There are hundreds of things that can be done to improve your business' margins. Yes, it can get complicated and overwhelming pretty fast, but Black Line Group VP and Manufacturing Leader John Madsen offers a logical approach to increasing your manufacturing profit margin by focusing on individual customer margins.
Why Customer Margins?
Not all customers are created equal.
As simple as that idea may seem, it's important for executives to truly embrace this notion if they are to increase their company’s profit margins.
Analysts estimate that the top 20% of customers (ranked by profitability) generate more than 120% of company profits. Conversely, the bottom 20% account for more than 100% of losses.
This is why customer margins present the greatest opportunity for increasing your overall manufacturing profit margin. You can only find so many ways to optimize your channels and processes or decrease production costs. But having more profitable customers can improve your bottom line almost overnight.
Optimize Customer Margins
Optimizing customer margins can be difficult, especially where contractual agreements are already in place. If you can make changes to the way you service their account or increase the revenue they bring in, fantastic! But when those things still aren't enough, you have to really examine whether keeping a customer is worth it for your company in the long-run.
Just because you've been doing business with someone for a long time doesn't mean they're a good customer. In fact, it could mean they've been hurting your business longer than you would like to admit.
Although it can be difficult, you must do all you can to understand individual customer margins and try to either improve those relationships or end them as appropriate.
Create a Customer Margin Optimization Strategy
As much opportunity as there is for customer margin optimization, it will only get you so far if it's not being executed as part of a larger profitability strategy. You will still likely need to find optimization opportunities in the following areas to truly increase your manufacturing profit margin:
- Channel margins – Examine the cost structures for each of your channels and analyze the potential for increasing profitability. Then, focus on those channels that give you the best opportunity to succeed.
- Product margins – Analyze variable and fixed costs at the product level so you can make better decisions regarding capital and resource investment. Focus on your high-margin products and don't be afraid to let go of the low-margin products that are hurting your bottom line.
- Margin erosion – "Be willing to take a short-term margin hit to keep an order," says John. "Sure, you may actually lose a little money on some part production. However, by showing flexibility and a willingness to work with customers, you can set yourself up to optimize the overall relationship.”
- Function performance – From sales to R&D to shipping, there are a number of areas that can hurt your margins because of poor performance. By improving performance within each department of your organization, you can cut down on hidden costs and increase overall profitability.
- Cost reductions – When customers make their annual plans, they may demand cost reductions from you in order to keep their business. As noted above, just because they are a current and potentially long-time customer, that doesn’t mean they’re a good customer. Investigate customer history before deciding whether a cost decrease is worth it. As noted above, sometimes losing a customer is necessary to improve margins.
- Tool investment – Though at first blush it appears that you’re losing money when creating a tool to complete one of your customer’s orders, keep in mind that not only are you investing in process improvements, you’re also potentially eligible for the R&D Tax Credit. Therefore, you could be earning a tax credit to subsidize the tool build.
- Supply chain – Supply chain management in manufacturing is more difficult than ever given products are becoming more complex and many are no longer built by brand owners. Continuing to optimize the link between engineering and production can lead to lower cost, higher quality, and reduced time-to-market.
Focus On What Matters
The point of all these optimization methods is to focus your business strategies around what matters most. Life is short. Every manufacturer is in business to make a profit, and hopefully have fun doing it. So, why put undue stress and strain on your people and your infrastructure by conducting bad business?
As a wise man once said, “The only thing worse than no business at all is bad business.”
For more manufacturing guidance, check out our Manufacturer's Guide in 2020: Top 8 Issues Facing the Manufacturing Industry in 2020.