No More 'Etch A Sketch' Planning
How the smartest strategist in America is preparing for 2002
Jack Stack is the CEO of SRC Holdings Corp. (formerly Springfield Remanufacturing Corp.), in Springfield, Mo., a budding miniconglomerate that now comprises some 22 companies and expects to do $160 million in business this fiscal year. Enough of a job for one person? Not for Stack.
The indefatigable 52-year-old is also an author, speaker, sometime Inc columnist, board member of several companies and consultant to several others, and general all-purpose evangelist for the open-book system of management he calls the Great Game of Business. A hallmark of the Great Game: rigorous, detailed, hold-everyone-accountable planning. Inc contributor John Case interviewed Stack about SRC's planning process.
Inc: Jack, these are tough times. Where does your company stand right now?
Stack: We've been planning for a recession for the past 19 years. For 18 of them we looked pretty stupid. Now we look smart.
Inc: So what are your watchwords for the coming year?
Stack: Oh, man. Next year? You have to figure out how to be liquid. It's dangerous to build up assets right now -- inventories, receivables. You want to be short on debt. At this moment, cash is really king. You have to have a strong balance sheet and be careful of heavy capital expenditures.
Inc: Are you talking about cutbacks?
Stack: Not necessarily, just smart decisions about where to invest. Can you invest in services? Can you provide something to customers who don't want to hire people? Can you offer something new? You have to look at the cycles. For instance, we're heavy in marine [engines], but in a down economy there isn't going to be a lot of boat buying. What there will be is a lot of engines failing. So we'll see a better aftermarket than a new-goods market.
Inc: Do you think most company owners are doing the kind of planning they need to do?
Stack: Well, everybody plans. Everybody plans in terms of two things: What happened in the past? What's the least we can get by on that the shareholders will accept? This is Etch A Sketch planning.
Inc: And instead you should...?
Stack: At SRC our planning process starts with three steps. First, we want to gather as much data about the marketplace as we possibly can. What will the markets we're in look like over the next year or three years or five years? We've actually developed templates that we review every six months.
Second, we want to look at the competition. We analyze them the way you would public companies if you were buying their stock -- their profitability, their efficiency, their solvency. That tells us where we need to improve. If we aren't turning inventory over as fast as somebody else, we know we need to focus on that.
Third, we analyze our product mix. Do we have all our eggs in one basket? One customer? How secure is our company?
Inc: But you still need to come up with a growth target, a goal, don't you?
Stack: We strive for 15% growth. That's the rate we know from experience we can finance, that we can afford.
Inc: What if the marketplace is telling you that you can't achieve 15%?
Stack: Then we'll look at introducing new products -- or else starting or acquiring another company.
Inc: So the planners in your existing businesses try to come as close to 15% as they realistically can. Who are those planners, anyway?
Stack: At this point, it's our sales and marketing people. They're the ones that know the marketplace. They will actually break down the dollars per month they intend to sell by product and mix. Once we have that we'll pass it along to all the employees in the organization -- salaried and hourly -- and ask them what they need to support the plan. We'll go to Candy in the pump room and say, "OK, Candy, they're going to sell 6,000 nozzles. What kind of labor will you need? What kind of materials?" With the competitive data, Candy can make an analysis of what she needs that's based on the standards of the marketplace.
Inc: What's Candy's next step?
Stack: Sorry. "Candy" is my shorthand for any SRC manager. The real Candy is now a grandmother -- she hasn't worked with us for a while. But all the Candys get together with their people and project their financials -- their income statements, cash-flow statements, and balance sheets. Then they'll send those upstream to the board of directors.
Inc: In effect, the board combines all the departmental and unit plans into one big plan, reviews the data that went into it, and approves it?
Stack: Yeah. And OKs the extra compensation that will drive the plan.
Inc: A bonus system? Tied to the planning?
Stack: Sure. The board has looked at all the financial data, the solvency, the efficiency, the profitability. If we're not competitive in terms of inventory turnover, we know we have a long-term weakness -- our company is vulnerable. We want to put out an incentive program to get everybody to focus on that long-term weakness.
Inc: Let me get this straight -- you'll pay a bonus if you meet a certain level of inventory turnover?
Stack: Or any other ratio that we're weak on. In 19 years we've had something like 22 different bonus programs. It's based on picking out the vulnerability of the company this year. It says to people, "If you get competitive with the marketplace, you've taken out a future weakness -- and you deserve a reward." Then, of course, there's the succession plan and the contingency planning.
Inc: Whoa -- one at a time. Succession plan?
Stack: When you go to the board, you don't just supply them with the financial plan. We want to see, for every key salaried position, who's the designated replacement. Who's the potential replacement? The succession plan is critical to the growth of the company, because it tells you, Do we have the right people in the right spots to take advantage of the opportunities that are going to come along? I'd really love to see three replacements for each position. But that doesn't happen. Usually, I get one, maybe two.
Inc: And what about contingency planning? Is that some kind of fallback level of growth?
Stack: More than that. We always want what we call a trapdoor -- an alternative. I'll give you an example. Say one of our companies is selling truck engines in the medium-size-truck market. In a growing economy the trucks are rolling, and we can just build that one engine and grow along with the market. But if the economy shrinks, a trapdoor would be to have the R&D ready to launch a new engine, to go after another whole segment of the market. Why not introduce a new product when you're in a downturn? You're going to take a hit anyway.
Inc: Most big companies have elaborate planning systems like yours. They have departments devoted to planning, and those departments produce fat reports that sit on the shelf gathering dust. How do you keep that from happening?
Stack: Once our plan goes into effect, we have a weekly monitoring system -- we call it a huddle -- that constantly monitors where we are relative to the plan. Everybody always has the plan in front of him.
Inc: In effect, holding everybody accountable for meeting the plan?
Stack: Yes. But things change over the course of a year. So we also ask people their current opinions about what will happen six months out. And, of course, we post the actuals -- the financials. So we have the plan, opinion, and actuals. And we try to figure out how to eliminate the deviations from the plan.
Inc: Is that a kind of quality control?
Stack: It really goes back to [W. Edwards] Deming. What we learned from the quality movement was that everything's a system, and the key is to figure out how to eliminate the variances. That was the whole idea of statistical process control. We assess whether we're within plus or minus 5% of the plan and then take action accordingly.
Copyright © 2001 John Case.
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