Situational Analysis
Mike Valenti, owner of Michael’s Homestyle Pasta (MHP) (having revenue of USD 17 Mn), acquired the Southern Pasta (SP) company of Florida on 10th December in order to eliminate the only competition that MHP faced for its special stuffed pasta product. The work culture at SP was not transparent with top level management putting p utting pressure on the lower management to deliver products, even eve n if tested negatively in quality tests. For instance, in May 2001, SP had to recall contaminated products, following a FDA enquiry, which cost them 0.5 USD Mn. However, 3 weeks after the acquisition, on morning of 31 st December, Mike comes to know that seafood-stuffed seashells sent to 200+ restaurants to be used in the evening are contaminated with salmonella, a bacterium responsible for about 600 deaths per year. A decision has to be taken quickly and hence Mike starts analysing the facts. Few of the facts and inferences derived are as follows: 1. The restaurant company needs to heat the product above 160ºF according to the standards set by FDA. So in case, there is any health problem that takes place, the restaurant would also be jointly responsible as it would mean that they did not follow the regulation of heating the product above 160 degrees. 2. Considering that virtually every lot of the seafood-stuffed shells were contaminated before acquisition and there were no reported health issues among the public, it can be safely assumed that the cooking process is robust across all the restaurants. The cooking process can further be assumed to be robust across all the restaurants owing to the fact that all the restaurants are a part of a single restaurant chain. 3. The restaurant chain, with over 200 restaurants to which contaminated products have been dispatched generates $3.5 MN revenue out of total of $8 MN for SP. Thus, there is a risk of losing nearly 44% of the newly acquired business. 4. Taking no action can lead to Mike’s image as an interactive and hands-on manager can being tarnished in front of employees like Fred Jones (SP’s quality assurance assurance manager) 5. Since the contaminated food lots delivered to the restaurant chain were manufactured in November and early December i.e. before the acquisition, the blame, in case of crisis could be shifted to the previous owners. This could prevent the company from being shut down but again the reputation would take a hit.
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Problem Statement Mike Velanti faces a potential financial and reputational loss, and extreme ramifications including the shutdown of the entire company. He has to decide on a course of action that minimizes the above loss.
Alternatives 1. No action: Based on the assumption that cooking is robust across all restaurants and would continue to remain the same, taking no action would suffice. Also, according to the lawyer, lawye r, even if any incident occurs, the liability could be shifted to the previous owners, as the production of the bacteria tainted batch happened before the acquisition. However as it is the New Year’s Eve, the demand could be significantly higher than normal days and could lead to restaurants not following the regulation of heating the pasta to 160ºF. If anyone falls ill due to consumption of the pasta, the goodwill of MHP could be compromised. A negative cultural precedence would be set by Mike. 2. Recall: Mike can recall the shipments from all the restaurants of the customer. This would lead to a loss of over $0.5 MN as per the past experience, which is only 2% of the revenue. The goodwill of the company would be less damaged, as the decision would show Mike’s integrity. Mike would also set a positive cultural precedence. However the restaurant would face revenue loss as New Year’s Eve brings in a lot of revenue. This could lead them to drop the item from the menu. 3. Inform and Incentivize: Mike can inform the restaurant chain about the situation, and request them to ensure that the pasta is heated to 160ºF before serving. However, to maintain healthy relations with restaurant chain, next product lot will be provided at a discount. 4. Inform, Recall and Incentivize: Mike can inform the restaurant chain about the situation, and request them that the pasta should be heated to 160ºF before serving. This would lead to less sales of pasta as it would take time to heat. He can offer to recall and subsequently replace all the unused pasta. He can also offer the next batch of pasta at a discounted rate. The loss would be in tune with the second case ($0.5 Mn). But this would lead to less sour relations with the customer, as it would show Mike’s integrity as well as his willingness to go the extra mile to satisfy his customers. A very positive cultural precedence would be set by Mike in terms of quality and customer satisfaction.
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Criteria for Evaluation 4: Most Effective
1: Least Effective Criterion
A l t e r n a t i v e
Minimizing financial loss
Maintaining cultural precedence
Avoiding relationship loss with the restaurant chain
Cumulative score
1
4
1
2
8
Recall
2
1
4
1
8
Inform and Incentivize
3
3
2
3
11
Inform, Recall and Incentivise
4
2
3
4
13
●
●
●
●
Minimizing reputational loss No action
Minimizing reputational loss: While there can be significant loss of reputation in case any health crisis takes place after no action is taken by Mike, properly prope rly informing the chain and providing them option to recall products along with incentive plan would lead to least reputational loss. Minimizing financial loss: Recalling without informing will lead to maximum financial loss whereas taking no action will lead to no n o financial loss. Maintaining cultural precedence: Taking no action would lead to loss of cultural precedence of Mike’s company. Avoiding relationship loss with the restaurant chain: Recalling without informing the reason behind the same, there are chances of the business relation getting spoiled between b etween Mike’s company and the restaurant chain. However, providing option of incentive ca n help avoid this situation.
Recommendations As analysed through evaluation criteria, ‘Inform, Recall and Incentivize’ satisfies most of the criteria in an effective manner and carries a cumulative score of 13, this alternative can be recommended to Mike.
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Action Plan
Immediately call the headquarters of the restaurant chain, and request them to send out word to all their restaurants to only sell that amount of pasta which c ould be properly heated to 160ºF. Locating current status of all batches. Arranging logistics for collecting contaminated batches. Destroy the contaminated batches.