Fonterra management issues inevitable…

Fonterra has suffered fairly sustained criticism over the last few months regarding its processes around product safety. The report from an inquiry into the botulism scare released yesterday said “Fonterra lacked an updated, well- rehearsed crisis plan to implement, as well as a crisis management team that could spring into action.”  This should be a pretty basic requirement in a well-managed food producing company.

I believe that this crisis, and future ones, are inevitable not because of the sheer scale of Fonterra, but because the “essence” or “purpose” of Fonterra is focussed not on customers, but on its supplier farmers. A band-aid and PR will get Fonterra through this, but the cause is deeper in my opinion.

The normally structured company has the ultimate purpose to return maximum value to its shareholders, and that is often seen as comparable to the co-operative maximising return to suppliers. However, in the normal company structure the most capable managers, who create the greatest value, are rewarded for their achievements. They recognise that the customer who buys the product must be the focus – please them and the rest follows. The focus is usually on value added.  If the focus is lowest cost, then that is reflected in brand positioning, and the customer gets the benefit of price.

In a company focussed on adding value, management expertise is usually rewarded, whether the particular add is through people, branding, logistics etc. In New Zealand we have many examples of world class executives being developed in companies such as Fletcher’s or CCH and going on to lead globally significant businesses. How many have come through Fonterra? Come to think of it – how many Fonterra senior managers are New Zealanders? Is that because potentially great managers do not want to work in a co-operative structure? Or because the selection process favours managers originating in markets targeted for commodity products? Or because those selected have had a career in commodity low value added products? In these situations the focus is not on value added, and therefore customer centric, management performance.

The co-operative is structured to fulfil its purpose – to maximise returns for supply of milk to its suppliers. All entity functions are ultimately driven by that purpose. If the purpose is supply focussed – processing the greatest volume of milk for the least cost and capital investment, then I suspect there is going to be a dearth of talented executives, or at least a dearth of motivated ones. With fewer talented executives, you are going to get shortfalls in management expertise, such as … “Fonterra lacked an updated, well- rehearsed crisis plan to implement, as well as a crisis management team that could spring into action.” I also suspect that with a continued focus on “belt tightening” and cost minimisation, such an organisation would not have a particularly good organisational culture. That in itself impacts on performance.

The implications are important. Fonterra is the dominant milk processor at present, but we see overseas investment in dairy infrastructure all the time. If those businesses are better managed, what is the long term outlook for Fonterra? Is it not time even for farmers to realise there interests lie in moving on from the co-operative structure?

Looking forward, what might be the end game if the co-operative vision is taken to its limit? Robotic milking, robotic processing and shipping? Commodity standardised product streams being churned out – just like Detroit churned out cars some decades ago?