New Venture Lab: Equipping Christian Entrepreneurs

One of the most powerful learning experiences I had when I worked at the Mobil Chemical division of Mobil (now ExxonMobil) involved manufacturing operations strategy and what can happen when you get it wrong.  One of the products we produced was plastic grocery bags -- the “t-shirt bags” you get when you checkout at the grocery store.  Mobil Chemical had innovated plastic grocery bags and was by a wide margin the market leader in terms of size, market share and manufacturing expertise.

One of the jobs I held during my time at Mobil Chemical was the national marketing manager for the grocery bag business, a $150 million business.   It was a role where I led the product and sales efforts on a nationwide basis and managed the product line profit and loss (P&L) by coordinating closely with my Research and Development (R&D) and Manufacturing peers who were charged with further innovation and manufacturing operations.  Our R&D team spent most of their effort devising ways to lower manufacturing costs through innovations with the plastic extruders – the machines that heated up and extruded the plastic resin pellets into thin plastic sheeting, and the bag machines – the machines that took the large plastic rolls that came out of the extruder and turned them into neat stacks of plastic grocery bags.  Our grocery bag manufacturing capability was spread out throughout the U.S. and consisted of very large-scale plants that ran fast and wide.  In other words, the extruders we put in were very large extruders that cranked out massive amounts of plastic and the bag machines we put into place ran a large number of “webs” and were the widest bag machines of their type in terms of the number of webs of bags that were fabricated at the same time.  In fact, our R&D and Manufacturing crews were very proud of the modifications they made to the equipment to insure that we were “bigger, better, wider and faster” than anyone else.  In addition, our plants tended to be “gold-plated,” boasting everything from the shiny, seal-coated floors, to multiple layers of safety and quality assurance bureaucracy.  This manufacturing culture developed into a deadly hubris that ended up dealing a fatal blow to the company’s plastic grocery bag division.

By contrast to Mobil, our number two competitor was a little company called Sonoco Products that had very small extruders that developed one small web at a time that fed into very small bag machines that only fabricated bags one web at a time.   Their plants were small, humble and low-cost, which, as it turned out, put them in a much better position to respond to the coming changes in the marketplace.

Markets change.  It is inevitable.  And when they do change, a company’s ability to survive depends upon how quickly the company can react to those changes, which puts a premium on having a lean and flexible operation. 

The changes in the plastic grocery bag business began to take place fairly rapidly once the bags gained traction in grocery stores.  There was pressure from some environmental fronts to stay with paper bags because of the false perception that paper bags were better for the environment than plastic, but paper is decidedly not better for the environment: paper bags are much more expensive to produce, use up many more resources, produce tons of toxic waste during production and take up much more space in a landfill.  Even with the environmental pressure, plastic grocery bags took off because they were one-tenth the cost of paper and took up only one-tenth the space of paper.  The economic and logistical advantages of plastic secured their place at the front of retail stores across the country.  As the demand for plastic bags surged, so did the demand for more variety and more capacity.  The former demand ushered in the issue of product line proliferation and the latter demand encouraged new competitors to jump into the market.

Products always proliferate – another inevitable market change.  Just as Ford’s singular black Model T that eventually turned into thousands of combinations of automobile choices today at Ford, customer tastes and preferences over time tend to demand more variety in product size, style, color and design.  Plastic grocery bags were no different.  The market went from one size of plain white bags to several sizes of bags of all colors with custom print designs on each bag.  Then demand moved from one print design -- such as a store name and logo, to a new print design each season, to a new print design as often as each month.

Plain white bags of one size with no print were very easy to produce with large extruders extruding only one color and large bag machines punching out exactly the same thing 24X7, thereby giving us real scale advantage over our smaller competitors such as Sonoco.  But our advantage quickly turned into a major disadvantage as the product proliferation hit.  Suddenly, we had to shut down the large extruders on a frequent basis to bleed out one color and bring them back up on another color, resulting in large amounts of machine down time as well as large amounts of unusable scrap material.  And bag machines that could run four webs simultaneously now only took a few minutes to run a custom order and had to be shut down and reconfigured for the next custom order, resulting again in massive amounts of machine down time.  Meanwhile, down the road at Sonoco, their little extruders and bag machines were ideally suited for custom orders consisting of small lots.  They were much more nimble in their manufacturing process than we were.  Any cost advantage we hoped to have due to our scale (which we hoped would offset our higher-cost “gold-plated” plants) suddenly turned into a competitive disadvantage since we not only had a high-cost environment, but now we had a high unit cost of production as well.

Then the other shoe dropped.  Cheap imports hit the U.S. shore.  Yes the bag quality was lower, but the cost was so much less, that grocers voted with their wallets.  At the very time that our costs were already far out of line, we now had a much lower market price to meet.  We quickly went from fat margins as the original innovator to large losses.  Add to that the fact that the surge in demand sparked a sharp rise in new bag capacity coming online that far outstripped demand.  This is another common market phenomenon when companies overreact to a surging market demand by adding too much capacity, each tending to make capacity decisions without considering the capacity decisions of the rest of the market.  All this new capacity meant an oversupply that led to even more price cutting.  We had officially entered a “doom loop.”

These market changes put Mobil in a tenuous position.  With the vast asset investment that had been made in the plants that were now so ill-configured to meet the market demand, it was hard to admit the need to shutter the plants and build newer, lower cost plants that looked more like Sonoco’s configuration – a very bitter pill to swallow.  And with the threat of an over-capacity market with cheap import bags from Mexico, Costa Rica and Taiwan, there was a very real need to consider dumping our manufacturing completely and simply acquiring the foreign capacity or at least outsourcing to them.  My recommendation was to acquire one of the competitors rather than reconfigure our U.S. capacity.  Soon after my unpopular suggestion, I was promoted into another role in the company, but I kept tabs on the division that I had invested so much energy to help build.  Management struggled with tough choices, but the company was like a large ship that takes too long to turn around.  In their hubris, company executives opted for neither rebuilding, acquiring nor outsourcing.  We had a manufacturing mindset, rather than a marketing mindset as our company culture, so rather than give the customer what they demanded; we did our best to sell them only what we produced.  In the end, all the plastic grocery bag capacity was closed down and Mobil Chemical withdrew completely from the plastic grocery bag market, losing millions in the process.  In just two decades the company had gone from innovator, to market leader, to market loser, to complete withdrawal.

The key lessons for me as I participated in and observed the latter few years of this rapid cycle from success to failure were as follows:

• Markets always change;
• Products always proliferate;
• Advantages always get “competed” away;
• Lean and flexible is better than big and inflexible;
• Humility is better than hubris;
• The failure to react quickly is deadly;
• Deciding not to decide is a bad decision;
• Markets will often overact to rising demand by building too much capacity in the face of that demand (think housing market); and
• Give customers what they demand, rather than what you can produce (in other words, a marketing mindset is better than a manufacturing mindset)