Welcome to Peer to Peer Advisors. The posts in this blog belong to our members. We will share the ideas, suggestions and insights of manufacturing business leaders, as discussed in their Peer to Peer meetings. Names will be changed to protect confidentiality. What’s not changed is the experience and expertise your peers share in support of each other and manufacturing as a whole.
A recent discussion among some owners focused on the nature of customers, specifically how some customers are worth the time and investment and some are not. Zack heads up a $20M+ medical devices company. They recently went through a purging of sorts with their customer base. In essence, they look at costs and profitability on a customer basis. When faced with an investment decision, they look at the the cost structure to serve a specific customer, and the profit that customer delivers. Investment decisions are made accordingly.
In other words, they consider capacity and profitability by customer to make investment decisions about that customer. Are they worth having as a customer?
The analysis Zack and his team went through ended up with them pricing out of their customer base about 1/3 of their total customers. The return on the low margin customers did not justify the time and cost investment to serve them.
By increasing prices, low margin customers left. Capacity was increased. Gross margins by customer improved; gross margins overall improved; the entire organization is able to do more in less time because of the cumulative efficiencies achieved with individual customers.
The group summarized some what to look at on a customer-by-customer basis; situational questions to consider are:
- How good is the relationship with the customer?
- What percent of capacity of does this customer use; are they profitable?
- Is the customer a good fit with our capabilities?
- What amount of capital is needed to serve this customer?
Positive answers to the questions leads to good decisions on serving the customer, driving growth, and efficiently and profitably handling the growth. Some additional guidelines to follow include:
- Be diligent in accounting for the soft costs to handle an account. What internal resources are needed to keep the customer happy?
- Use loaded burden rates per person when calculating the costs to serve an account.
- Calculate accurate sales costs to acquire an account. Calculate accurate sales costs to retain an account.
The bottom line to evauluating whether all customers are good customers is that, if objective in your analysis, the bottom line improves.
Ned McCrory is the Managing Partner for Batchelor, Frechette, McCrory Michael & Co. They are a long-time and very well respected accounting firms in Providence, Rhode Island, serving clients throughout New England and across the country.
As Managing Partner Ned has helped inject into the firm’s culture a strong focus on relationships, emphasizing the strength and depth of the connections they establish with their clients and all others with whom the firm interacts.
To achieve this relationship-focused bias Ned leads by doing. One example is a simple spreadsheet Ned maintains. First, some quick background.
Ned is a golfer. Not your average weekend golfer, but someone who is passionate about the game. He loves to play whenever possible, and is one of the few people I know who can pull off wearing a pair of knickers and make it look good.
Golf is an integral part of Ned’s marketing effort. The New England golf season runs realistically from mid-March through mid-November. During that nine month time frame it’s not surprising to find Ned out with clients and friends several times per week.
Back to the spreadsheet. Ned records every round of golf he has ever played! On a simple spreadsheet he lists out all of the members of the foursome with whom he played. He notes the date and course they played. He designates whether the round was business or personal. And he notes any function, event, charity, etc. associated with the round.
This spreadsheet epitomizes Ned’s focus on relationships. Recording who he played with and where they played is not so much for Ned; it’s for the people with whom he played. Frequently Ned will get a call from someone that might go something like this – “Ned, remember when we played in that charity event last year at Newport Country Club. Who was the banker that was in our group?”
In a few clicks Ned knows the answer. The caller is happy because he has a banking resource who knows him on a personal level. The banker is happy because he can further a relationship and possibly get a new piece of business. Ned is happy because he is able to help.
This focus on relationships is dynamic stuff because it shifts perspective; it places in the forefront the individual and what their concerns, questions, issues, challenges, etc. might be. The spreadsheet is not merely a log, it is a conduit to connections and insights.
Strategic thinking about who you know and how you might help them is powerful. Business success is all about people. The ability to effectively connect people is an asset few individuals possess.
Viewed through the lens of relationships, a round of golf is a perfect venue. It is usually about 4 hours in length, and then a meal or drinks for 1-2 hours afterward. It’s social in nature, with lots of opportunity to talk between shots. In other words, a great setting for getting to know someone.
Ned’s perspective is based on generosity. He thinks about who goes into the makeup of a foursome. Inviting people who do not know each other but should is a generous gesture. Strangers become acquaintances, maybe even friends. This benefits everyone.
By focusing on relationships Ned builds stronger relationships with everyone involved. His business comes almost entirely through those relationships; through introductions and connections where Ned’s generosity is returned in kind.
One last point. There are about 20 years of golf rounds entered into Ned’s spreadsheet. There is foresight in recognizing the value of the approach and cataloging it. Relationships take time and effort. You can’t simply create them when you need them.
Build a relationship for the sake of the relationship. Strengthen a relationship over time; nurture it and respect it. When you need help maybe a relationship might already be there. You won’t have to go looking for it or hope to build it.
And have fun while doing it. Maybe a round of golf or two.
Sales training is too often focused on activities and tactics to get the customer to do what you want them to do. It should be focused on the customer getting the salesperson and their organization to do what the customer needs. This requires understanding, trust, and a strong relationship. Here’s a recent column of mine that explores this approach.
The power of positive cash flow is essential to continuing to operate. Cash is king, and every company leader at the table agreed they need to ensure cash is available. If there are months where revenues will not cover breakeven, have a plan in place to keep cash flowing.
Enter into the discussion lines of credit. Everyone should have one. Everyone should have a line that far exceeds anticipated requirements. For those in the group that did not have one, or had an inadequate line, the recommendation is to get one now.
It’s inevitable that the economy will experience a downturn (and some believe it will happen in the not too distant future). When the downturn happens the lines of credits will be difficult to get.
Therefore, get some love from your banker today. Shore up all cash reserve positions and resources now, before they are needed.
A recenct discussion focused on hiring. Our last topic dealt with the type of person to hire. Rick asked specifically about hiring a rock star. The consensus of the group was that a rock star might contribute strongly in the short term, but their long term effectiveness is totally dependent on their ability to work as part of a team.
An underlying principle from the day’s conversation is that scalable growth is a team effort. In profiling jobs and ideal candidates, building a team of solid players is more valuable than hiring 1-2 star players.
We talked about Bill Belichick and the New England Patriots. Belichick builds a team of versatile players who understand and fit within the culture of his organization. While Belichick’s public facing persona is almost non-existent, his persona in the eyes of the team is of a solid leader who establishes a clear team culture.
Belichick’s approach illustrates some of the concluding tenets from our discussion:
- Understand the culture of the organization and the team. Be clear on how the people work together and the underlying principles that are necessary every day e.g., discipline, work ethic, respect for teammates, respect for management, etc.
- Evaluate candidates based on their match to cultural characteristics AND job characteristics
- Hire for emotional maturity first. Can this person effectively fit into the culture? If yes, you can train for specific skills. If no, their skill set will be diminished because of a cultural mismatch, no matter their skill level.
- Know yourself as a leader, and the type of culture you establish by example and how you lead. What you do is much more important than what you say.
The process to hire the best people for the organization can take longer. However, it’s short term time investment for much longer term positive results.