January 2001 was make-or-break time for Leiner Health Products, the largest manufacturer of private-label vitamins and supplements in the U.S. In 2000, Leiner had revenue of $662 million, with 60 percent of its sales driven by discounters like Wal-Mart Stores Inc., Sam’s Club and Costco Wholesale Corp. On the face of it, this would seem to be a reliable and desirable customer base. But depending on these high-volume, low-margin, just-in-time inventory customers meant Leiner had to make sure its inventory management, supply chain, customer service and cash flow systems were operating in near-perfect sync. To be profitable, products had to be manufactured and shipped by specific dates to fulfill the requirements of in-store promotions. And Leiner had to bill and collect timely payments from these favored retailers while keeping track of a confusing series of discounts and special arrangements agreed to by the company’s salespeople.
Two years ago, all of this was beyond Leiner’s abilities. The company had no idea who its best customers were from one week to the next, let alone a plan for consistently delivering products to them on schedule. What’s more, Leiner had just been hit by a bombshell: In May 1999, an international cartel of 27 vitamin supply companies was found guilty of price-fixing. That sent vitamin prices tumbling and Leiner was left holding about $150 million in overpriced inventory, which it had to mark down by as much as 50 percent. As a result, in 2000, Leiner lost $2 million before interest, taxes and depreciation. And with only about $8 million in cash on hand at the end of that year, Leiner was facing default on interest from $280 million in bank debt and $85 million in bonds.
A significant portion of future revenue was in jeopardy as well: Wal-Mart, its largest customer, threatened to pull its business because Leiner was repeatedly late in restocking Wal-Mart’s shelves. So it was no surprise—but no less disconcerting to stakeholders—that company president Gale Bensussen said at an early 2001 meeting: “We’re in triage here. We’re bleeding and we don’t know from where and why.”
Simply put, Leiner was in an information rut. The Carson, Calif.-based company—which manufactures everything from vitamins A, C and E to Saint John’s wort and sells it to retailers who label it with their own store brands—had enjoyed six heady years of solid growth and expansion, supported by cash flow and borrowed money. But during that time, Leiner executives had let the company’s computer systems and databanks deteriorate. What was once a simple, easy-to-manage company serving relatively few large accounts with a limited number of products had become a hodgepodge of operations long on redundancy and complexity and short on usable data about such vital issues as which products are most profitable, which customers are most valuable, which accounts receivables are lagging and why, and which items must be manufactured and delivered on a tight schedule. Manufacturing and supply-chain information had become unreliable. Salespeople signed up orders without knowing whether they could be completed and shipped by a set date and the accounting department was managing cash flow from sheets of paper handed in by sales staff.
Many of the problems lay in the fact that Leiner had no CIO who could coordinate technology implementation and data distribution. The person most closely resembling a CIO was too busy overseeing Leiner’s manufacturing resource planning (MRP) system to worry about Leiner’s mushrooming IT woes. “This sort of do-nothing scenario is an option to only go backwards,” says David Coles, a managing director at Alvarez & Marsal Inc., a New York City-based turnaround firm hired by Leiner in January 2001.
By that time, Leiner was spread thin, supporting 150 customers with 4,000 separate vitamin lines manufactured at five plants. Customer service performance—measured by on-time and complete orders—dipped under 70 percent. Open chargebacks—payments held back by retailers pending investigation into whether Leiner had billed them properly—were shaving $17 million from annual revenue. And inventory turns were an anemic 2.5 times a year, nearly half of what private-label pharmaceutical companies generate in profitable years.