Ready-made misfortune

CASE STUDY:Sue O'Donnell knew the risks involved when it came to outsourcing production of her line of ready meals but now that her supplier has gone bust, she doesn't know which way to turn to save her fledgling business

DAVID AND Sue O'Donnell met while studying for an MBA with the Open University. Both had chosen distance learning as they travelled extensively with their jobs - hers in food ingredients, his in consumer brand management. They were in the same tutorial group, and over the duration of the course romance blossomed and they got married.

With such hectic schedules, the couple had little energy for cooking at the weekends and tended to eat out or snack on ready meals. Sue was a vegetarian and well used to getting the thin edge of the wedge in Irish restaurants. She also found the selection of chilled and frozen vegetarian meals in supermarkets very poor. A lot of what was on offer was either over-spiced or tasteless. With her food background, she often thought she could do a much better job in coming up with tasty meals vegetarians would want to eat.

When Sue fell during a skiing holiday and broke her ankle, she suddenly found herself grounded with plenty of time to think. Having originally trained as a nutritionist she was aware that her eating patterns were poor and guessed it was the same for many time-poor workers.

With her ankle healing slowly, Sue became an avid watcher of TV food programmes. She had David buy her cookery books and armfuls of food magazines, and by the time the plaster came off she had a thick file of plans and recipes for her vegetarian ready-meals business. The couple had made good money from their globetrotting jobs and David agreed a large chunk of their savings should go into starting the business.

Sue resigned from her job, enrolled on a business start-up course and took advice from former colleagues on how best to approach the production of her ready meals.

One of the biggest challenges she faced was deciding on the most effective business model to support the enterprise. At one extreme she could start small and do everything herself, from manufacturing through to sales and distribution. This would maximise the return to the business from each of these activities, contain costs and ensure price competitiveness. It would also ensure Sue alone had overall responsibility for quality in all aspects of the business, which was something she was passionate about.

At the other extreme she could contract out production and distribution, which had potential benefits but also associated costs.

She eventually opted to outsource because of her lack of experience in food production and the high cost of setting up a manufacturing facility, both in terms of the finance required and the amount of her time it would demand in the first five years.

The next big decision was not to work with a distributor. On the one hand a distributor could push her product in a wide range of outlets giving her immediate national coverage. However, it would also absorb a very large chunk of revenue on top of the money being paid to the manufacturer.

Furthermore, for the numbers to stack up it would require a much larger volume of sales to break-even. Sue decided to buy a secondhand refrigerated van and do the distribution herself. If things went well she could hire a driver.

Sue had been to several State agencies with her proposal and the feedback was very positive. She got some assistance from a food mentor attached to her local Enterprise Board to finalise her plans and he also put her in touch with a company interested in making her products.

Finding a potential manufacturer had been more difficult than Sue had imagined. She had assumed companies would be falling over themselves for her business but found capacity was an issue for some while others shied away from the idea of producing a vegetarian product.

There was also the question of volume. Her would-be suppliers wanted her to be specific about how much product she required and she was only in a position to provide an estimate. She had done the rounds of all the major supermarket chains and symbol groups and reaction had been good but it proved hard to tie down buyers on exactly how much product they would take. Having come from a multinational food company that prided itself on building partnerships with its customers, Sue was taken aback by the lack of flexibility and cooperation at her level.

At one point it looked as if the manufacturing would have to be located outside Ireland but Sue was keen to source locally. After many frustrating months, a suitable manufacturer was identified. Following several months of trials, the products were ready to go and, having secured an order from one of the small symbol groups, the business was officially launched.

The first two years were tough but Sue persevered. Public reaction to the products was excellent and a number positive enquiries had come in from the UK. It looked like the product had export potential and Sue felt excited by the prospect of being able to develop the business outside Ireland.

As the business moved into year three, the customer base was strong and growing, the company was beginning to make money and Sue had felt confident enough to take on a full-time delivery man, a young sales rep to look after existing customers and part-time help in the office. She continued to look after the company's finances and to make all first approaches to potential customers as she believed she was her product's best ambassador.

Towards the end of last year Sue heard rumblings all was not well with her manufacturer. She swiftly arranged a meeting with the company and was told there was no reason to worry. But the rumours persisted and she went to see them again. At this point they admitted a major contract was not being renewed. However they assured her they had other work to fill the gap.

She met them in March to discuss increasing her volume and was reassured to see new equipment being installed at the plant. Her extra volume started coming through in May and she pushed ahead with plans to send her first order to the UK.

Just over a month ago Sue was devastated to get a call from her mentor who told her he had heard on the grapevine that her supplier was going out of business. She made frantic phone calls to the company over a period of three days but there was no one to take her calls. Eventually she got in her car and drove to the plant where the managing director agreed to see her.

He apologised for the lack of contact but said he and his team had been working night and day to try to secure enough business to keep the plant open. They had failed and the company was to start winding down immediately and shut by the end of the year. In that period they could produce enough product to keep Sue going for around six months. Thereafter she was on her own.

Sue now has a short period of time in which to decide what to do next. The disadvantages of out sourcing have become abundantly clear and she is faced with the dilemma of either going this route again or trying to set up her own production from scratch.

A third possibility is selling the business but she feels there will be few takers for a fledgling food business at this time.