2. REAL: Pickled Peppers Case Study: Overview and Initial Challenges

In this series, we explore the remarkable transformation of Pickled Peppers Inc., a company that quadrupled its profits during a recession. Guided by consultant Dan Strongin, the company adopted innovative management practices based on direct observation and a focus on what is real. Each edition reveals how these practical strategies were implemented to overcome challenges and improve profitability.

Overview of Pickled Peppers Inc.

Pickled Peppers Inc. started in 1988, purchasing pickles and pickled peppers in Mexico. By 1993, to secure a more reliable supply, the American owner partnered with two Mexican nationals, forming a Maquiladora partnership to produce and package fermented pickles and peppers. A Maquiladora is a company with Mexican and foreign partners; the Mexican company manufactures, while the foreign company administrates. Under Mexican law, the foreign company pays fewer taxes but must guarantee the Mexican company a profit.

At the time this project began, there were over 390 Maquiladoras employing more than 165,000 Mexicans. Pickled Peppers S.A. employed about 125 workers, fermenting various spicy peppers and cucumbers in open vats, producing diced pepper and cayenne mash for export to the United States and domestic sales. To import the pickles and peppers into the US, the owners used Pickled Peppers Inc. and signed a contract with an existing brokerage for US sales.

Initial Challenges

By the year 2000, the company had settled on producing mostly fermented pepper products as industrial ingredients and some pickles for the local trade. Their expectation for profit, when doing well, was around 3%, which is not uncommon for ingredient producers. However, over the next six years, profits dwindled until deep losses occurred in 2006 and again in 2007. These losses had to be funded by increasing debt, and the company took on operating loans guaranteed by a second mortgage on the owner’s home.

The company had become a murky stew of dubious data and suspicious journal entries. Infighting occurred at all levels of the company. Differences in American and Mexican accounting law made the books difficult to decipher, requiring two sets of auditors who often disagreed. Huge tax bills were paid on little to no liquid profit, with cash flow being highly erratic. Conflicting managerial agendas—between the owner, the American manager on-site, the Mexican managers on-site, and the owner’s son—made progress difficult.

Summary of Challenges and Solutions

In the newsletters to follow, we will explore how Pickled Peppers Inc. navigated its complex challenges to achieve remarkable success. We will delve into:

? Organizational Chaos: Examining the dysfunctional focus and micromanagement that plagued the company.

? Communication Issues: Understanding the impact of poor communication and cultural misunderstandings.

? Structural Barriers: Addressing the outdated organizational structure and the need for unity of command.

? Employee Relations: Improving morale and building trust among employees.

? Management Interventions: Implementing strategic interventions to streamline processes and foster a culture of continuous improvement.

? Success Stories: Highlighting key victories, from process improvements to enhanced profitability and employee satisfaction.

The Project

In November 2007, the owner of Pickled Peppers hired me to assess his company’s operations in Mexico. At sixty, wanting to semi-retire, he needed to determine if his son could run the company or if someone on his Mexican team could take over.

The chill of winter had passed by March 2008, when I visited the Mexican plant for the first time. Over a few days, I spoke with key people, walked the grounds and the plant with a quiet mind, simply observing. I noticed the fear on the workers’ downturned faces, heard accusations, finger-pointing, and signs of degraded morale. Like a detective, I asked questions, avoiding premature conclusions. By eliminating what could not be true, what remained was the truth.

Evenings at the hotel were spent piecing the puzzle together. I needed a way into the problem. I mapped relationships between observations, what I was told, and logic, using a Fishbone diagram.

Cause and Effect Analysis

Given the chaos, a simple flow chart wouldn’t suffice. To make sense of this complicated and potentially explosive situation, I began a root-cause analysis. This process, which I call Untangling?, involves breaking the messy problem down into smaller, more easily understandable issues. I visually mapped the relationships between these pieces and created a Fishbone diagram to illustrate the disharmony.

Observations During Analysis

During this analysis, several key observations emerged:

? Micromanagement: The owner, frustrated, tried to micromanage from thousands of miles away, creating a vicious cycle of increased chaos.

? Communication Issues: The owner and his son had a difficult time communicating. The son’s angry outbursts caused fear and distrust. Latin cultures frown on disrespecting elders, and the acting General Manager described the behavior as “shocking.”

? Organizational Structure: The structure, cobbled together in the early years, was too dependent on the owner, and had become a barrier to growth.

? Employee Relations: Relations among employees, plagued by confusion and fear, deteriorated to the point of public accusations in chat rooms and newspapers.

? Communication Tools: Texting became the main communication tool, leading to accusations and counteraccusations—a Shakespearean tragedy in the making.

? Work Assignment: Work was assigned irrationally, with managers too busy protecting their turf to plan ahead. Responsibilities were unclear, leading people to avoid taking responsibility out of fear of being blamed. Blame was fully delegated, and people were given tasks without the necessary resources or authority to complete them.

? Focus on Pleasing the Owner: The focus was more on pleasing the owner and covering mistakes than on adding value for customers.

Key Assets

Despite these challenges, the company had some key assets. Assets that could help it transition from a chaotic, fear-driven environment to one where employees could take pride and find joy in their work.

? Valuing Workers: The company valued its workers, offering free English classes and home loan programs to help workers purchase housing, which helped keep willing workers from migrating across the border.

? HR Manager: The local Mexican HR manager, fluent in English, had taken courses on Dr. Deming during his studies in Europe. Initially skeptical of Deming’s principles, he later saw their practical application and became a crucial asset, eventually being promoted to General Manager. He did not condescend to front-line workers and could navigate between different cultural contexts effectively.

? Production Manager: An experienced American production manager brought professionalism to the plant, which had been initially patched together with whatever was at hand.

? Willing Workers: Most importantly, there was a pool of over 100 willing workers at the plant—a hidden treasure of untapped human potential.

Root Cause Emerges

The root cause emerged clearly: an outgrown organizational structure. Fundamental organizing principles were a jumble. Unity of command didn’t exist, and workers had at least four bosses giving conflicting orders at any time. The “span” of control was wide at the top, narrow at the bottom, and nonexistent for the son. Despite not working for the company and having little real power, he had a wide span of responsibility. Delegating responsibility without authority doesn’t work. You can never delegate accountability, but delegating responsibility without the necessary authority sets someone up to fail.

The company tried to operate like a small entrepreneurial organization even after it had grown to over 100 employees. Its workers, good people forced into bad behavior by an outdated management structure, were continuously pulled off one task and put on another, according to the fire of the day. Multitasking doesn’t work; it excites the adrenals, increases stress, and makes a person feel busy all the time. Feeling busy and acting busy aren’t the same as working.

An Educated Guess Emerges

The best way for the owner to know if his son could run the company was to let him try. This was seeing the blindingly obvious. Too many people were giving conflicting orders; there was no unity of command.

Diamond Cutting

I call the process Diamond Cutting, like a diamond cutter, studying to find the seam that will yield the most beautiful diamond. There is always more than one seam. Study to understand the structure and know where best to strike; when ready, put thinking aside, take a hammer and chisel, and swing!?

I approached the breakfast meeting with trepidation. I knew I was about to suggest something radical, something that could entail real risk beyond the losses he was already experiencing. Not only that, but I was concerned that I might be thrown off the project even before starting, but I felt a professional responsibility to speak clearly and objectively. With hammer and chisel in hand, figuratively speaking, I told the owner he had to fire himself; remove himself from daily operations and put his son in charge. Only then could he know if his son could do it. I also told him his son needed to stay on-site in Mexico until balance was achieved, and a replacement was fully trained. Running the plant from thousands of miles away was too confusing.

Stay tuned as we unravel the journey of Pickled Peppers Inc. from chaos to a thriving, harmonious organization.