When De Beers began the strategic review that ultimately led to its Supplier of Choice program in 2000, the diamond industry was shaken to its foundations.

Whether SOC has been better or worse for the industry is a matter of opinion, but in view of the industry’s overall financial health (see “2007 Forecast: Moderate Growth, Despite Pressures,” JCK, February 2007, p. 100) and such events as the Fabrikant bankruptcy (see “Fabrikant Goes Chapter 11,” JCK, January 2007, p. 39, and www.jckonline.com), it’s clear that the traditional, seat-of-the-pants business model of the diamond industry needed to change.

Hertz Hasenfeld, vice president of sightholder Hasenfeld-Stein in New York, embraced change. He undertook a complete evaluation and overhaul of his company, examining everything from major strategic direction to daily minutiae. What emerged was a company with a tightly focused strategy and a clear plan for achieving it.

Hasenfeld was a featured speaker at the Gemological Institute of America’s International Gemological Symposium last August. His session, titled “Reinventing Your Business: The Diamond Manufacturer’s Perspective,” offered a candid look at how his firm took stock of its position in a changing marketplace and transformed itself from an old-fashioned diamond manufacturer to a modern business that manufactures diamonds. The principles can be applied to any business.

Business owners must examine every aspect of the existing business, Hasenfeld said. It entails justifying its existence and seeing if it can be improved.

For example, the four main components of Hasenfeld’s business are sourcing, manufacturing, operations, and sales and marketing.

Sourcing The questions he asked were: “The DTC is our main source of rough; how much additional rough can we source elsewhere while sustaining our sight? How do the costs compare? Can we form partnerships to complement our own production?”

As a sightholder, the firm continues to be supplied mainly by the DTC. But it took on other suppliers and formed some strategic partnerships to complement its own production. It also eliminated some sources that no longer met its needs, said Hasenfeld.

Manufacturing Questions were: “Do we want to start manufacturing more commercial makes as well as Ideals? Do we have the right product mix? Are there cost savings by manufacturing overseas? What are the risks of off-site manufacturing?”

Hasenfeld reasoned that change is good but never at the expense of quality, so the firm continued to focus mainly on Ideals. But following his dictum of “Once its existence is justified, can a process be improved?” the firm overhauled its manufacturing process and brought automation into its Hearts and Arrows production.

To further reduce costs, the firm moved large amounts of rough to its factory in China, which reduced cutting costs by 50 percent and, contrary to initial concerns, improved quality.

Operations Questions included an evaluation of the inventory levels the company wanted to achieve, and how shapes, sizes, and qualities should break down to fit the firm’s selling model.

“A diamond cutter’s success or failure is based on having the right stone[s] at the right time for the right client,” Hasenfeld told JCK. “That involves a lot of communication, forecasting, capital, and risk management.”

After the evaluation, the firm improved its projections capabilities, tracking not only what’s in stock but also what rough it expects to receive in the next three to six months, and ensuring memo items are turning.

“At today’s narrow margins, we have to achieve at least a three times turn of inventory,” Hasenfeld said. “The more efficient the model, the faster the turn. That means manufacturing our typical top-make goods to specs for retailer programs … and it can also mean forsaking profit on some items to free up capital for the more profitable high-turn items.”

Other operational questions considered office efficiencies; breaking down various tasks into departments; and the effectiveness of current staff.

Further results included implementing new modeling software, hiring an in-house IT professional, designing custom software to help improve projections capabilities, departmentalizing each location, and hiring a marketing professional to increase awareness of the firm and sales of its product to upscale retail jewelers.

“Typically, diamond wholesalers run their businesses as one integral unit, with the owner/boss making every decision, regardless of whether it’s finance, buying, selling, marketing, or manufacturing,” Hasenfeld explained. “Unfortunately, most people, no matter how talented they are, are talented in some areas and not others. We decided to departmentalize, find the best talent in each area, and then give a significant amount of autonomy to each division head, with the owners acting mostly as coordinators and planners for each department.”

Hasenfeld brought in Steve Feldman, a publishing and marketing executive well known in the industry, in mid-2006 to help build the firm’s client base among upscale retailers.

Sales and Marketing Hasenfeld’s evaluation involved some of the most complex questions: “Is our client mix the best for our operation? Are we concentrating too heavily on one market, and are there opportunities with other markets that we are missing? How can we make economies of scale that work for the chains work for independent jewelers as well? How do we support independent retailers effectively, and at a cost that is efficient? Do we create our own brand, support jewelers’ [store] brands, or both?”

He determined that building a national brand was inappropriate for his customer base, so he worked at strengthening the firm’s position as a B2B supplier and its products as a superior house brand. “Don’t just sell them the best diamond you’ve got; sell them the best there is,” is his motto to retailers.

One lesson Hasenfeld emphasized is learning from mistakes and not being hampered by them. In his firm’s transformation, quite a few things looked great on paper but proved unworkable in practice. For example, an experiment with a proprietary 70-facet Ideal round cut performed well on lab tests, but bombed on retail tests.

Another product idea, the Let Freedom Ring three-stone ring of ruby, sapphire, and diamond created to memorialize the 9/11 tragedy, also tanked. The product was attractive, but retailers rejected it, saying “enough is enough.”

Undertaking this kind of business transformation involves practical considerations, not just theory, said Hasenfeld. Set realistic goals and objectives, establish a time line, evaluate the cost, measure progress against a benchmark, hold periodic reviews of progress, and, most important, make sure changes are providing an adequate return on investment.

“On a macro level, we measure against our last year’s performance, multiplied by overall market growth,” he explained. “On a micro level, we examine our sales to a specific client as a percent of share of market, when the data is available. How did our growth compare to the industry’s, and has our market share with specific clients grown or not?”

Hasenfeld said the most important thing in transforming a business is not being afraid to do it. “Remember,” he said, “the Ark was built by amateurs, and the Titanic was built by professionals.”