Factors For Product Chemical, Inc To Become A FoE

Product Chemical, Inc. (PCI) is a publicly traded, international, fortune 500 company that employees one of our team members. It has offices in 50 countries and employs over 25,000 people. It has won several global awards for diversity, innovation, sustainability, and ethics. PCI is known as an industry leader for achieving high profit margin and for delivering consistent year-over-year (YOY) growth to its shareholders. Its consistency over time has been driven by tenured executive and management teams made up of people who have been with the company for decades and have come up through the ranks. While PCI has many traits of a FoE, it lacks one major quality that would make it an FoE: long-term perspective.

We have learned about how companies such as Google and Southwest emphasize long-term perspective. This emphasis has taken them from small start-ups to well-known, positively recognized, global market leaders. As Google’s founders stated in their “Letter from the Founders…,” “We will optimize for the long-term rather than trying to produce smooth earnings for each quarter.” This is good advice for any industry and any size company. To this day Google still emphasizes this. The amenities they provide, the reach projects they work on, the way they allow their employees to fail while testing new ideas, these are all example of investments for long-term growth and return. It’s important to realize that there will be times when you must make judgment calls that are short-term in nature. However, continuously making decisions for short-term gains will create limited long-term upside. Only with a long-term perspective will companies create sustainable growth for not only their shareholders but all their stakeholders. "Equity markets view FoEs’ long-term perspective as making them more attractive investments.”

PCI lacks serious long-term perspective. The company holds up its industry-leading margin and YOY growth as a trophy, doing anything to maintain or exceed it. In order to operate with large margins in a tight margin sector, PCI must run lean. They accomplish this by hiring the minimal number of people to accomplish the job. Running lean can help spark improvements, similar to the way that stretch goals do. It can help employees be creative about how to accomplish tasks efficiently. However, running lean becomes an issue when you are too lean to function properly. As stated in FoE, “Trust… is regarded as an outcome from consistently meeting or exceeding customers’ expectations.”

PCI’s is so lean that they cannot consistently fulfill orders on time. Missed orders cost the customer time and money. The customer, in turn, cannot fulfill orders for its clients on time, and so on down the supply chain. Causing this type of disruption can do irreparable harm to customer trust and loyalty. And there are other costs associated with late orders. Sales reps must spend time speaking to clients to smooth things over. The time it takes for the sales rep to respond to these problems is time away from trying to acquire new customers and grow the business. The time spent on trying to maintain a customer is a fraction of the cost it would take to replace them, so the effort is worth it. But if these problems continue to happen, clients will eventually leave PCI anyway. An additional consequence of all this is the moral of the sales reps. You can often overhear a sales rep make remarks such as “we cannot hire anyone because the big guys upstairs need to keep their jets fueled.” It's only a matter of time until the sales reps leave for a company that has better support. Saving money in the short-term by running thin does not help in the long-term if it’s going to cost the company clients and employees. If one customer leaves because of bad service, they will likely talk about it. If that continues to happen eventually the company will earn a bad reputation, making it very tough to acquire new business.

All in all, this continued frustration creates a “negative organization energy, one of fear of loss and frustration” for PCI’s employees. Another example of PCI’s lack of long-term perspective is their resistance to invest in new assets to help long-term growth. This is evident in their truck fleet. A new truck costs roughly $250,000 and takes 16 months to manufacture. This is a big hit without any immediate reward when you are trying to hit large YOY growth and profit targets. For this reason, PCI does everything possible to not have to buy new trucks. With no new trucks and a fleet of aging trucks that are consistently breaking down, PCI is one incident away from a distribution nightmare. By putting off investment in vehicles for so long, PCI runs the risk of needing to buy multiple vehicles at some future date. With such a long lead time for these trucks, PCI could find it has created a debilitating bottleneck for itself. Changing from a culture of short-term planning to one of long-term planning would create some immediate pain. The stock might take a hit and some goals might not be met. However, now is the perfect time to make this change. With the economy trending positively, there is room for investment. If PCI would start the process now and commit to looking long-term, they would be better situated to capitalize on opportunities such as taking on large new clients or fulfilling orders on short notice. They would no longer be missing orders or delaying deliveries because they do not have the resources. This, in turn, would improve customer retention and free up sales reps to generate new business, thereby reducing stress and frustration among employees and improving morale. Additionally, they would limit the risk of catastrophic breakdowns of trucks that could cripple their distribution.

To accomplish such a cultural shift, I believe that PCI would need to make a change in management. The current management team has been in place for a long time. Many are close to retirement, and it is believed that they are not inclined to change their philosophy at this point in their careers. Bringing in one or more new top managers with a different perspective may be the only way to move the company in a new direction. Realistically I do not believe this is possible in the near future. The company, despite its major fault, is profitable and therefore operating well in the eyes of the board and shareholders. But time will eventually bring change, be it retirement, acquisition or an economic shift. We hope this change will be the catalyst for PCI to truly become a FoE.