly. Anthony then enquired if this customer had ever experienced this problem before. The answer was no. When asked if it was possible that these faults might occur in factory processing, Geoff had to agree.
According to Anthony, the customer would argue that they have not changed their operational patterns and therefore it was a product fault. Since this was possible, it would result in a legal stalemate to the customer’s advantage. Anthony had personal experience of this, explaining that they would inevitably lose the customer as well as incurring substantial legal costs. Geoff was instructed to continue with the warranty replacements. The following day, Jan was informed that the contracting company modifying the production line was unable to resume work for another six weeks due to their one-week availability window. And worse, because the line had been put back to its original state, they would have to start again at full cost. However, because the replacement batteries were now being produced, this gave Geoff the time to visit the Coldstore company. His excuse was to check out the remaining batteries in service, under the guise of prioritising the trucks for the battery swap. The results of his visit were devastating. He found that the company had begun an energy saving project the previous year, which identified the operation of fork-lift trucks (FLTs) in the warehouse accounted for 65% of Coldstore’s total energy cost.
To reduce the energy usage, they had contracted the battery charger manufacturers to install more energy efficient battery chargers. This had been completed 14 months earlier. The new chargers had switch-mode rectifiers with higher AC to DC conversion efficiency. Whilst they retained the same output rating, the end-of-charge voltage was reduced to save more energy. Additionally, the final equalising phase had been removed and replaced by a series of high-current pulses. These changes were tried and tested energy saving methods, often used within the materials handling industry.
Unfortunately, 50% of Coldtech’s FLTs operated within cold storage freezers, resulting in the trucks spending much of their working day within sub zero temperatures. Consequently, these FLT batteries had been at least 10°C lower than those operating in ambient conditions. This resulted in operating voltages higher than those with standard usage. This higher voltage reduced the current input when on charge, resulting in a gradual decline in the batteries’ state of charge over time. This explained the results found in the battery tests. Geoff knew immediately that this was the cause of Coldstore’s battery failures and warranty claim.
Once informed of this, Anthony, responded with a five-minute temper tantrum, berating the customer for not informing Tradtech of the situation. When finished, Geoff who had received information that the MD had been informed of this the previous year, confronted Anthony with this crucial fact. During the ensuing tense discussion, the MD claimed that the reason for not taking action when informed of the charger modification was that he did not think it would affect the batteries. He wrongly, but in his opinion, reasonably, assumed that the charger manufacturers knew what they were doing, and that they understood the product characteristics for which their chargers were designed. Geoff argued that it was reckless for an inexperienced person to make such technical decisions. The MD replied that it was not technical and that he should trust an established charging company to make the correct product. The row ended with the technical director storming off, leaving the much-deflated MD in no doubt about his opinion of the company’s leadership.
Geoff’s next move was to call an impromptu meeting with the sales, production and engineering directors. During this, they made a detailed review of the status of the current projects and the warranty claim from the Coldstore company. It was not good news. The crucial element of the project plan was the tooling change for the assembly process. Because both the testing of prototypes and the measurements needed by the tooling company were delayed by a week, the re-tooling slot agreed with the supplier had been missed. This gave a three-month delay before the work could be restarted. In the meantime, sales and production pressures meant that the production line would not be available for another month. In all, the cost saving project would be at least five months and, more likely, six months behind schedule.
Clearly this was unacceptable. Within an hour the directors hammered out a plan of action as follows:
- Warranty claim: A solicitor would draw up a letter showing that this was a change of contract terms based on Coldstore’s unapproved new charger characteristics. This was possible as their new chargers did not meet the characteristics described in their battery sales contract. Geoff also explained that he could keep the batteries going for another six months by increasing the charging voltage on the rectifiers. This additional time in service would further reduce the warranty claim.
- Keeping the existing customer: Coldstore would be offered a reduced warranty value of 10% (25% of its claim) based on Geoff’s findings. A higher value of 20% would be applied if Coldstore were to contractually purchase the new, low-cost batteries. The additional 10% for the 20% warranty option would be covered by giving Coldstore a lower battery price over two years. However, for Tradtech, the lower selling price would reflect only part of the cost savings from the new product, so there would still be some residual profit for Coldstore even with the discount. This residual profit would completely repay the 20% warranty claim against the company.
- Keeping the new customer: It was possible to meet the contract date by supplying the initial 25% using the old product, but at the same price as the new lower-cost batteries. Admittedly the margin would be low, but still profitable as this extra business would be marginal. The remaining 75% of the contract could be supplied with the new product and the true profitability would be realised.
The whole plan required both Coldstore’s and Newco’s acceptance. Klaus agreed that they could make this work and immediately gave the new sales figures to Gustav, who immediately put it to his finance department to construct a new set of projections. These were provided within 30 minutes. They showed that the year would end in slight profit; however, the following two years would see the highest profitably since the company began.
Gustav called an emergency board meeting for the end of the day. In this they presented the new plan and the forecasts to the MD. His immediate reaction was to be livid that he had not been consulted and accused the directors of conspiring to undermine him. However, Klaus made it clear that under his leadership the company had been in decline and the shareholders were already dissatisfied with his performance. Further, he himself was about to suggest to the chairman a vote of no confidence in his management. All directors agreed to give notice of a board meeting for a vote of no confidence. The meeting details would be sent to the chairman the following day.
For Anthony, the writing was well and truly carved onto a granite wall. A vote of no confidence on his record would mean the end of his career. He gave notice of his resignation the following day. The company? Well, it thrived with a new MD, which, incidentally, was a promotion for the finance director.
