4.6 North America

North America - Strategic Chronology 1999 – March 2005 Barry Packham

From 1998 onwards the financial performance of SOLA came under increasing pressure with revenues and profit generally stalling, costs increasing and the new products pipe-line strangled off largely due to the Enigma program draining most R&D resources. Compounding this issue was the acquisition initiative launched by Essilor in North America to buy up the route to market through acquiring independent labs. This commenced with the purchase of the Omega lab network in 1996. SOLA took an entirely different strategic path, consciously not entering into lab acquisitions but rather remaining as an industry supplier, further accentuating this stance with the purchase of lens producer AO in 1996.

Barry Packham:

I was visiting Menlo Park for discussions with John Heine on the morning that the Omega acquisition was announced. John told me this, and was quite buoyant, saying that “Essilor has just placed a huge millstone around their neck – high acquisition costs, high capital cost equipment soon to be obsoleted, and becoming competitors to their customers”, plus a few further choice Heine expletives. Following my meeting with John, I went into the adjoining office occupied by Ted Gioia, our corporate strategy analyst – Ted’s face was literally white – he was quite distraught – I sat with him and his opening remark, without any preliminaries was “this is the beginning of the end…” Ted was clearly much nearer the mark than John.

This strategic divergence of paths by Essilor and SOLA was the turning point in the modern ophthalmic market, leading directly to Essilor’s pulling away from SOLA and the other larger players and establishing an almost unassailable lead position in the global ophthalmic market place.

The rapidly declining financial position of SOLA resulted in Barry Packham’s “where-to-make” proposal of January 1999 (which was set aside by then long-time CEO John Heine (JEH) as “emotionally too difficult”) and that later resulted in cost savings that contributed substantially to pulling SOLA back from the brink of insolvency.

At the International Executive meetings from late 1998 through 1999 JEH appealed to all of the executive leadership to bring forward cost reduction plans, particularly in overhead reduction, to narrow the increasing profit and cash shortfall gaps. The response of Regional leadership to this request was minimal in most cases, and JEH although despairing, didn’t take any forceful initiative to further reduce costs. At least one senior board member counselled JEH privately that urgent cost reductions were essential to both the survival of the company and to JEH’s own continued tenure as CEO. JEH responded again that he just couldn’t bring himself to carry out the sweeping job changes, especially from developed to developing sites that were required. Further accentuating the profit problem was an increasingly tight working capital situation due to constantly expanding SKUs and inventory holdings which was accompanied by falling customer service levels and quality issues.

One of JEH’s more admired traits of loyalty to those whom he had employed or were employed through his strategic leadership would lead directly to his dismissal in March 2000 and the near insolvency of the company.

The situation continued to deteriorate, with the SOLA share price sliding from US$40+ to below US$ 5.00 in early 2000, culminating in the dismissal of JEH in March 2000.

The board of directors, after a canvassing a variety of options, including AEA Investors coming back into play with a US$6.50 per share offer to take control of the company, finally decided upon continuing to trade through the crisis with an internal CEO appointment. Jeremy Bishop, the then president of subsidiary American Optical (AO) was appointed as CEO. AO at that time was the only part of SOLA that was convincingly demonstrating revenue and profit growth, principally through the great success of the recently launched new short corridor progressive AO Compact lens.

Following the dismissal of John Heine as CEO in March, Irving Shapiro, chairman of SOLA (and ex-chairman and CEO of Du Pont) since the sale by Pilkington’s in 1993 presided over the 2000 annual general meeting and retired soon after as a result of declining health. He was succeeded by Maurice (“Mo”) Cuniffe, a SOLA director and the previous owner of the AO business purchased by SOLA in 1996. Mo proved to be a committed and engaged chairman, taking the board through the very difficult several years of recovery that lay ahead, through to better performing years and finally the merger with Zeiss AugenOpik to create the Carl Zeiss Vision joint venture between Zeiss A.G. and EQT Investors in March 2005.

Jeremy was appointed in April of 2000 and very quickly decided upon restructuring the company into a formal front office / back office format. Within a week of his appointment as CEO he offered Barry Packham the role of leadership of the back office (dubbed “Global Operations”), reporting to Jeremy.

The first few months of Jeremy’s leadership were further complicated by cash flow uncertainty through poor cash reporting systems and processes, and the discovery that the major portion of SOLA’s long term debt was to fall due in only a few months. This situation became immeasurably worse when CFO Steve Neil advised that SOLA’s principal lender, Bank of America had decided not to roll over the debt. Further investigation revealed that Bank of America had offered to roll the debt over in during 1999 but it had been decided by SOLA to hold off until 2000 with a view to extracting a better interest rate from them. Hence if a new financier couldn’t be found promptly the company would become insolvent, facing Jeremy with his first major act as CEO being to put the company into Chapter 11 administration.

A flurry of activity ensued, led by Jeremy in obtaining the essential new finance. Against all odds in a sharply contracted lending environment, with a company that appeared to be making no profit and with cash flow problems, he almost single-handedly managed to obtain refinancing at the 11th hour. He virtually single-handedly saved the company from default and Chapter 11 administration. This qualifies as one of the great individual feats in the history of SOLA.

What followed was a series of tight cash control and austerity measures while the new Global Operations team created a plan for the execution of Barry Packham’s 1999 “where-to-make” proposal. A number of senior executive changes followed rapidly on this appointment. Some key participants in the recovery process who saw the program all the way through from beginning to successful completion were David Cross, Jon Westover, Bob Sothman, Barry Sheridan, Kym Gibbons and Mike Pittolo. A detailed costed and time-lined proposal was prepared for board approval, incorporating Jon Westover’s “project de-coupling” ideas. The proposal consisted of 19 separate projects involving a comprehensive consolidation of manufacturing and distribution throughout the world, requiring multiple plant and distribution centre closures with some 2,000+ job migrations to lower cost environments. With Jeremy’s strong support the proposal was put to the board who applauded the scope of the proposal but expressed doubt as to whether it was too ambitious to be achievable. After considerable discussion the board unanimously approved the proposal and the program began that evening. Chairman Cuniffe later remarked that the successful execution of the program was one of the two great achievements during his tenure as chairman. The other was Jeremy’s masterful refinancing.

The environment in which the program commenced was very poor for such an undertaking – most factories were providing indifferent to poor quality product, with poor scheduling resulting in huge backorder problems and burgeoning un-usable finished goods inventories. SOLA’s largest factory, OSM in Tijuana had backorders exceeding 600,000+ lenses, from a factory producing 140,000 lenses per day. Two years later this same factory had improved its service so much that it reached as low as only 2 lenses on backorder. To everyone’s chagrin we didn’t ever achieve the magical zero backorder day – however this reflected credit on the honesty of everyone concerned, as with service so high it would have been relatively easy for someone to fake a zero backorder day.

Further to this, the complex of 11 distribution centres scattered across North America was reduced to three, causing significant short term supply chain issues for an already under-siege USA commercial operation. During this period of difficulty in 2001 Paraic Begley was appointed Vice-President North America Supply Chain. Once bedded down however under Paraic’s leadership this configuration provided the platform for a best-in-class supply chain. By 2003 the US manufacturing / supply chain activity was nominated as best practice by the most demanding of our chain retail customers, Luxottica.

Similar exercises played out in Europe and Asia, with multiple leadership changes in Europe until a successful team led by Paraic Begley (expanding on his North American responsibilities) resolved endemic service issues. Mike McKeough played a key hands-on role in rectifying the European problems firstly by turning around the disastrous performance of the Euro warehouse located in London, and then the key scheduling issues in Wexford, Ireland. Similarly Steve Gillies was appointed as Director Supply Chain Asia Pacific with the intention of performing a similar improvement of customer service.

The 2002 AO-SOLA strategic plan stated:-

In addition to some unfavorable market and demographic trends, the landscape of the ophthalmic marketplace has changed dramatically in the last few years. Competition in the industry remains vigorous, with continued consolidation and integration among manufacturers, laboratories, retailers and HMO’s:

• Essilor now dominates access to the EyeCare Practitioner (ECP)
• Over 70% of ECP’s sell the leading progressive lens brand, Essilor Varilux Comfort, compared to around 40% distribution for SOLA VIP. [source: Jobson LensTracker 2000]
• The USA lab industry has undergone tremendous consolidation during the last five years as a result of aggressive lab acquisitions by Essilor and Hoya, and by the recent lab entry of Vision-Ease.
• Essilor acquired labs represent 27% share of the lab market.
• Essilor exerts substantial control over an additional 35% of labs through Varilux distributor contracts, which restrict promotions of non-Varilux products and require sales reporting of ECPs’ purchasing behavior.
• Hoya acquired labs represent 9% share of the lab market.
• The independent wholesale labs are losing market share.
• 20% of AO•SOLA revenue is in competitively owned or directed laboratories. An additional 27% of AO•SOLA revenue is in the shrinking independent wholesale market.

During 2002 the focus of Global Operations moved from manufacturing and distribution consolidation to “inventory health” and product quality assurance. By early 2003 SOLA was being recognised in the USA as the leader in customer service to the chain retail and wholesale channels, receiving commendation from both Luxottica and Wal*Mart. Similar performances were demonstrated in Europe although lagging the USA successes by some six months. Asia Pacific reached a competitive level but did not become a clear industry leader. Inventory working capital was reduced significantly with demonstrated control over setting and reaching targets for customer service level and working capital holdings.

Almost a sideshow, during the depths of the crisis, Jeremy questioned the low market share enjoyed by SOLA in polycarbonate lens production in the USA, the major market for polycarbonate. At Jeremy’s request, he and Barry sat together in Jeremy’s office one morning and firstly calculated a SOLA “fair share” based on our share in other materials segments, and from there calculated the additional manufacturing capacity, both stock lenses and semi-finished lenses required to service such a market share. Barry took these numbers away and converted them into Capex proposals and action plans to create the capacity. With Jeremy’s active support the Capex proposals were approved by the board, and this expansion of capacity added to the Global Operations Grand Plan. While up-take of the growing capacity lagged in the first 18 months or so, after two years from the day of crystallizing the idea the capacity was fully utilized to the extent that further urgent capacity was required to meet demand growth. Key people in creating this additional capacity were Mike Pittolo, Alejandro Flores, Jon Westover, Edgar Guidino, Steve Heilborn, Mike McKeough and Bob Sothman.

Brett Olsen struggled with Americas Commercial and was replaced by Mark Ashcroft in December 2001. Mark also continued as leader of European Commercial. Mark managed to achieve modest increase sales in his areas of responsibility, but suffered considerable pressure on margins and market share. Mark made several Rx lab acquisitions in the USA but this was out-stripped by Essilor’s ongoing acquisition program by a factor of three.

On the Rx lab side, efforts by Jeremy Bishop to effect improvements in cost and especially customer service through the regional commercial leadership fell short of his expectation. As a consequence in July 2003 he transferred management of all labs to Global Operations. Jon Westover was moved from his role of leading North American Manufacturing to take on the global Rx lab network role, working out of the UK.

In April 2004, with the targeted improvements and economies in back office achieved, Jeremy Bishop decided to revert to a regional structure to concentrate efforts on sales growth. Barry Packham was appointed President of the Americas Region, Mark Ashcroft MD of the European Region and David Cross MD of the Asia-Pacific Region. Group Manufacturing Development, the manufacturing matrix organization of the 1990s is re-instated and Jon Westover appointed to lead it.

On the front office side, on Jeremy’s taking over the CEO role he appointed Brett Olsen to leadership of commercial and lab activities for North and Latin America, and reconfirmed the appointments of Mark Ashcroft for Europe, Wayne Rockall for Australia, Adrian Walker for Asia with Les Kocsis for Sunlens. Over the succeeding years the commercial leadership resolved itself into Mark Ashcroft leading the commercial activities of Europe, North America and Latin America, David Cross leading Asia Pacific and Gaetano Scuito for Sunlens.

Sometime in 2001 the highly successful leader of R&D Matthew Cuthbertson left SOLA to lead the Automotive CRC in Australia, with Simon Edwards succeeding Matthew. Simon was later succeeded by Warwick Freeland.

CFO Steve Neil continued with SOLA until 2003, and was succeeded by Ron Dutt, who arrived just in time to institute the US government mandated Sarbannes-Oxley processes.

Karen Roberts role expanded to become Vice-President New Products, reporting to Jeremy.

In early 2004 Jeremy decided to carry out a further global restructuring, returning to a fully regional model, as the global manufacturing and supply chain revitalization program had reached a successful conclusion. Global Operations was de-constructed, with the Rx labs, factories and supply chain activities dismembered and allocated to the geographical regions in which they resided. The new regional line-up became Barry Packham leading North and Latin America, Mark Ashcroft leading Europe, David Cross leading Asia Pacific, and Gaetano Scuito leading Sunlens Division. The concept of Group Manufacturing Development was also resurrected with Jon Westover moving to take over this role, to provide a matrix management support structure for the factories. This global restructuring took effect on 1 April 2004.

On Barry Packham taking up the Americas role, Jeremy posed the question of determining the strategic direction for North America, particularly the Rx channel which until now had only been addressed in the most piece-meal of ways. Several weeks of comprehensive analysis of route to market trends and a Kepner Tregoe analysis of the remaining major independent laboratories in North America occurred. The findings were devastating - they showed SOLA's market share to be in deep decline, projecting being so decisively cut off from route to market that the viability of SOLA in the USA would be in doubt as soon as five years out and hence any growth prospects for SOLA in total.

The Essilor Rx lab acquisition program had been steadily absorbing the better independent Rx labs since the acquisition of the Omega group in 1996, and was on a trajectory to effectively cut off SOLA’s route to market in the most profitable wholesale channel within the next 5 or so years. This erosion of route to market would not only eliminate any growth opportunity in this channel, but would progressively drive SOLA out of this market almost entirely. In concert with Jeremy, a program was rapidly developed to counter this most dangerous of threats.

As a result, the board in July 2004 approved a $100 million Rx lab acquisition program in the Americas - the most significant strategic move since the mid-1990s

Thus started the much-delayed catch-up in Rx lab presence both by acquisition and organic growth for SOLA.

The acquisition program was led by Barry Packham, assisted most ably by Darrell Zoromski and Rich Sanzari. The Rx lab acquisition program was linked to the available but largely under-utilized Teflon AR coating brand as our Rx lab flagship product, together with SolaOne to combat Varilux.

Part of the acquisition plan involved going against the then perceived wisdom that independent labs with a Varilux contract were untouchable due to the Essilor poison pill clause pulling Varilux product if the lab was acquired by anyone but Essilor. Executing a brilliant marketing plan conceived by marketing VP Darrell Zoromski, the first lab purchased was deliberately targeted to be a high profile Varilux lab. True to promise, Essilor pulled all Varilux products on the day of taking possession. However immediately on take-over SOLA offered a short term conversion program to the labs customers involving heavily discounted premium SOLA lenses and Teflon coatings. The campaign was astoundingly successful, with a customer conversion and retention rate in the high 90%s, causing shock waves throughout the USA ophthalmic market. These results were duplicated with the second and third Varilux lab acquisitions that occurred in quick succession. The market realized that a paradigm change had occurred. Essilor fought back tenaciously as always, making customer retention with successive acquisitions more difficult, but nevertheless effective for SOLA.

Latin America also rose to the Rx lab acquisition challenge, putting forward the proposal to acquire the largest Rx lab network in Brazil, Quality Labs. The acquisition was led by Paulo Frias and Lee Johnson, with Rich Sanzari overseeing the legal and financial aspects, supported operationally by Jorge Mario. Acquisitions in the turbulent Latin American market are at the best of times fraught with risk, and this acquisition was no different. Early after taking possession significant operational issues became evident that hadn’t been exposed by the due diligence process, leading to a period of considerable challenge through 2005 and 2006. However the network was finally stabilized and again has provided the essential platform for SOLA to maintain and improve route to market, and thus its growth path.

While the acquisition program stopped at about the $70 million mark by the time of the acquisition of SOLA by Zeiss and EQT, sufficient labs had been acquired in both the USA and Brazil, when added to the handful of existing SOLA labs, for SOLA to reach a modest but critical mass in the Rx lab market. SOLA had at last a sufficient network of Rx labs to embark upon an active campaign of reversing the route to market situation, and providing sufficient Rx capacity to go after large retail customer work such as Wal*Mart and leading USA national eye carer insurer VSP.

As well, a model was developed where-by the individual Rx labs would be linked electronically to create a true network which would allow channelling of jobs to specialist labs and to better leverage capacity. The growing network also provided a platform for SOLA to convincingly enter the Anti-reflective (AR) coating market with its own branded offering, Teflon.

The concept of low cost Rx from developing countries, analogous to the earlier move in lens production began to gain traction in SOLA, ahead of SOLA’s main competitors for once! It was decided to build a low cost Rx lab in China – on Jeremy’s prophetic basis of “build it and they will come” – reminiscent of his earlier prediction and actions concerning polycarbonate lens production capacity, which proved to be highly accurate.

This initiative was expanded further with the establishment of a second high volume low cost Rx lab on the OSM site in Tijuana, forming the anchor-point for an integrated North American Rx lab network to provide a credible platform from which to challenge the Essilor Rx lab network.

American Optical’s Lens Business 1990 – 2006 Jeremy Bishop

Neil was a breath of fresh air to the business, was popular with virtually all and worked tirelessly to improve the business. Satisfied that Europe was heading in the right direction and that the relatively small Singapore operation was in good hands, Neil devoted the majority of his time to improving the USA operation and manufacturing. At this time the Company sat with unutilised manufacturing capacity and the need to improve its profitability. Two clear strategies emerged; the first was to launch a new Progressive Addition Lens (PAL) that would be positioned at a lower price point than other PALs; the second was to implement and sustain a reduction in the Company’s operating costs and working capital.

Since the PAL strategy required design and manufacturing work to be completed, it left the sales and distribution business with the time and capacity to deal with cost reduction programs. In support of these programs, an EVA (Economic Value Added) based system of management reporting and reward was introduced. Initially, many of the AO managers ignored EVA, considering it a matter for the financial departments but this stance started to change as they realised their compensation depended on their creation of EVA at a local, regional and group level.

One program that significantly improved the business’ EVA was introduced for other reasons; service reliability had long been an issue at AO with many customers believing that AO stood for “Always Out”. Inventory management and purchase order systems differed throughout the AO world and the principal factories in Tijuana were seen as well intentioned but unreliable partners. To improve the situation a small suite of software programs was developed named Fast Response System (FRS).

The objective of FRS was to improve customer service and inventory turnover rates. At its simplest, all operating businesses provided the factory with a nightly data download for every inventory position they carried, including current inventory and the previous 24 hours demand for that item. From this, a global picture of demand for each of the company’s SKU’s could be seen and the factory could move to a position of anticipating demand and scheduling to meet it. This changed the supply system from pull to push and amongst the operating companies considerable concern existed that the factories would simply push anything they felt like. In reality, the continual development of the system prevented any of the anticipated “nightmare” scenarios from emerging and in those businesses where the system was embraced as opposed to suffered, customer service improved dramatically and inventory reduced. Perhaps one of the most comprehensive successes occurred in the UK where customer service rates improved from overnight first time delivery success rates of less than 80% to over 98% while inventory holding reduced from 4 months cover to 12 days. The improvement occurred over a period of 18 months and was enduring.

Concurrently with the introduction of EVA and FRS, development work on a new PAL design was completed by Dr John Winthrop and his team. Based on the technology covered by a patent application that resulted from the design of the Omni progressive lens, AO had the PAL design that its businesses had asked for – ease of fitting and fast patient adaptation were important and a full range of materials was a necessity – it’s worth remembering that at this time glass remained the material of choice in much of continental Europe, while the UK was committed to CR-39 and 1.6 index organic, with the USA preferring the combination of CR-39 and polycarbonate. Add to this the requirement for higher reading additions in the French market and the complexity of a simple decision to launch a new PAL quickly becomes apparent.

The market positioning of the new progressive would be as important as the quality of its design if success was to be achieved. At this time PALs were always a high priced product and AO’s profitability depended on this; but the decision was made to position the new PAL at a price point that was less than half that of existing product, both its own and its competitors. At the same time, design superiority had to be demonstrated and in support of that, white papers were produced and wearer trial data was published. AO Pro was adopted as the name for the new lens, with the suffix 15 for product manufactured in CR-39, 16 for 1.6 organic, etc. The inclusion of AO in the product name marked the start of a deliberate effort to rebuild the AO brand in a common manner around the world.

And so in 1992, AO Pro 15 was launched. Initial results were disappointing but this was not due to the market. AO sales management were frightened of introducing a product that upset the normal pattern of introducing a new product at a higher price point than that of those it replaced.

Combine that fright with the “not invented here” syndrome directed at the required marketing positioning and the product languished through a lack of attention. But two businesses saw the potential – AO Basle (Switzerland) and AO UK. Both businesses were bulk suppliers to Rx laboratories and retail chains; both businesses had been through management changes and were hungry for success; both businesses saw the opportunity to gain much needed new business. One year after the launch of AO Pro, the majority of the Swiss and UK profits resulted from this product line and within a further year, AO UK was the market leader in progressive lenses, when measured by volume sold.

Of course success wasn’t confined to these two businesses; as the product range expanded and local needs were met, success occurred everywhere. This prompted and justified further investment in PAL designs and it was as result of a suggestion from Claude Labeeuw, General Manager of AO Basle, to Dr John Winthrop that work began on a “short corridor” PAL design with the intent to provide a PAL design that would work effectively in the shallow frames that were being sold in much of Europe.

No account of this period of AO’s history would be complete without mention of AO France. Previously named Ouest Optique and part of the UKO group of companies, the business was originally a small glass production unit that complemented UKO’s larger factories in England, Scotland, Wales and Northern Ireland. Rescued from this obscurity by George Gougeon, a skilled general manager hired by Mo Cunniffe, the business was transformed into a modern Rx laboratory that successfully competed with Essilor, the world’s largest lens company, in its own back-yard. Supporting George was a very capable management team comprised of Marie-Therese Groussard (Finance), Christian Fernbach (Sales) and critically to the operation, Jean Luc Viel (Production). Of course many others contributed to AO France’s success and it was testimony to the George Gougeon and his management team that the quality of personnel at all levels of the company was unusually high. In approximately 1992 George Gougeon retired and was succeeded by Francois Bes de Berc.

By 1995, Mo Cunniffe, encouraged by the success of AO Pro, the effectiveness of EVA based management activities and the continuing growth of AO’s European businesses, decided that the time had arrived to find a new owner for the lens business; an owner who could grow the Company to the next level in the market. This disappointed many of AO’s managers who held Mo in high regard and enjoyed working for him. Despite misgivings as to what the future might hold, the marketing of the Company began with AO’s senior management playing their role in presentations to various parties. Over prior years, a friendship had developed between Mo and John Heine, CEO of SOLA International Ltd. John saw the value in AO and after some tough negotiations, the lens business of AO was carved out by Mo into a free standing enterprise called the American Optical Lens Company (AOLC) and this was sold to SOLA.

Effective from the acquisition date (06-May-1996), John Heine appointed Jeremy Bishop, AOLC’s VP Europe to the role of President of AOLC and more importantly, agreed that AOLC should remain a standalone operation within SOLA. AOLC was given independence and support by SOLA; Ian Gillies, who was waiting to step out of SOLA following a successful period as group CFO acted as a mentor and facilitator to Jeremy Bishop and this was particularly important during the first three months following the acquisition, when Ian’s principal role was to keep well intentioned SOLA colleagues away from the AO organisation. But AOLC recognised that to grow it needed a stronger central management team and two positions were created and filled – Karen Roberts joined as VP – New Products and Bernie Freiwald provided marketing guidance and direction. The energy and competence that Karen and Bernie bought to the organisation allowed AO Compact to come to life.