If your gross and net profits in manufacturing are not where you want them to be, then you have two choices:
- React and develop plans to manage the change in situation.
- Cross your fingers and hope to “ride out the storm”
In the second half of the 20th century, making a profit from manufacturing was not difficult. The product cost £X to make, a profit margin was added, and then the product sold at £Y to realise the profit. However, globalisation has changed the manufacturing model, with the impact of cheaper products/components, foreign exchange markets and more international competition leading to significant changes in how manufacturers need to look at their businesses in order to stay profitable and sustainable. Resisting change is futile, and building an efficient supply chain is critical to success. If your profit margin is being eroded, or you are struggling to be competitive, then here are three areas to explore:
Your Product, Your Supply Chain and Your Customer Service
Does your product design and costs meet the desired price point?
The instantly recognisable Toblerone bar is a valid recent example of the volatility of selling to retailers, particularly in food and drink, where competition is fierce and many purchases are made on impulse. When faced with rising commodity and ingredient costs, but with inflexible retail customers not willing to take on a price rise, the manufacturer had little option to redevelop it’s product. Using cheaper ingredients would move away from the Swiss reputation for quality which the brand is associated with, so the alternative was to change the product size or design – in this case with larger gaps between segments. They have acted in time to preserve profitability of this product. I was once asked by a client to look at their accounts, and a gross profit of 15% observed. They were very slow in responding to a change in their customer requirements for price point, and tried to “ride out the storm” instead of redeveloping recipes with cheaper ingredients. The result was insolvency in a multi-million pound business. The lesson from this experience was to stay on top of product profitability, and have plans in place to adapt and redevelop if the market place requires.
Cash is king in business, and in manufacturing, inventory control plays a key role in working capital management.
Your inventory policies need to be developed around lead times, utilisation rates and agility to react to change in demand. The adage of “buying in bulk” to achieve a good unit price is no longer valid – while price advantage may be gained, the cost of financing that excess stock can be expensive, and the physical presence of excess stock takes up space and can mask operational inefficiencies. World class today means “lean and agile” – maintaining response to customer demand, but with lean supply chain in place, developed through working with suppliers on various solutions. This may include vendor managed inventory, suppliers and customers holding stock to meet short term demand, or other techniques. One of the governing principles should be to align the inventory plans with your manufacturing strategy. If making to order, then look at what items/components are practical to hold on site for manufacture/assembly, and determine a practical lead time that is not inhibitive for the customer. If making to stock, then linking demand management and forecasting to the stock and manufacturing plans is crucial.
Customer service and development. 68% of customers change suppliers owing to “perceived indifference” from their existing service/product provider.
A startling statistic, and one that can be mitigated through being very proactive about customer communication. You work hard to secure a new customer, so why risk throwing that hard work away by switching focus to winning another new customer, and not looking after those you already have. Ongoing dialogue can explore service levels, performance, innovation and open channels to cross-sell other products or to add more value to what you are supplying. Yet many manufacturers do not clarify who is responsible for managing and growing accounts, let alone set up regular dialogues. Buyers often move and change, so even more important to establish a strong relationship and an agenda of “working together”, which will provide more leverage on maximising the opportunity with that customer.
We specialise in helping manufacturers realise their profit potential. To contact us, please email ian@i2iconsultants.co.uk
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