Overview

Semco is a small size engineering and manufacturing conglomerate that employs about 250 people and produces a variety of industrial machinery including

• high volume commercial dishwashers (capacity of up to 4000 plates per hour),
• high volume pumps designed for use aboard of large scale oil tankers,
• commercial mixers for blending a variety of industrial substances including rocket fuel and bubble gum,
• large scale cooling units for centralized air conditioners in large office buildings,
• complex, turnkey biscuit production equipment, with contract volumes ranging up to $5M.

Semco managed a remarkable turnaround over the past decade since its current CEO, Ricardo Semmler, took over the operational responsibilities from his father in 1982. While initially pursuing a rather traditional management style, Semmler quickly recognized that Semco’s highly turbulent markets required a different organization in order to stay successful in the longer term. He therefore initiated a turn around process in the mid 1980s that radically changed Semco’s organization, management, and corporate culture.

When Semmler started the restructuring process 1982, the company had about 750 employees on its payroll. This number came down to about 500 throughout the 1980s; currently (1994) there are about 200 (250 if including part-time workers). In the process of restructuring, Semmler initially focused on reducing the size of Semco’s administrative organizations (examples include the headquarters that was downscaled by about 75% in terms of employees) through assigning its functions to the operative units. As a result, Semco has no centralized data-processing and training departments any more. The number of management layers, initially twelve, were cut down to three. Beside his early successes, Semmler claimed in 1994, that the restructuring process was only about 30% finished.

Financial performance

In 1995, Semco’s overall revenues have been about $35M. Over the course of its turn around, Semco managed to grow sales per employee from about $11,000 in 1979 to approximately $135,000 in the mid 1990s; over the same time period, its sales have grown by factor six, productivity by factor seven and profits by factor five.

Competitive Positioning and Sources of Competitive Advantages

Semco positions itself in its markets as a low cost, high quality supplier with innovative and differentiated products. Its current competitive position is build around a unique corporate culture that results in an unusually creative R&D process, and a highly efficient manufacturing system.

Semco’s corporate culture and organizational design is based on three core principles: employee participation in management decisions, company wide profit sharing, and an open information culture. Theses principles are being translated into the following organizational features:

• free access to all financial and other information for everybody with the company,
• about on third of the annual profits are being shared among all employees,
• top-down and bottom-up bi-annual evaluation process of all employees,
• major decision making on a voting base,
• working hours and pay levels are being set in a self-evaluation process and justified through company-internal supply and demand principles,
• no security checks/open access for every employee to every facility,
• job swapping/rotation for about 20-25% of all managerial employees per year,
• three organizational levels from chairman to manufacturing associate.

Semco’s manufacturing system is designed around the concept of outsourcing. It encourages its employees to spin-off and run manufacturing units; it leases equipment to this new mini-enterprises (called “satellites”) that usually remain on Semco premises. In order to secure its supply stream and to help the satellite during its start-up phase, Semco provides the initial financing and closes a long term outsourcing contract. The satellites are not exclusively dedicated towards supplying Semco - they are expected to do some outside business in order to prove their competitive cost and quality positions. The first step towards splitting up the company in independent units was done in 1990, when Semmler divided Semco’s 300 employee food equipment manufacturing operations in three independent units and ultimately spun them off. Today, approximately 200 former Semco employees perform about 50% of all manufacturing operations in satellites that ideally employ about 10 people; the percentage of external manufacturing is projected to grow by another 10 to 20% within the next couple of years.

Semco’s R&D process is based on entrepreneurship. Creative employees, that come up with new product ideas or process improvement suggestions, are provided with funding and other resources in order to further develop their ideas. They take over the operative responsibility for their projects and their future compensation will be based on the performance of their respective projects. The upside for individual employees is a significantly higher reward potential compared to regular paychecks; Semco, in turn, benefits from the ongoing improvement efforts. The idea was first implemented in the mid 1980s, when Semco founded its Nucleus of Technology (NIT) Innovation, an R&D unit, that initially consisted of three engineers. Within six month, this group had 18 major projects under way. During the first two years of its existence, NIT firmly established a process of ongoing improvement throughout the entire company.

Conclusion

Semco is an interesting organization because of its very unusual organizational structures and processes. It managed to safely navigate through the troubled Brazilian economic environment of the 1980s and early 1990s without incurring major organizational damages. From an information technology point of view, the most apparent difference between Semco and more traditional organized firms are its open policies towards information sharing.

However, it is not yet clear, whether the organizational principles that made Semco successful can be applied to other companies. Semco is a very small firm compared to major internationals. Even though it seems likely that Semco’s management principles could be implemented in other organizational units of the same size, it remains unclear what they would do to a significantly larger organization. Other remaining issues that need to be clarified include Semco’s ultimate financial performance and role of the Brazilian economic policy in its turn around process. Due to the relatively young age of Semco’s organizational structure, longer term financial performance data is not available, i.e., it is still too early to judge whether Semco’s organizational model is viable from an economic point of view. The highly protective nature of the Brazilian economic policies might have played an important role in the development and early success of Semco’s turn around; whether the system will work in a highly competitive international economy is therefore not yet clear.