Engineering Brain Drain? New Strategies for Coping
The industry is experiencing a number of barriers to achieving its aggressive growth goals. Minimal population growth and saturated store shelves have resulted in slow market growth. Overcrowded markets have seen less true differentiation in their products leading to increased private label introductions and traditional competitors "knocking off products" at a lightening pace. Wal-Mart's unprecedented growth in food sales as well as traditional retail consolidation has shifted buyer-seller dynamics. Private label products continue to significantly influence the price points of large product segments. Consumer health concerns and fads have impacted various product categories-both positively and negatively for manufacturers. And, new customer segmentations continue to define and drive sub-categories and unique product needs.
Top-line growth (sales) is heavily dependent on new product successes. Last year, there were more than 33,000 new consumer products introduced in the US. Yet, traditionally 60% to 90% of new products fail in the marketplace. The cost of these failures is enormous with the R&D, marketing and advertising costs, as well as potential capital investments, required to launch a new product.
Bottom-line growth is equally important to companies. Productivity has been the driver of margin improvement for the past decade and many feel that the major productivity opportunities have been exhausted. Randy Darcy, chief technology officer of General Mills, admonishes people who feel the low hanging fruit has gone to "get a bigger ladder or find a new orchard!" The next generation of productivity gains will likely require new creative approaches and technologies to unleash potential.
The key to driving both top and bottom line goals for the future may well rest in the technologies and innovations of people who are both creative and highly experienced. Do food and beverage manufacturers still have the "brains" to deliver results? To provide a perspective on this question, interviews were conducted with senior leaders of food manufacturers, engineering service firms and equipment suppliers to assess the current state of their engineering capabilities. Respondents included large and small companies in each of these primary sectors. The trends were consistent, but varied in degree between individual companies.
While engineering means different things to different companies based on their organizations and accountabilities, we focused on the engineering that works with R&D on product/process/packaging development, develops manufacturing technologies and executes capital and productivity projects. In addition to these engineering skills, most food companies have retained and even expanded their food scientist capability to develop new formulas and products. However, their engineering competencies vary significantly.
Internal engineering capabilitiesMany mid- to large-sized food companies have downsized their internal capabilities over the last ten to fifteen years. Much of this trend resulted from the drive for increased financial performance following acquisitions or for pure cost-cutting initiatives. Paul Wood, CEO of Hanscomb, Faithful & Gould, observes, "Engineering was often one of the early targets for downsizing because its function was not well understood or appropriately valued in food companies."
Most companies outsourced engineering to external services firms, where they felt they could save the cost of engineers who were not always needed to execute the varying swings of capital expenditures. Many companies even offered significant incentives for their most "experienced" people to retire early. This leads Burt Young, vice president at Lockwood Greene, to observe, "The industry does not so much have a brain drain, but more of an experience drain." This matches the view that experienced engineers with detailed knowledge are important assets that will drive product and manufacturing innovations. When these assets go home one night and do not come back in the morning, the company has lost important capabilities.
The general strategy has been to keep "core competencies" inside the company while sending the more generic skill work, the work overloads and the detail work (i.e. drafting and programming) to outside firms.
A core competency is a combination of skills and knowledge related to the company's core business as well as the capabilities that come from significant experience in that business. However, the real test is: does this competency provide a competitive advantage? Is it difficult for competitors to imitate?
Engineering skills such as process, process control and packaging are usually considered "core" and are some of the last to go outside. Yet, in many companies, with the current requirements for ultra-fast projects and the need not to miss any deliverables, project management is a true competency and is almost always staffed from the inside on significant projects. Project managers interface with all corporate groups involved in a major project today, which makes the use of external managers in that role difficult at best.
Similarly, the skills to design and fabricate proprietary equipment were once found in all large food companies. Today, these skills have largely been lost; commercially available equipment is primarily used on technical solutions. The obvious concern is that your competitors can purchase the same equipment. Commercially available equipment is usually very appropriate for most manufacturing but there is usually a need for a few pieces of unique equipment to provide product differentiation and manufacturing efficiency.
Interestingly, a number of food companies are now attempting to rebuild their in-house engineering capabilities after significant downsizings. The pendulum seems to be shifting back again to centralized engineering organizations to maintain core competencies. However, a few companies are also starting to build plant engineering to pursue productivity and reliability opportunities. Some of the stated drivers for increasing in-house capabilities are the loss of innovation, the lack of needed speed to market, and, in some cases, declining performance from outside firms.
Outside engineering servicesEngineering service firms and equipment suppliers have been impacted by many of the same dynamics as the food industry. Their traditional customer bases have consolidated, leaving fewer large capital projects/budgets. Mergers and acquisitions provided better access to new customers, other industry sectors and newer technologies. Yet, the result also brought new pressure to improve bottom lines and realize the benefits to justify the acquisition costs. Senior management's time was diverted to focus on new financial pressures, organizations and relationships, and administration and information systems that come with any major merger or acquisition. These strategies accelerated top-line growth, but are not necessarily optimal for bottom-line growth and customer service.
Many engineering service firms have witnessed a downsizing in their specialized food skill levels as part of cost savings initiatives. These firms must have high percentages of charge out of their staffs to meet financial goals. They typically do not staff additional skills for an extended period in the hopes of obtaining future business that could utilize these skills.
The result is that some firms have slipped in their performance and ability to provide key skills for food industry projects. In response, there has been an increase in smaller specialty service firms and independent contractors attempting to address certain skill needs. Mohamed Basma, director of engineering at Schwan's Foods, says, "Layoffs have created a number of new small firms and independent contractors. Everyone seems to claim to be a project manager for hire today." The challenge is the coordination and management of the various elements needed to successfully design and execute a project.
Equipment suppliers have been experiencing similar trends for mostly the same reasons. To address the financial pressures associated with acquisitions and mergers, many suppliers have downsized their technical and service staffs. Secondly and very importantly, many have decided to outsource their supply chains, especially the fabrication of parts for their machines. While this strategy may improve the remaining asset utilization, it can create issues regarding how to manage these new global supply chains effectively. In some cases, equipment quality and fulfillment of committed deliveries has suffered. Further, R&D budgets for new equipment development have been reduced significantly across most of the suppliers.
Over the past decade, equipment suppliers have attempted to create additional revenue by offering engineering services to design and install entire processes or packaging lines. Some have been moderately successful-mostly through standard solutions. However, most have been unprofitable on their innovative applications projects. The current reduction in applications engineering skill levels is raising the concern of food companies that look to these equipment suppliers for innovation and project services.
Technology developmentWith the loss of innovation skills and budgets for many food manufacturers, the development firms are becoming a primary source of new technology due to their highly skilled staffs and unique business processes focused on delivering difficult, unique projects-but only for food companies that truly seek real innovation. Ed Goldman, senior vice president of Foster-Miller, Waltham, MA, says, "Innovation breeds innovation. If companies are not willing to invest in the development of the next generation technologies and attract or at least have access to the best talent, they will certainly lose the next competitive advantage."
There are a limited number of firms that specialize in the development of new processes and/or equipment. Unfortunately the number of mid- to large-size firms is few in number and declining. Arthur D. Little of Cambridge, MA, is an example of a major technology research and development firm that has ceased to exist. Recently, there have been a number of small start-up companies with engineering knowledge to provide these services, but very few that specialize in the development of food applications and equipment.
What it means to youTechnology, achieved through innovation and core competencies, can be a major driver of not only successful new products but also competitive efficiency in production and the efficiency of capital deployment and use.
Is it more difficult to attract highly talented people into a mature industry like food? In many cases, the answer is yes. There are a number of highly technically appealing industries competing for the best talent and not all graduates want to work in engineering. Ralph Olson, recently retired CEO of RA Jones Company, and director at Penn State's Leonhard Center, says "a recently completed study by Penn State University found that more than 50% of its engineering graduates are not practicing engineering just five years after graduation." Today, many food and engineering services companies report that they do not hire off campus, but only hire experienced engineers as needed. However, those companies with comprehensive recruiting programs stated that they are able to compete for the best talent and win. It truly takes a commitment to make the program work for the long run.
The key to the dilemma of retaining core competencies in-house can be found in your strategy for the use of engineering skills. If you believe that you have no core competencies and do not require innovation to drive new products and operational efficiencies, then you probably need only a minimal engineering capability to oversee your outside firms-whenever you need them.
However if these capabilities are needed, the following are the key elements of success:
- Ensure you understand, develop and retain your core competencies.
- Provide the proper long-term funding for technology development.
- Use programs to capture and use developed engineering efficiencies to effectively and efficiently drive capital investment.
- Alliances (not "buy-sell" relationships) with key equipment suppliers are essential to getting the machines necessary to succeed.
- Alliances with engineering services firms are needed to obtain and deploy the necessary skills to succeed.
- Alliances with technology development firms can be a significant source of "brains" to augment your internal capability for innovation.
- Manage all skills as a whole regardless of the source: Integrate internal and external resources through appropriate collaboration procedures and tools.
The food industry engineering "brains" are still available, but today they exist in many different places with different business models than in the past. The technology itself is evolving at speeds faster than ever and in places previously not considered. Meanwhile, the industry's business challenges are as intense as ever. The winners will be the ones who can uncover the keys to successfully converting the opportunities to real business results.
Jim Getchell recently retired as vice president of engineering at General Mills, with more than 30 years of food industry experience. He formerly held executive positions with Nabisco Brands and The Foxboro Company, and started his career with Campbell Soup Company. He now consults, speaks and writes on industry-related topics on a part-time basis.