Januar Darmawan: Nutrifood Indonesia: Manufacturing an Ethical Workplace

Januar Darmawan is the chairman of the board of PT Nutrifood Indonesia, headquartered in Jarkarta, Indonesia. He was born in Juwana, Central Java, Indonesia, came to the United States for his university education, graduating from North Carolina State University with a Ph.D. in horticulture and soil science in 1970. Upon returning to Indonesia in 1972, he established a nursery business producing fruit seedlings and established the Indonesian Nursery Association. He started PT Nutrifood Indonesia with his brother in 1979.

The company provides high-quality health food and beverages under leading brands such as Nutrisari and Tropicana Slim, which is available in more than 20 countries around the world. Its manufacturing facility is located in Ciawi, Bogor, West Java. Darmawan built the Sentul Leadership Development Center (SLDC) in 1999 located in Sentul, West Java, where Nutrifood conducts most of its training programs. The company has become a quality leader in Indonesia, gaining International Standards Organization (ISO) certification for its manufacturing in 1994, for distribution in 1997, and for its laboratory services in 2001. It started its journey toward quality goals with a study of the work of W. Edwards Deming in the early 1990s.

Darmawan officially became the CEO of the company in 1993, and he became chairman of the board in 2002.

Indonesia has been identified as a country with one of the most corrupt governments in the world, and provides a challenging context for operating an ethical company. More discussion of this climate can be found in “Reflections” on page 12.

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Ethix: You are trying to run an ethical company in Indonesia, where corruption within the government is known to be significant. How can you work within this framework?

Januar Darmawan: We are trying to be a clean glass of water in a dirty river. We can be only ethical within the company because we have full control internally. Most of the time, we have no choice but to adapt to the practices of other companies when dealing with external entities. For instance, it is a necessity to pay an “informal fee” to get shipments out of the port. If we attempt to go against the established practices within the existing infrastructure, it is almost impossible to exist as a business. As a domestic Indonesian company, we do not have a strong enough bargaining power as multinational companies do to stand our ground. Hence, we have little choice but to comply with the existing “culture” and external pressures to behave in a certain way. Larger multinational companies can take the position to move to another Asian country such as Vietnam if they are unhappy with the way the infrastructure is in a certain country. But we do not have the luxury to do so because we are too small.

How does it make you feel, living in these two different worlds?

Sometimes I feel that I am living in two conflicting states. However, there are certain things beyond my control which I cannot change. I have to accept these limitations. After awhile, I can accept this situation and focus on how I can function in this type of environment. I take the position of changing the things that I can change. We are making a difference within our own company and this is all we can do for now.

If you can trust 100 trustworthy and competent people, you can increase your capacity 100-fold.

Do you think this environment will change in Indonesia in the near future?

This is an interesting question, and you ought to ask some others about this (Editor’s note: See “Reflections” on page 12). Corruption has been so bad that it is considered commonplace, even fashionable. Outside our organization, things are still like that. Whenever our people must deal with entities outside of our system (meaning outside of our company), they have no choice but to follow the practices of that external environment, whatever is going on out there. This is because in that bigger system (meaning the nation) we are not in control.

Brother Started Company in 1973

How did you get to be chairman of the board of PT Nutrifood Indonesia?

My youngest brother worked in the United States at the Carnation Company, and returned to Indonesia to start a food business in 1973. He started the business in our hometown of Semarang in Central Java. Six years later, he realized that the business would not be able to flourish unless he relocated the business closer to a larger market, which was concentrated in Jakarta, Indonesia’s capital city. I helped him relocate the business to Ciawi, Bogor, West Java, not far from Jakarta. In addition, I started helping him set up the new head office in Jakarta. We started with dietetic products, then beverages, and the business grew to the point where we could not manage it any longer because neither of us had the business training — we were both technical people.

Starting in 1989, we hired a number of local consultants, but we were never satisfied because our experience told us that we were more knowledgeable than they. They were groping in the dark just like we were, so we decided to look for a solution abroad. When visiting Perth, Western Australia, in 1992, I met Norman Venus, who was the executive director of AIM (Australian Institute of Management) at the time. We invited him to help us. At that time, we sent our senior people to AIM in Perth for leadership training. We have retained him as our consultant until the present time.

Norman Venus introduced us to Total Quality Management (TQM). He told us that leaders need to be VIP, that is have “vision,” be completely “involved,” and be “persistent.” This helped us in leadership, but we also needed specific help in manufacturing. In 1993, we reviewed a set of 22 video tapes about the Deming Management method. My daughter, Yul (Julianti Darmawan Swecker), who was working at Nutrifood at the time as corporate secretary and HRD manager, translated and summarized the content of this series and produced leadership training material for our managers.

Deming Tapes Promote Trust

Most don’t have the patience to implement this management method because they want immediate results.

The Deming teaching fit with my philosophy — to trust people. I realize that I do not have all the knowledge, competence, and expertise that other people have. If you can trust 100 trustworthy and competent people, you can increase your capacity 100-fold, because these are intelligent and competent people who are all working for you.

I studied the Deming management principles myself and then started to provide training every Saturday for our people with the training material we produced. We made a lot of progress in 1994. We were the first food company in Indonesia that got ISO certified.

In 1996, we found another consultant, John Dowd, who was a senior American consultant living in Thailand. He is a Deming master, which means that he had the privilege of working directly with Deming. John Dowd, showed us that we were doing things the other way around. We tried to start with the implementation of Deming’s 14 points before we fully understood the Deming philosophy. We intended to retain John Dowd but could not do so due to the financial crisis which hit Indonesia in 1996-1998. This meant that we had to cut expenses where possible, hence eliminating all consulting services. We had to work it all out ourselves.

Deming’s teaching is actually very simple when you think about it. We applied his ideas to manufacturing, using continuous improvement, but then gradually adjusted these ideas to managing people.

Valuing people is what makes a business thrive.

So your idea was to learn to manage people by adapting the theory of continuous improvement from the Deming material?

Yes. Paul Swecker, my son-in-law, who was managing the SLDC at the time, and I, transformed the Nutrifood managers’ way of thinking into a new paradigm consistent with the Deming philosophy, which is presented as the system of profound knowledge and can be viewed through four different lenses. Paul was instrumental in developing the leadership training material of the “Four Lenses” for the company. Most of the information contained in this training material is just common sense, but people just do not realize how important it is.

FOUR LENSES FOR TRAINING

The first lens is systems thinking.

In a business, each individual is a part of a system. In a system there must be a vision, there must be a leader, and there must be members of the system or components. People must realize that they are part of the system. Sometimes an individual is a leader within the system, and sometimes an individual is a member of the system. Because a system consists of interdependent components, the people in the system must be able to work well in a team.

Each person is interdependent with everyone else in the system. The leader determines the vision and the goals of the organization and the components must align themselves to meet the goals of the company. The leader must clearly communicate the goals and objectives to the members of the system so that people know what the goal is and then removes roadblocks and obstacles that hinder the members. That is the main job of a leader.

The second lens is variation.

As a leader, you need to be able to have a good idea of what the capacity of your own people is and that is what Deming calls “process capability” or “process capacity.” Process capacity means that a system has an average, a mean value, and a deviation from the mean, which is called variation. Everybody basically has a normal variation that can be measured and a leader should be able to see this in his own people. Deming insists that a mean of a system must be gradually increasing and variation of the system must be gradually smaller so that the process can be more predictable. If you do that, you are gradually increasing quality. So quality is basically producing more consistent products, more consistent people, hence bringing the average or mean to the desired level while lowering the variation continuously. You can apply this to the raw material that you are buying, to suppliers, to customers — and we applied these basic principles to our employees.

The third lens is knowledge.

Deming states that everybody acquires knowledge through books, from lectures, from successes, as well as from failures. If you select people from a population, you would probably find that the variation among those people is quite large. But in an organization, you can select people with specific criteria which will result in a group of people with smaller variation. If you provide training for these already preselected people who have less variation, then the mean will be even higher and the variation will be even smaller also. So the variation of your people will become smaller and smaller and the capacity of your people will increase as you provide training. Hence, we will get a more productive workforce, producing higher quality products, and yielding higher profit in the long run.

Salaries go up every year. So you must insist that competence also goes up. When the competence goes up, you must provide more challenge and more responsibility. Otherwise the people lack a challenging work environment and leave your company. If you do not do this, then you are losing money as a businessman. So it all makes business sense to us.

The fourth lens is about the people.

Each individual is unique. Their competencies are different. So you have to be able to detect the competence of your own people and utilize and maximize their strengths. Somebody may have strengths in management, others may have strengths in accounting. Somebody may have strengths in something else, etc. People will do their personal best if you put them in a good environment and treat them well, allowing them to have the freedom to do what they do best. So a leader needs to provide this type of environment for people to flourish.

It seems so obvious when you put it this way. Is this the way most businesses are run in Indonesia?

People will do their personal best if you put them in a good environment and treat them well, allowing them to have freedom to do what they do best.

Unfortunately, it is not. I have been invited to several companies to present how Nutrifood has been doing these things, and how we have reached the quality level we enjoy today. The leaders of these companies understand the logic I present to them. However, most don’t have the patience to implement this management method because they want immediate results. This is a process which must be learned over time. Some companies have succeeded, of course, but not very many.

How long did it take you to succeed?

After implementing the Deming management method, we made significant progress. The energy, excitement, and the desire to succeed was evident throughout the company at all levels. After the fifth year of implementing Deming’s method, probably progress slowed down a bit, but was still significant. This is a never-ending endeavor.

“Good Morning” to Better Attitudes

In more practical terms, we studied the principles of Total Quality Management (TQM), which is a more structured application of Deming’s principles. One of our programs was focused on the improvement of people’s habits. We developed learning groups consisting of seven members each that met weekly. Here is an example of what was discussed in one of the groups: The topic was related to the efforts by leaders to create a pleasant work environment. During the first meeting, we talked about the idea that a leader we should take the initiative to say “thank you” and “good morning” to their subordinates. We asked the question, “Will people despise you or will they work better if you do say ‘thank you’ and ‘good morning’ to them ?” We all agreed that of course they would work better, because they would appreciate such pleasantries. After one week we had our second meeting to assess how they did. We asked the question “Have you been able to do this?” Some managers answered, “I cannot do it. I was almost able to say ‘thank you’ to my subordinate, but I could not get the words out.” Finally, at the third meeting, we made progress. One manager said that their subordinate was very surprised that their manager said “thank you” to them, and had a better attitude and was more enthusiastic on the job henceforth. With such a small effort, the pay back is so significant. That is why such training is important during the first stage of implementing TQM.

Deming presented 14 points of implementation of his philosophy, and we studied each one, adapting them to managing and dealing with people as well as to our manufacturing systems. (Editor’s note: A discussion of the way Nutrifood implemented each of the 14 points in its people systems can be found in the Web version—www.ethix.org.) We also developed techniques so our people could easily memorize and understand all 14 points in a short period of time. At the heart of it all, you must treat people like how you would like to be treated, like equals, regardless of their position. Valuing people is what makes a business thrive.

You went a step further than just the way you treated people when you decided to really trust people. Tell us about that.

The principle of the third lens, knowledge, suggests that people have great capacity. When you provide them with relevant training, they become smarter than you in a certain field, so you cannot make decisions without consulting them. That is why you need teams which consist of different experts. After soliciting input from your people, who are knowledgeable about their respective fields, you, as a leader, can make better decisions. Further, it will be easier to implement these decisions because they will be implemented by the people who suggested what you should do in the first place.

To do that, you must trust them. There has to be trust and the willingness to risk trusting people. Risk means that sometimes the new recruits are going to make a mistake, but the mistake they make is not going to ruin your company. So let them make mistakes because that is how they learn. With better knowledge, they will be able to make better decisions on their own. As the owner, you are the one who has the advantage, because you will actually earn more when your organization gets smarter. We endeavor to be a “learning organization.” This makes great business sense. You cannot do things yourself. We have 105 managers and they are the ones who are doing everything around here.

Trust Leads to Flatter Organization

You took this to another level though by flattening your organization.

Yes, flattening comes naturally afterwards because when you trust people you have less need for supervision. Before the 1990s, we used to have seven levels, headed by the board of directors, the CEO, and the COO, CFO, and CS (corporate secretary). And under the directors there were general managers, managers, supervisors, foremen, and then workers. We reduced this to just four levels. The first two layers (board of directors and directors of business units) determine the vision, mission, and strategy of the company. Then the managers and the operational people (supervisors) will translate this into action plans. The managers among themselves can decide because there is clear direction provided by the strategy and the vision or objective. So the leader basically is setting up the vision and strategy and then training the people involved. This ensures that the members of the system have the same objective and have a shared vision.

Once you get there, the leader only observes the size or the growth of each of the components. Sometimes a component of a system grows faster than another component or the sales grow faster than manufacturing plant. So what is the output of the system as a whole? The output of the system is determined by the smallest component. The leader’s job is to figure out how to maximize the output of the system as a whole by optimizing the capacity of each component. Hence, the components that have excess capacity should help the components which are left behind, so as to maximize productivity.

So you view the way you treat people as a matter of good ethics, but also a matter of good business. Is that right?

Yes. Actually, Deming said that if you run a good business you must make money. If you treat your people badly, actually you are doing bad business because they will be less productive. I believe obviously that if you treat people well, they will pay you back double or triple in productivity, which translates in increasing profit.

But if you treat them well just so they will pay you back this way, they will see through that. So you have to really believe it.

Yes, and they need to believe it too. And by practicing it, they are happy in doing their work. A company that prospers will eventually make their employees prosper too.

Management, Salary, Trust Reduce Theft

Theft is a problem is some factories. Is it in yours?

Before we implemented all of this, whenever we took inventory or conducted an audit of the warehouse, there was always a large deficit of missing products. People steal when they have an opportunity. Ever since we implemented better management practices, increased their salary, treated them well, and trusted them to be responsible for their respective areas, theft seldom occurs.

On the other hand, if there is objective evidence of theft, we act swiftly and decisively, terminating their employment. This consistent and firm policy shows people that we are serious about fully trusting people by giving them decision-making power and responsibility in their respective areas. However, if trust is abused, then the consequences are serious as well. It has been many years since the audit department found discrepancy in stocks during inventory or embezzlement during a financial audit.

We have three kinds of audits that are going on as part of the system. The first is a financial audit that is done annually by an external certified public accountant. The second type of audit is the system audit done by an external quality-management certifying body. Because our company is ISO certified, we are audited every six months to determine whether the company is still implementing the ISO principles and doing what we say we are doing. The third type of audit is the people audit. This used to be done by external trained psychologists. We now have a business unit that is called the assessment center, which is doing this assessment. They talk one on one with our managers and employees to see if they are happy with us. We want to be able to detect early on if something is going on that makes them unhappy with the way the company is run. So with the three types of audits going on, the company has embedded checks and balances to ensure accountability of each department, allowing the company to grow by itself.
In our company, young people can become competent managers in two years.

You have a careful approach to growth. Could you describe this?

We grow by starting new businesses, but we keep each of them small because we want accountability. We have many young people working for us who we count as senior though they have only been here four or five years. By giving them limited responsibility they can cope with the size of the unit and develop their skills.

Company Employs New Graduates

And you primarily hire new graduates rather than people who have worked for other companies. Why do you do that?

So that we can grow and blend them into our culture. Our culture is not that easy for other people to understand, especially for someone who has already worked for more than 10 years in a company with a “command and control” culture. We have learned from our past experiences of hiring experienced managers who had worked in other companies for many years. While they were very bright and competent individuals, their culture was not compatible with ours, resulting in their eventual resignation.

What is it you do to make sure that these young college graduates blend into your culture?

We have a leadership transformation program that is focused in the first three months, culminating with three days and two nights in the leadership center to try to get them to change if they had other beliefs at the start. But most of these fresh graduates are already inclined in our direction because during their recruitment, we selected those who are team players and things like that. If after three months they do not fit our culture, we let them quit or we just let them go. Then we have another trial period for one year to get to know them better. Within one year, we can still terminate their employment. If they are able to make it through the first year in our company and adapt to our corporate culture, they usually stay on with us and come to appreciate and enjoy the way we do things. This is the key to a successful flat organization.

We listen to ideas and let our people try them out.

If this practice works so well for you, why don’t more companies follow this path?

I think they believe it, but somehow they want things to be fast. They cannot wait for new graduates to be proficient in operational tasks. They want instant managers. In our experience, it does not take four years or five years for them to become full-fledged managers. In our company, young people can become competent managers in two years. It depends on the person actually. I have a female new graduate who has been working with us for two years. When you have a conversation with her, you have the impression that she has been with us for 10 years. She can make decisions. She can discuss issues with anybody. It depends on how daring you are to risk, to give people the freedom to show what they can do, to trust people. The more you are able to trust them, the faster they will become independent.

Built Leadership Center for Training

How does your leadership center fit into this picture?

As we were implementing these things, we realized that we needed a leadership center to back us up. If you have a center like this, you have a central location where you have the opportunity to observe people during training programs, hence being able to screen people better. We are able to provide training to meet specific needs. We can have a better feel for who will be fit to be promoted to a certain position. With this training and assessment facility, it is not so difficult to determine our managing directors. Not only are they obvious to us, they are also acknowledged by their own colleagues.

My thinking was that to build a leadership center like this cost only something like 2 percent of our annual revenue. Our marketing costs are like 20 percent or 25 percent. So when you reduce the marketing cost by 2percent, you can build this training center and run it. So the overall cost of the leadership center and its operational costs are very, very miniscule. I assured the other shareholders that by having the training center, we can improve the sales, hence improving the profitability by more than 10 percent. In the end, the leadership center can cover its own costs through increased profit.

You have outsourced the running of this center, is that right?

When you are successful in implementing this flat organization concept, you think that this will work in any organization, as long as it is related to the core business.

After the economic crisis in Indonesia in 1996-1997, the corporate level staff proposed an idea. They felt that the corporate level’s function was no longer relevant because the directors were able to handle things on their own. They offered to voluntarily resign from the company and requested assistance to establish their own businesses which service Nutrifood, such as establishing distribution companies to distribute Nutrifood products. We agreed to their proposal. The distribution function was now outsourced to these newly established businesses. The same was done with the running of the leadership center as well as some other services.

Next Steps for Growth

What would you say is the next step for Nurtrifood? What new kinds of business units would you foresee?

What I hear is that they are preparing for more service-oriented businesses like nutrition centers, where people can go in and check their cholesterol or sugar level or other services and get advice on nutrition, and then buy the products from us. Centers like that can be located in a shopping mall like a retail store. People are also looking at a wellness center, expanding into more health-related functional foods, and the like. We listen to ideas and let our people try them out.

There is no master plan?

No master plan. They will create their own master plan and when they can present to you and it makes sense to you, just let them go ahead. Most of these service-oriented businesses do not cost much to invest beyond the manpower and brain power.

Have you done any acquisitions?

No, and we don’t intend to. There are huge cultural problems when you try to mix two cultures together. It is very difficult. Of course you can survive by firing the whole team, but if you are not familiar with the core business there are huge dangers as well. We can grow our business more easily and with less risk the way we are doing it. And we do not need to grow that fast anyway. We want to grow gradually.

We usually take the time to stop and celebrate the successes along the way. We believe in RRC, which stands for reward, recognition, and celebration. A big party might cost about US$500 including food, and rewards people for doing a great job. It is a miniscule expense, but the benefit you get in return, in the form of people’s joy to work and people’s improved performance, is exciting. I take pleasure in seeing bright and enthusiastic faces of people who feel like their ideas and successes are recognized and they themselves are valued.