Ask most company executives about their plans to boost their bottom line, and they’ll tell you about all the things they’re doing to increase top line revenue. But by focusing only on the top line, these executives may be missing a huge profit improvement opportunity – one that can help businesses both large and small, those in specialized fields and those selling commoditized products. Instead, we staunchly advocate for continually reducing expenses and improving operational processes.
While increasing sales is certainly important to improve corporate profits, it also requires a significant amount of resources. And combine that with the competitive pressures evident in just about every business today, a single-focused initiative of increasing sales is not as smart as you may think. After all, the quickest way to grow sales is by slashing prices, a strategy that will almost always result in a business’s demise.
In mature industries, businesses compete in the same sandbox with very little differentiation among them. Sales professionals repeatedly tell us that, absent a clear differentiation strategy – a strong unique value proposition – the only thing separating their company from their competitors is price. And competing on price is a zero-sum game.
There's a solution to all that: expense reduction removes excess costs from operations, thereby significantly improving profits, in many cases without the need to increase sales by even one dollar.
An ongoing, earnest commitment to continually reducing expenses should be part of every company’s mission. Doing so will provide significant profit improvement opportunities for all businesses over the long term.
Over the next couple of months, this enewsletter will look at a variety of case studies that show how logistics professionals like yourself put this theory into practice.
Case Study 1
One of our clients, a medical equipment manufacturer, hired a new director of supply chain. At our initial meeting the director asked the following question: "How can we build a world-class supply chain?" I immediately thought, wow, that’s a great question. My response: "You start with your customer!"
The response was met with blank stares from several meeting attendees, including the new director, and many of his team members, some of whom had been with the company for many years. By way of explanation, I proceeded to tell the following story.
"Your company manufactures a variety of medical equipment products that are sold to large medical distributors. We have a good understanding of your current manufacturing process, which has certainly improved recently, but is still somewhat disjointed. For example, when orders from the customers are received at the factory they are sent immediately to the manufacturing floor for production. If all of the raw materials to manufacture items within the order are in stock, those products are made and sent out that same day, or next day via your preferred parcel carrier.
Products that cannot be assembled the day they are ordered, because they require additional assembly parts not in inventory, are placed on backorder awaiting the component parts from your suppliers. Once the component parts are received, whatever backorders can be filled are assembled and shipped that day, again by your preferred parcel carrier. This could be the day after the initial order or it could be several days after the initial order was received. And, this process goes on and on until the entire order is complete."
I then proceeded to answer the director’s question regarding how to build a world-class supply chain.
I told the team assembled at this meeting that since a majority of their customers were large medical distributors, we believed it made sense to query those customers to see if they would prefer receiving their shipments in a consolidated fashion once or twice a week as opposed to receiving bits and pieces of the order on an almost daily basis. Not only had they not taken this step, it hadn’t even occurred to them to do so. They simply assumed their customers were happy with the manufacturer’s standard manufacturing and shipment process.
Not surprisingly, our client was in for a real shock. They contacted their customers and found out that most of them preferred to receive consolidated shipments on a regularly scheduled basis.
Our client immediately began to consolidate their customers’ orders and arranged to ship the goods, shrink-wrapped on pallets. Now the shipments were made via the manufacturer’s preferred LTL carriers directly to their customers. This improved shipping process provided the following benefits to our client and their customers:
●The shipments reached their customers faster than they had previously, even though many orders were previously being shipped the same day the order was received
●The shipments arrived at the customer's door with little to no damage, in fact, product damage had been an issue for their customers in the past
●Claims processing costs were now virtually eliminated
●Our client’s shipping costs were also dramatically reduced
What’s more, our client gained many, happier customers. Not only did our client gain a distinct competitive advantage over some of their competitors, but their distributor customers’ costs to receive and check goods into inventory were also reduced.
Now, our client had a couple of options with their new shipping arrangement. They could pass some of the newly found savings on to their customers by reducing prices. What a great way to increase sales and customer loyalty. Or they could use the savings to boost their R&D budget and develop new products, the lifeblood of their business.
Our client chose option one: They fortified their customer bond for long-term business growth by passing along the additional savings. Our client also was adding new customers on a regular basis and the size and value of their customer orders were continually increasing, all thanks to the improvement in order fulfillment.
So, as you can see from this simple example, the benefits of a well thought-out program that focuses totally on the customer cannot be overstated.
Tony Nuzio is President, ICC Logistics Services. Tony has been serving domestic and global shippers for over 40 years by analyzing their transportation and logistics operations and associated costs and then implementing real and quantifiable cost savings solutions.