The manufacturing world (the entire world, really) can’t get much more unpredictable than what we just experienced in 2020. Flipping the calendar is inspiring many companies to get back on track, and the manufacturers that were fortunate enough to grow in 2020 want to maintain it.
After all, profitability is the name of the game, whether it’s a typical year or a chaotic one. And, while struggling with all the surprising impacts of a global pandemic emphasized the importance of profit margins, it will continue to be a focal point in 2021, given many of us are being asked to do more with less. Therefore, executing on the right things and working with the right customers is more critical than ever.
In this article, Black Line Group VP and Manufacturing Leader, John Madsen, offers a logical approach to increasing your manufacturing margin by focusing on individual customer margins.
Why Customer Margins?
Not all customers are created equal, especially in these challenging times.
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 manufacturing 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.
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
As the coronavirus pandemic swept the nation, you may have reassessed your customer relationships. Can you confirm who your top 20%, middle 60%, and bottom 20% really are? Asking the following questions may provide insights:
- Can they commit to a future revenue stream?
- Can they pay on time?
- Are they asking for concessions?
- Might this be a good time to re-negotiate many of your customer agreements so each party gets more of what they want?
In these challenging times, everyone needs clarity — don’t let this opportunity to dig in and improve your customer relationships slip by.
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. And, while the current health crisis is troubling to all, it may provide an opportunity to make some long-awaited and difficult decisions.
Now may be the right time to approach unprofitable customers regarding the dilemma you face in maintaining the status quo during this challenging time, allowing you to improve the relationship. In the event that’s not possible, they may be more understanding of your justification for pulling back if things can’t improve.
Create a Customer Margin Optimization Strategy
As much opportunity as there is for customer margin improvement, it will only get you so far if it's not being executed as part of a larger profitability strategy. So, how do you improve profit margin? You’ll likely need to find opportunities in the following areas to increase your manufacturing 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”
- Efficiency — 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. Sometimes losing a customer is necessary for margin improvement
- Tool investment — Though it may appear 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 that 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.”
One wise move, especially if you’re looking to find capital to fund the ongoing operation of your business, is to claim the R&D Tax Credit. This can be a critical source of needed cash during a time when it’s needed most.
Lastly, even though the coronavirus pandemic continues to challenge individuals, companies, and the economy, there’s some good that can come of it … if it results in taking a hard look at your profitability and opportunities for margin improvement. So, don’t be afraid to act in the best interest of your company now.
Want more advice for 2021 success? Our 9-point checklist provides insight on process improvements to help you protect your business, increase profitability, and keep growing. Just click the link below!