The Innovator's Dilemma
Five years ago in an old Massachusetts mill room 12 workers scurried about with plastic bags, plucking electrical components from shelves. They bagged transistors, resistors, and capacitors. The room hummed. The components in the bags would become part of beige metal shoeboxes called environmental-control units (ECUs). The shoeboxes would be plugged into electrical outlets at disabled people's homes. The handicapped people would operate the shoeboxes by voice, by tongue or chin movements, or by blinking their eyelids. They would use the boxes to turn up the heat or to turn on the lights. Simple things like that, things that most of us take for granted.
Michael Rourke had invented the boxes to help people who were trapped in their own bodies. His inspiration was his mother, who suffered from multiple sclerosis. She used to sit through Sesame Street because she couldn't change the channel. If her house had caught on fire, she would not have been able to dial 911. In 1985 Rourke founded Quartet Technology Inc., which sells the box and other inventions to medical suppliers, which sell them to people with disabilities.
But in 1996, as Rourke watched his workers bustling around his factory, his dream in action, all he could think was, "What the hell am I doing?"
In its first 10 years, Quartet sold 2,500 ECUs. But the company Rourke had launched to improve thousands of lives was making his own life miserable. Instead of inventing more devices, he was sitting in his office calling parts distributors. "I was sucked into a vortex of materials management," he recalls. "Sleepless nights, and days and days of chasing down components." So five years ago he decided to change everything. He turned his parts inventory over to his distributors and outsourced manufacturing. Now sales, which are in the low seven figures, are ticking up, but profits are really jumping. And Rourke spends his days designing new products, like a voice-operated controller for a computer's mouse and keyboard, for people who can't use their hands. Here's how it all happened.
SUCKED INTO A MANAGEMENT VORTEX: The company Michael Rourke had launched to improve thousands of lives was making his own life miserable.
Rourke started Quartet with his brother and two friends while working full-time as an engineer. He was passionate about his shoebox invention and beguiled by its sales potential. His own mother, for example, used her shoebox to reduce her need for a home health aide by 18 hours a day. Rourke believed he could convince insurance companies that the ECU, which now sells for $5,000, would similarly reduce the costs of caring for 20 million disabled people in this country alone. So he quit his 9-to-5 and bought out his partners one by one. By 1996 he'd grown the company to 12 employees. Which brings us back to Rourke's problem -- a common one, really. The innovator innovates, only to end up managing the mundane day-to-day operations of a company. "Person- ality problems, work flow, inventory...15 problems every day," says Rourke. "The more I did of that, the less I was doing of what I wanted to do: R&D and design." He had new inventions to patent but no time or money to file the paperwork. "I would go to bed with my head ticking all the time," he says. And it wasn't just a matter of personal satisfaction. "I watched the money," Rourke says. As he hired workers, from 1994 to 1997, Quartet's net income dropped 96%. "I realized we were never going to grow in the management style we were doing."
For one thing, the parts sitting on Quartet's shelves were together worth more than Rourke's house. Rourke had to keep at least a six-month supply on hand in case a medical supplier placed a large order. Otherwise, he might have to wait as long as a year to get a part from a distributor. That was no way to make money.
Too busy and tired to read, Rourke listened to an audiobook about manufacturing called The Goal, by Eliyahu M. Goldratt and Jeff Cox. The authors had created a character called Herbie to illustrate that the slow guy on the manufacturing line could create a disastrous bottleneck. As Rourke lay in bed with a Walkman pressed to his ears, it occurred to him that Quartet was one big Herbie.
That thought spurred Rourke to set about reinventing his company or, more precisely, returning it to its R&D roots. He had finally realized that he didn't need to do everything himself. First he researched the possibility of paying someone else to order, stock, and kit the parts. The professional inventory managers wanted to charge Rourke a fee of at least 15% of the price of every part -- an unacceptable cost increase.
So Rourke approached the Bolton, Mass., facility of Future Electronics, a parts distributor that had worked with Quartet back when other suppliers had thumbed their noses at the start-up's small volume of orders. Rourke offered a deal: he'd use Future exclusively if the distributor would keep a three-month supply of his parts on hand at its own expense, charging him only when he needed a part. Though it cost Future money to hold the inventory, Rourke's offer was exclusive, so Future would get more business from him than before. He showed Future his parts list: "You can have it all if you make it go away," he said.
Future was interested but could handle only 85% of the parts on the list. Rourke really wanted to unload every last part, so he took his deal to another distributor. That vendor could handle all the parts, but the arrangement fell through when another electronic-components distributor acquired it. Rourke settled; he went back to Future and gave it the 85%. Then he cut a similar deal with another distributor for 10%. He still manages that last 5% himself, but he reduced the time he spends managing inventory to about an hour a month.
Once he got the inventory out of his hair, Rourke set about outsourcing manufacturing. He'd always paid a local contract manufacturer to affix all the electrical components to blank circuit boards. But Quartet's line workers had put together cable, speaker, and battery assemblies themselves. Rourke logged on to the Internet to find contract manufacturers who could bid on that work. "Some guys said, 'If you're not doing $10,000 a month with me, I don't care" about you, Rourke recalls. But two or three manufacturers came through. (Now that the economy has slowed, some of the companies that initially scoffed at Quartet's small volume are calling Rourke back, saying, "We'll take that $1,000 a month." "Get lost," Rourke tells them.)
Today when Rourke receives an order for 100 units, he contacts his manufacturers. The manufacturers inform Future, which ships the parts the same day. In two weeks the pieces arrive at Quartet for final assembly, before Rourke even receives a bill. "We took our inventory and converted it to cash," he says.
Those two strategic moves -- outsourcing inventory management and manufacturing -- enabled Rourke to shrink the company from 12 full-time employees to 3, plus 2 part-time workers. The transformation from Herbie mode to Thomas Edison was neither easy nor quick. It took at least half a year for the company to recover from the shock, Rourke says -- "like trying to turn a cruise ship around." Once the new, svelte Quartet got going, though, net income rose 773% from 1997 to 2000.
One thing that hasn't changed: Rourke still works almost as much as he did when he was bootstrapping his start-up dream. It's just that he doesn't mind, because he's doing what he likes to do. In early 2002, Quartet will introduce the first major new version of the ECU since 1994, and Rourke is planning to launch six new products by the middle of the year.
Today Quartet does not hum. The only notable sound is the clack of the packing-tape machine, signaling that another unit is on its way out the door, that another person will gain a little more independence. Rourke looks up when he hears the machine. He raises a finger to his ear. "Profits!" he says. He smiles.
Jill Hecht Maxwell is a reporter at Inc.
It's Your Problem: Doug Curtis wanted to ensure that a behavior that plagues many CEOs wouldn't happen to him: employees running to their bosses with their every predicament. So the CEO of HR America, a human-resources-outsourcing company based in Fort Wayne, Ind., found a solution: he requires employees to fill out a problem-solving form before they seek his help. Instructions on the two-page work sheet include: "Write down the possible problem statements. Answer the following imperative questions before trying to solve the problem: A. Is it a problem? B. Is it insoluble? C. Whose problem [is it]?" Curtis has found that after filling out the work sheets, managers end up solving most problems themselves. Our guess: some employees take one look at the form, say, "To hell with more paperwork," and make a decision. --Rifka Rosenwein
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