Tag Archives: Cost

Do You Expand Production Locally or Internationally? Five Points

Situation: A company has built a very successful specialty manufacturing business in the US. Their manufacturing operations are labor intensive, with manufacturing practices optimized using motion studies and sharing best practices developed on the production floor. The CEO is evaluating whether it makes more sense to expand production in the US or to explore international options. Do you produce domestically or internationally?

Advice from the CEOs:

  • There are trade-offs between domestic and international production. Quality labor is available internationally at lower costs than in the US. However, risks include potential loss of quality control and higher levels of waste.
  • While investigating international production options, focus first on less critical operations where savings from lower labor costs outweigh the potential cost of wasted material.
  • Do not try to move highly controlled operations. These will include critical operations which require both an elevated level of operator skill and close supervision.
  • Before evaluating international options, break down the steps of manufacturing or processing to identify specific subcomponents or subprocesses that could be outsourced at reasonable risk.
    • For example, look at high volume parts where quality and variation in tolerances is less critical. These will be the best candidates for production in a lower cost, potentially lower quality environment.
  • How critical are trade secrets or patented IP to production? In the US and Europe there are strong protections for IP. However, these protections are not as strong in all countries. If production is outsourced to countries with poor IP protection, this may enable IP theft and create future low-cost competition.

Can You Pass Higher Expenses on to Customers? Six Thoughts

Situation: A company is concerned about increased energy expense as prices rise, and the impact on the bottom line. Pricing in their market is competitive. What’s the best way to recover these costs? Can you pass higher expenses on to customers?

Advice from the CEOs:

  • Businesses regularly pass on their increased gas and transportation costs to both commercial and retail customers as these costs rise.
  • This isn’t just true for gas and transportation expenses. As other expenses rise, companies regularly increase their pricing to account for increased costs.
  • Is it necessary to send out an announcement letter about the company’s intent to do this?
    • Some companies do. Others just start adding a line with a gas surcharge to their invoices. This is happening frequently enough so that most customers just pay it without question.
  • What do you do if someone objects?
    • If a customer objects, you always have the option to credit them the charge.
    • Again, most customers are so accustomed to seeing and tolerating these costs that they don’t object.
  • Look at the company accounting system. Are costs and performance trackable by business segment? Performance numbers show both the impact and magnitude of energy cost and improve the ability to manage the business.
  • If the talent is not present to either improve the current accounting system or to shift to better software, bring in part time accounting help. A good source is Robert Half International/AccountTemps. The cost of adjusting the current system will be recovered as the company gains more control over expenses by segment.

How Do You Establish Performance Metrics? Three Guidelines

Situation: A CEO wants to establish baseline metrics to evaluate company performance, and guide both planning and operations. Without baseline metrics it is difficult to compare the impact of options that the company faces. What are the most important areas to analyze, and what do other companies measure? How do you establish performance metrics?

Advice from the CEOs:

  • Start with the basic divisions of the business. As an example, take a company which has three arms to its business – products that it represents for other companies, products that it distributes, and custom products that it manufactures to customer specifications.  
    • For each of these lines track gross revenue, profit net of direct costs, FTEs necessary to support the business, number of customers, net profit percent, net profit per employee and net profit per customer.
    • Calculate these metrics on at least a quarterly basis for the past 2-3 years to set a baseline and a chart of historic trends.
  • Once you establish a baseline, chart current performance on at least a quarterly basis and look for trends and patterns.
    • Where is your greatest growth and greatest profitability – not just on a global basis but in terms of profit per customer and profit per employee?
    • If you’ve included your full costs including the costs of the FTEs to support each business, then the analysis should show you where you want to invest and what it will cost you to support additional investment.
    • Do a similar analysis of costs per line to further support investment analysis.
  • This analysis will help to evaluate whether it is better to purchase another rep line, or whether you would be better off investing the same funds to grow custom business.
    • Similarly, it will demonstrate on what kinds of customers and products you want your sales force to focus to grow profitable business and will help you to establish objectives based on anticipated revenue or profit per new customer that sales closes.
    • Finally, it will highlight potential vulnerabilities such as the impact of the loss of a key customer in one portion of the business.

How Do You Evaluate an Acquisition Opportunity? Four Issues

Situation: A company is considering purchasing a line from another company to complement its existing product line. They would split commissions with the current owner, and gain an additional employee with knowledge of the products to be acquired. The purchase would add to the company’s offering, as well as rights to additional products. The CEO sees this as a low risk move. How do you evaluate an acquisition opportunity?

Advice from the CEOs:

  • In evaluating a commission split opportunity, will the commissions that you would receive exceed the cost of both the additional employee which you will add, plus the support that it will require to maintain the new business? Do the new commissions cover the anticipated costs, plus a reasonable profit?
  • Have you vetted the numbers to demonstrate that this purchase provides a suitable return on investment vs. other potential investments that you could make? Is the marginal revenue that you will receive greater than the marginal cost that you will bear? Is the ROI of the new line greater than your cost of capital? If not, what can you do to improve the return?
  • Looking at your current operations, do you have your existing shop in order? Have you calculated the metrics that will allow you to understand, where you’ve been, where you are, and which provide a clear vision of where you want to go? If not, the question is whether you are ready to take on another line.
  • The bottom line question is – how do you know that this acquisition is the best use of your funds?

How Do You Build in a Declining Market? Five Solutions

Situation: Revenue for a product and craft business has been slipping. At the same time, their competition has been disappearing. It is clear to the CEO that demand is and will continue to be present because of the market that the company serves. The question is how to maintain the profitability to survive long-term. How do you build in a declining market?

Advice from the CEOs:

  • The keys to recovery in a business like this will be in two areas: improving sales and increasing margins.
  • To increase sales the choices are more aggressive marketing and selling to existing customers or creating new markets like previous generations did when they started the business. Consider services that you could bundle with your products to augment the ways that customers use them. It will be the responsibility of your sales and marketing teams to demonstrate these product/service bundles to increase sales both to new and existing customers. This will help to solve the revenue slippage.
  • The other side is ongoing efforts to reduce cost which will, in turn, improve your margins. Costs can be reduced in creative ways that are not obvious. These include improvements in purchasing, reduction of waste, recycling of component materials, and inventory controls. It will be the responsibility of your production, purchasing and inventory management teams to develop these solutions. Assure that these teams are recognized and rewarded for their solutions.
  • Look at the segments of your product offering. Are they declining at the same rate or are there differences? This will help you to focus your efforts, as a company, to grow market share even if the overall market is declining.
  • Other suggestions for increasing sales:
    • Take advantage of the craft trends. Do this with NEW talent – not tired talent.
    • Consider partnerships and collaborations.
    • Set up contests and craft classes.
    • Look at how other industries promote to the craft industry and follow their lead.
    • Consider kitted craft products.

How Do You Respond to Unrealistic Demands? Six Suggestions

Situation: A tech company is having difficulty with a customer. Given three options – high quality, low cost and rapid delivery – the company can deliver any combination of two, but the customer wants all three. When the company asks which two are most important, the customer responds that they want all three. How do you respond to unrealistic demands?

Advice from the CEOs:

  • The Devil’s Advocate response to this question is to look at your processes. Is it possible to do all three, and if so under what circumstances?
  • Think from the perspective of the customer:
    • What will you need and when?
    • Integrate the customer into the decision process as much as possible.
    • Demonstrate where trade-offs exist, and work through these in binary fashion until you reach agreement on the scope of work, delivery timeline and price.
  • The challenges change depending upon who within the customer company you are working. For example, the engineers understand the challenges and complexity of the product in question. However, the purchasing agents do not necessarily understand the product, its complexity, or how critical it is to their final product.
    • In this case try bargaining with the purchasing agent – if the purchasing agent goes back to the engineers and gets their agreement that your company can change the quality or delivery spec, perhaps you can be flexible in your pricing. Put the ball in the PA’s court – but make sure that the PA knows that he/she will be responsible for any project delays for not giving you the order today
  • Use stories to set expectations – better yet, use stories, combined with metrics about the costs associated with attempting short-cuts to develop authoritative arguments in support of your position.
  • Create a User Guide for your customers – paper and web formats – to sell your story. Sell fear, uncertainty and doubt; for example, if the PA wants to go another route here are the potential costs in terms of time, market share and profits lost.
  • In particularly difficult negotiations, use the real estate mantra: Some Will, Some Won’t, So What, Who’s Next?

How Do You Negotiate Contract Terms? Three Recommendations

Situation: A company has secured a significant new contract with a new, large customer. The customer sent over their standard, non-negotiable contract which includes the right to cancel orders anytime, even if the company has invested significant funds preparing product against those orders. How does the company respond? How do you negotiate contract terms?

Advice from the CEOs:

  • Before you sign the contract talk to the customer about restocking or cancellation fees in cases where you have already invested irrecoverable funds against the customer’s orders. See if they will adjust their purchase order clause or offer language to cover unrecoverable costs.
  • If the customer says that they cannot change the contract, ask for an addendum or side letter of understanding that will protect you from loss of sunk costs against cancelled orders.
  • If the customer will not bend on any contract language, you can go ahead and sign the contract and then take care of your needs as they submit purchase orders. Create a stamp that you can stamp on their purchase orders defining your protections. Each PO is a new contract that supersedes the general contract.

How Do You Change Suppliers for a Key Product? Four Thoughts

Situation: A company buys several important components from a single US supplier. They are considering an offshore source for one of these components which makes up a large portion of what they purchase from the supplier. Does off-shoring make sense in this case, and how do they mitigate the risk? How do you change suppliers for a key product?

Advice from the CEOs:

  • The key consideration is the off-shore partner’s ability to reliably make the component at the price promised. If they can, why not outsource offshore?
  • The decision depends upon two additional factors: the amount that you stand to save by off-shoring your source, and the potential cost to you of inconsistent or unreliable components from the off-shore supplier.
    • If the cost of failure is high, a modest savings is less valuable. You may want to wait until you have higher volume and higher potential savings before looking at off-shore sources.
    • In the US, we assume – with some security – that a pilot run predicts a large run. Historically this has not been shown to consistently apply to offshore suppliers.
  • Can you afford to invest and potentially lose the amount that it would cost you to secure your first production order from the off-shore source?
    • If the answer is yes, invest the time and effort to visit the supplier, and secure resources to monitor their production – your own or a trusted partner’s. Your presence and interest are very important.
    • The principal challenge will be quality and consistency of raw materials, and varying age of production equipment used to produce your components.
  • Are you concerned that your current supplier might cut you off?
    • The CEO is not sure, but has identified this as a risk.
    • If this is the case, start now identifying second sources for other components made by this supplier – if only to keep them honest in price, quality and delivery.

How Do Small Companies Outsource Infrastructure? Eight Ideas

Situation: Start-ups and early-stage enterprises are typically both resource and talent constrained. The CEO of a start-up asks how others successfully outsourced infrastructure cost effectively and when they were early-stage so that they could focus on critical success factors and improve their opportunity to succeed. How do small companies outsource infrastructure?

Advice from the CEOs:

  • In the early stages of company development, outsource everything possible and focus our efforts only on the key functions.
  • In order to focus on the most important things first, decide what must be accomplished and when. Set priorities, establish key milestones and create a timeline to measure achievement. Celebrate your successes!
  • Identify the most important strategic foci within your business model and outsource everything else.
    • For example, use outside data centers instead of developing these yourself.
    • With the increase in Cloud-based options, early stage companies can do without the IT infrastructure that they used to need. Just be careful to safeguard your intellectual property!
  • Attend relevant meetings and functions to learn about existing and available capabilities. Look for local networking opportunities relevant to your market.
  • Incubator sites have developed in a number of high tech centers. These are designed to cover infrastructure needs at a reasonable cost so that founders can focus on product and service development.
  • Hire a virtual assistant – you can find these locally using a Google search.
  • Take advantage of lower cost labor and enlist younger, less experienced labor to manage databases and clean records.
  • Set up a wiki for information. This exchange is free and you can tailor it to your needs. It is permission-based; you can find it at pbwiki.com.

How Do You Pitch a Blue Ocean Service? Six Recommendations

Situation: A company is planning to pitch a Blue Ocean service to a major prospect. The service has a proven track record with industry leaders and is not being offered by other vendors. How do you pitch a Blue Ocean service?

Advice from the CEOs:

  • Start by listening to the client’s current situation. Here are some opening questions:
    • How did you get here? Just the 2-3 minute version. As a follow-up question, ask what their past performance has been.
    • What is your most important competitive strategic advantage? Follow-up: what is your future competitive advantage – the same or different?
    • If everything goes right, where do you see things in 2-3 years?
    • What obstacles, roadblocks and constraints will keep you from getting there?
  • Include graphics in your presentation on both the prospect’s current situation and how your proposal differentially impacts their ability to reach their future objectives.
  • In your presentation, highlight your ability to offer a very competitive overall cost proposal based on your ability to outsource work to lower cost subsidiaries or partners.
  • Emphasize your track record providing the proposed service to industry leaders.
  • Be sure that your overall proposal looks sound and responsive to the prospect’s need as you understand it. It will be important to understand whether the individual with whom you are meeting next has the same perspective. Try to determine this before your next meeting.
  • Adding an additional vendor within your proposed framework doesn’t upset the apple cart. It probably benefits everyone as long as it benefits the prospect.

Note: The term Blue Ocean Strategy comes from a book published in 2005 and written by W. Chan Kim and Renée Mauborgne, professors at INSEAD and co-directors of the INSEAD Blue Ocean Strategy Institute. The authors argue that companies can succeed not by battling competitors, but rather by creating ″blue oceans″ of uncontested market space through the simultaneous pursuit of differentiation and low cost to open up a new market space and create new demand.