Small and mid-size manufacturers do not like to do business or growth plans. There are a lot of reasons for this, not the least of which is management tends to consider planning an academic exercise leading to generalizations and ethereal results. Manufacturers like to do things that are action-oriented and lead to tangible and believable results.
On the other hand, all manufacturers want to grow. And growth usually requires investment because strategies like new products, finding new markets, and expanding the sales organization all cost money. So how do you know if the company is ready to commit to growth?
By way of a litmus test, here are six essential questions you can (and should) ask yourself before proceeding:
1. Can you identify the best customers to sell to, both now and in the future? Profiling your customers is the first essential that needs to be looked at, owing to a simple fact: All customers are not good customers.
Selecting new customers and markets will drive decisions and changes to products, services organization, and manufacturing. It is important to know how to profile the best customers, their wants and needs, or customers with future sales potential to grow your business profitability.
The simplest way to achieve this is to carefully profile the ideal type of customer…then find more like them. Usually, you can do this by examining the best of your current and past customers. Here is a simple process to objectively profile your customers:
• Begin by printing a list of all accounts sold in the last 12 months by sales volume, from the largest to the smallest volume account.
• It is also very helpful to include the average profit margin percent of each account before overhead. This is known as the contribution margin or sales—direct materials and direct labor.
• Next, assign NAICS codes to each customer account. As noted in previous columns, NAICS refers to the North American Industrial Classification System, and you can find these codes online at www.naics.com.
• The next step is to determine good and bad customers. This can be accomplished simply enough by marking each customer account with a plus or minus. Obviously, more bad customers will limit your profit growth and more good customers will help you achieve growth goals.
• Now go through the list of good customers. These are the ideal customer profiles with the best future sales potential.
• The codes for these profiles will help you find more customers like them.
When the objective is profitable growth, going on the hunt for a customer who sees the value of your price is the most advisable course of action. Continuing to accept low margins—or counting on cost reduction turning around a bad customer who is always focused on price reduction—is a dead-end approach.
2. Do you know which market niches (customer groups) to focus on, both now and in the future? For growth planning, it is important to determine what markets you are already in, evaluate whether they have untapped sales potential, and determine whether you should look for new markets. To wit:
• Group customers into market segments. You'll recall each customer account was assigned an NAISC code. If your customers are in a spreadsheet, you can sort the NAISC codes from the smallest to the largest number, and then group these customers into market niches.
These niches can then easily be identified and grouped together by common factors. For instance, manufacturers of butter cheese, milk, and ice cream can all be grouped under a dairy market definition or approached as individual market niches.
• Determine market size by prospects. This requires that you access a database to find out how many prospects are in each market segment. This will give you a preliminary idea of the market size you will be prospecting.
3. Monitoring customer wants and needs. Do you know what kinds of products and services they want? The more you can define what customers want and need in terms of products and services, the better chance you have of making growth goals.
For most manufacturers, this is the most difficult of the six questions to answer because it requires developing a systematic way of monitoring customers. But doing so is how will find many ideas for new products and services; it is the key to success in increasing sales and finding market opportunities.
Regardless of whether it is something you're naturally good at, or it feels like pulling teeth, it must be done. You might consider hiring a third party to help you get started, or perhaps another employee with these skills. The important point is, you can no longer afford to operate in an information vacuum. Your future depends on it.
4. Can you compare your products to the competitor's products in terms of price, delivery, and key features—model by model? Simply put, it is almost impossible to grow and sell more to customers unless you have a competitive advantage. When the objective is to find new customers and new markets, it is important to find out:
• How many competitors there are for each product line or service.
• How your products or services compare to their products in terms of customer buying perceptions.
• How your prices compare to their prices from customer buying perceptions.
Many job shops and product manufacturers find themselves trapped in competitive situations where they have little competitive advantage and dwindling profits. They need to gather critical competitive information, so as to find out whether their company can differentiate its products and services from the competition well enough to maintain margins or grow the business.
If you find you don't have a competitive advantage, it's best to find ways to differentiate your products and services before investing in a growth plan.
5. Do you know the specific reasons why you lose orders to competitors? One of the best indicators of whether a marketing or sales program is working is the ratio of orders to lost orders. Knowing why customers buy or don't buy is vital to growth planning. The reasoning is simple: How can you know what to do to prevent future lost orders or customers if you don't know why you're currently losing customers and orders?
Keeping track of lost order information is critical to perpetuating long-term growth. The bottom line is you can't really develop a plan to increase sales growth, or even just survive, without first understanding why you lose orders and customers.
6. Do you know if you are making adequate margins on each product line, model, or job? To harbor any chance of competing in the new economy, you must know the answer to this question. Many small manufacturers have good sales records but rarely keep summaries of profitability.
Maintaining detailed records on profit by customer account, product line, and even product model is necessary to make customer selection decisions, to change selling and pricing strategies, and to identify "product dogs" that should be dropped.
The most important reason why costs and margins are important is this: It is dangerous to find new customers, pursue large accounts, or to bid on large projects when you don't have good cost information.
Once you have identified new customers and markets by the procedure described above, the next challenge is actually contacting them. The good news is, you're now likely in possession of some of the best customer and marketing information you've ever had.
Once you have obtained enough information to where you can confidently answer all six questions with a "yes," you have an excellent chance of setting attainable sales and profit goals.
Mike Collins is the author of "Saving American Manufacturing" and its companion book, the "Growth Planning Handbook for Manufacturers." To learn more about the author or these titles, visit www.mpcmgt.com.