They Messed up and Left... Part IV

A fanciful story inspired by events observed in different companies in the contract manufacturing market and could happen again in the future in other companies in the same industry.

?Connection to Parts 1 to 3

The family owned CDMO became PE owned. A 5-year BP is ready indicating quadrupled EBITDA at the end of the 5th year. Profitability improvement is expected to come exclusively from discontinuing “unprofitable business” and from Price increases and Recharges. The word “Contribution” was forbitten any new RFQ should be reviewed in terms of EBITDA even if not clear how EBITDA could be calculated in RFQs. General overheads were increased to modernize the company, following what BP was indicating. i.e quadrupled EBITDA at the end of the 5th year. But sales were still to come. The manufacturing sites were given full responsibility on their P&L and thus the other functions, like Business Development, become supporting functions. Even the COO could only consult the sites.

Chapter 7: The committee of the Wise men

Capital equity owned companies differ a lot from family owned ones. One of the differences is that unlike family businesses, where family members play a role in the management, it takes time to take decisions in capital equity firms because there are different people who need to be involved in the process of decision making, when EBITDA is about to be impacted. Different people in different levels need to give approval.

In the example of this CDMO, when it came to provide a new quotation, Business Development Managers were used to prepare the business case, discuss with Business Development Director and if the project was too big, then family members were involved in order to give their final approval. And this was a process taking couple of days. It had to be a decision making process of a couple of days because deadlines from customers were strict and the clock was ticking. Therefore, if the deadline from the customer for an accurate offer was 3 weeks, the first two weeks were consumed for internal cost calculation processes, one or two days for the responsible BDM to review / challenge the quotation and prepare the business case and then another couple of days to agree with the BD Director and/or the family members on the case and prepare the offer for submission to the customer.

In the first quotations of the new era it became clear that this process could not work anymore. The reason was that the Commercial Director was not authorized to approve a price/capex required for a new quotation without first being aligned with the CFO. And then the CFO was not authorized to approve a price/capex required for a new quotation without first being aligned with the CEO. And for big quotations (for which CAPEX was above a certain threshold), even the CEO was not authorized to approve a price/capex required for a new quotation without first being aligned with the members of the board. So, a decision making process of couple of days, became a decision making process of a month. Because CEO and CFO clearly had other priorities in their agendas and members of the board met once per month in their regular monthly meeting.

It was clear that an alternative should be found. It was not possible for the CDMO to continue missing customer deadlines or needing one and a half month to respond to a quotation. Hence someone had the idea to arrange a bi-weekly call where all quotations would be reviewed and decisions should be taken for the important ones. This was scheduled for Friday mornings every fortnight. So, every two Fridays the members of the quotations steering committee gathered together for one whole hour to discuss quotations and take decisions. The members of the committee consisted of the Business Development Directors, their boss the Commercial Director, the deputy CFO and the 2 Heads of Operations. And of a middle level manager who was keeping the minutes of the call and setting the agenda with the open quotations that needed to be discussed.

The purpose of this call was to take decisions on subjects like if the CDMO should quote for a new RFQ, where to allocate it (in which manufacturing site) and what price to offer to the customer. Nice idea.

But "Nothing is more dangerous than an idea when it is the only one you have." - Emile Chartier (French philosopher)

And indeed, apart from the idea to schedule this RFQ Steering Committee call, nothing else has been thought through. The fact that apart from every two weeks there was no other time for the Steering Committee members to take a decision related to quotations meant that delays were still there. The fact that for important quotations, the deputy CFO was not authorized to take decisions meant that there was a need for an additional call/meeting with the CEO and the CFO to discuss and take a decision. The fact that the committee members were gathered every two weeks meant that in case something was challenged by them (such as the go or no go for a quotation or which manufacturing site is more suitable to prepare a quotation) the quotation process should start over.

But the main issue was not the fortnight. The main issue was not that it was clear that new quotations were not a priority for the company. The main issue was not even that nobody apart from the CEO and the CFO could take decisions.

The first main issue was that there was no in depth discussion about quotations. There was no real challenge any more in the quotation process, unless something was obviously wrong. Many Business Development Managers were new to the company, so they were not in a position to understand the details of the cost calculations that the sites provided, and it was not their role to challenge anything coming from the sites. They always had in mind anyway that the sites were P&L responsible. And of course it was not the role of the members of the committee to review the details. They were there for the high level decisions, not to discuss what OEE the packaging line had assumed, or to understand why the batch size was small or big or why the MOQ was that or the other one or how many operators were assumed to be needed for the packaging line. Clearly this is not the role of the deputy CFO, the Head of Operations and the Commercial Director. But because nobody was checking the quotations, they were just presenting them to the committee, the outcome was questions like this: “Why for this quotation, site A in France has a cost of 10 and site B in Austria has a cost of 15. This does not look right, go back and double check it and let’s discuss again in two weeks about it. Next one in the list...” Or another common comment in these calls was “why we have used this site in Portugal to quote for this quotation, please check the site in Italy to see what is the outcome. And let’s discuss it in two weeks”.

Therefore, in reality this committee instead of improving the process, was delaying the process. And the solution that was found to get around these delays was to baptize some quotations “indicative” and mention to the customers that “we can give you an indicative offer which is subject to board approval”. So the CDMO had the right to come back to the customer with an alternative offer after some more weeks. Some customers were buying it while some others were not so happy about it.

But there was another issue with the committee. They were obsessed with the overall target of the company of 10% EBITDA. They wanted each new product to have 10% EBITDA at the minimum. “Otherwise we are losing money”. Nobody cared what 10% EBITDA meant or that it doesn’t make sense to calculate EBITDA at SKU or product level. And because nobody in the company knew how to calculate it, each site was providing funny figures based on who knows what.

But no matter the figure, since it was coming from the site which was P&L responsible, it was valid. The fact that the quoted price could be out of the market standards was not important. It was preferable not to quote at all for a new product rather than trying to understand how the bottom line of the site would be impacted if the new product would come in. Nobody was evaluating the fact that since no additional fixed costs would be needed for the new product, even with a lower profitability, a new product would make the profitability of the site better off at the end of the day. NO. The wise men preferred to wait for the perfect project to come. They would not accept to bring in something which did not make a perfect fit or something that would not have 10% EBITDA. The fact that the biggest site of the CDMO was not awarded with any new business during the last 2 years did not ring any bell. Nobody worried about it.

So the weeks went on, indicative quotations subject to board approvals were communicated to customers and delays continued until the point where one big customer asked for an accurate quotation with a deadline of 3 weeks. 3 weeks is not something crazy. It’s a normal deadline in the CDMO word. The CDMO was unable to respond on time, the big customer took the CDMO out of the quotation process and the CEO of the CDMO got angry. Then, after a week or so, another big customer asked for an accurate quotation within 3 weeks, the CDMO was unable to respond on time, the big customer took the CDMO out of the quotation process and the CEO of the CDMO got angrier.

The Commercial Director was hold responsible for it and as always had to persuade the angry CEO that everything is under control. So, apart from the bi-weekly RFQ steering committee call, he organized another call which was called “escalation call” with duration of 30 minutes every other Friday whose purpose was to escalate cases where a delay seemed possible.

Meanwhile a new RFQ process was drafted where timelines per step became very clear. The overall quotation process remained 3 weeks but the cost calculation should be ready in 7 days and the remaining days should be kept for the decision making process. When the Procurement Director tried to complain about it, mentioning that most of the suppliers ask for 10 days to give a cost for raw and packaging materials, the reply of the CFO was imminent. “There is no way to risk again to miss a deadline, this organization needs to learn to work more efficient and faster when it comes to quotations. So, you need to learn to work faster and no matter what, respect the new deadlines”.

It was the moment when a big decision had been taken. The CDMO would compromise quality of quotations in order for its directors to have the time to review the business cases and decide at the end of the day to give to customers prices with 10% EBITDA. It did not matter that everyone within the company was complaining about the fact that while the quotation process assumed 3 weeks in order to come up with a proposal, more than half of this time was spent for review by the management.

On top of that, one person was identified to manually follow up every single quotation and ring the alarm when a delay of one day was spotted in any step of the quotation process. So, the CDMO was paying the salary of one person to make sure that no more deadlines would be missed. It was more important to make sure that the timelines were ok rather than providing a qualitative quotation.

And of course because it was clear that the committee could not review all quotations, some thresholds were created under which the committee would not be involved but only informed. One of the thresholds was revenue related and another one, capex related. Every quotation whose revenue was below €x million and the CDMO would not finance any investment, could be worked from the Business Development Directors.

It was so obvious that nobody wanted to discuss with the Committee any new quotations, that there were cases where BD Directors artificially split big projects in two parts in order to fall below the x million revenue threshold and avoid involving the Steering Committee in the process!!!

It was clear that the Committee of the wise men was there only to play the politics game…

Chapter 8: Customer Service is here to solve customers’ issues, where is customer service?

Customer service is one of the key aspects in a CDMO. Customers pay the salaries of people working for the CDMO, customers participate in or even sometimes fully finance necessary investments, at the end of the day the customers are those who contribute to the organic growth of a CDMO. And it makes sense to keep customers satisfied by at least making sure that they will receive their product on time and at good quality. And in this case it is pharmaceutical products that we are talking about.

All these years this particular CDMO had a reputation of treating customers right, caring about their concerns and trying to find solutions to their problems. The priority towards customers was so high that often there were voices within the company that “we protect our customers so much, that we tend to forget our own benefit and well being”. When you manufacture pharmaceutical products, there will always be problems related mainly to delays and quality and this is due to the nature of the business. But as soon as you show to the customer that you care and you try to solve the problem, they usually understand. Most of them have manufacturing sites of their own and they understand that such problems during a production process will occur. And at the same time, they cooperate with more CDMOs, each one of them having their own share of issues.?

All these years, Business Development department played a fundamental role in customer relationship management. Business Development Managers were there whenever the customer required support and when people in the manufacturing sites faced difficulties in communicating the right message to the customer. And it is true that some times BDMs complained about the fact that they spend more time in solving problems related to operational issues, than contributing to growth of the company by bringing in new business. But the internal message was that if our customers are not satisfied, they will stop sending us new requests for quotations and if this happens, growth will be impacted.?

However, under the new ownership this mentality should change. Don’t forget that the Business Plan under which the private equity agreed to join the company, was mainly based on growth. So, in order to support growth, we should have as many people possible on the road try to find new customers and provoke new requests for quotation. The new CEO during his first (and last) meeting with Business Development team mentioned that “it is criminal that there are potential customers out there, who do not know us”. It was clear that the focus of BD team should from now on be purely on growth and in order to do this, BDMs should stop spending their time with operational issues. Such issues should be dealt with by the sites, who at the end of the day know better how to solve them since they created at a first place. Correct but…

This notion was so strong that most BDMs with operational background were considered black sheeps and this is because it would be difficult for them to change from one day to the other and stop being involved in operational issues. Because if you have a past experience in operations and you are used all these years sharing customers’ concerns and understand how you can help, you will not so easily turn your back to customers when they need support. But if you don’t have a clue about operations, even if the customer asks for your support, most probably you will not be in a position to help and you will direct him to the sites. Hence, all new people that joined Business Development were sales people with no operational experience.

But this strategic shift left a hole into the system. People working in the majority of the sites were used all these years to escalate to BD problems that required some negotiation and some relationship management skills. They would not have this opportunity any more. And within “operational activities”, practices like “recharges” were involved. If for example the material cost of a specific product increased from one year to the other, people in the sites should negotiate from now this price increase with the customer even if there was no such provision in the contract. So on top of their every day routine, supply chain department of each site had to be involved with customer negotiations related to price increases coming from variations in the cost. Nobody had trained them to do so but nevertheless they had to do. And on the other side of the coin nobody had trained customers, who were used all these years to speak with their contact in Business Development. Now they had to speak with as many people as was the number of manufacturing sites they had business with and contact Business Development only for topics related to new business.

It was like saying to customers that “don’t speak with me about your problems with the production or recharges of your current portfolio, but by the way do you have any new business that you would like us to quote for?”

And because time was pressing enormously due to the timelines of the Business Plan, this shift to mentality had to take place in one or in some exceptions two months. And to make it more challenging, the idea of the CEO was that the majority of existing customers do not have much growth potential so apart from some exceptions of large customers, all other current customers should be handled by the manufacturing sites entirely. Business Development should only spend time in identifying new prospects and stop wasting time with small customers without real potential for growth. So supply chain of each site had to wear a second hat with the label “Customer Service”. The only support they had was that 3 people from Business Development with years of experience under the old regime would be part of a corporate Customer Service department and would train the supply chain people on the way they should approach customers. ?

The fact that Supply Chain of most manufacturing sites was not ready to take all these new tasks was not important. The fact that customers were not ready for this change was not important. The fact that there was no real alignment between different sites sharing the same customer was not important.

This new approach could work, but definitely not within one or two months. Because such a shift in the way of working requires a shift to mentality and maybe even culture. And such changes require time, training and resources.

These were just details. Some more of them…

Now BDMs would have more time to travel around the word to meet new customers and if an existing customer called them for support, the guidelines were clear. Give him the contact details of supply chain people and the Business Unit Head. "Get the monkey out of your shoulder and give it to them. Its not your problem any more dear Business Development Managers. You should just worry about developing the business".

Well yes, but developing a relationship and gain the trust of a potential customer that does not know you takes some time. Nobody will trust you with the big business if they don’t test you first. And the way to test you, usually is to give you some small products to produce and if you prove that you can do, then additional opportunities may arise. This means 2 to 3 years minimum but the expectation according to the Business Plan is that new business will come now.

But again. Details…

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Disclaimer: This is a fanciful story inspired by events observed in different companies in the contract manufacturing market and could happen again in the future in other companies in the same industry