We all start the year with a grand strategic plan of projects and initiatives that are designed to help our business grow and thrive. For many years, I’ve helped manufacturing executives and their teams develop their Strategic Plans and build a visual management system for execution. And over and over again, I’ve seen great plans derailed the very first time the numbers are missed for the year – often by about February or March.
In a heartbeat, leadership focus, energy, time, and attention gets pulled away from critical strategic initiatives to the mundane tactical, from the C-suite on down, as everyone shifts their attention to putting their fingers in the dike. All of a sudden, it’s all about “making the numbers”. Sound familiar?
Again and again, I’ve seen this trigger a cascade of well-intentioned but misguided activities, because strategically, making the numbers is conceptually easy: sell more products and services… to more of your ideal clients… at higher prices… and lower costs. In practice, and in rescue mode, it’s more difficult because we instinctively default to behaviors we’ve been taught that deliver exactly the opposite effect.
This is probably what your train wreck looks like:
You launch (costly) discount programs to drive sales, introduce (costly) incentive programs to drive sales, doing business with any customer that has a pulse (even if it costs a bundle on the back end because they’re not an ideal customer). You announce mandates to departments to slash travel and training (which are investments in the future, not costs that make a big bottom line difference today) or you put hiring on hold (also an investment)… I’m sure you’ve been there too!
Here’s How One Manufacturer Got Back on Track
There is two massive mindset shift that will help you stay focused on executing your strategic objectives, and I now I teach them to my clients so that they can stay focused on executing their strategic plan knowing that their business is structured to reach their financial objectives. These shifts are simple in concept, but its taken me more than 20 years to perfect the mechanics that make it work.
Massive Mindset Shift #1:
When they learned to take their profit off the top, they found that spending came in line automatically, without drastic cost cuts. They found another huge benefit: they no longer had to chase bad business to make the top line, once they knew they had the bottom line looked after.
If you were a kid with an allowance or a part-time job and a piggy bank, you’ve already instinctively done this – you put a little away for that bike you were saving up for and spent the rest on whatever you want. You didn’t have to whine to Mom and Dad for a higher allowance because you’d spent it all, and you didn’t have to beg your boss for a raise.
In business, this strategy is a bit more involved to implement, in fact, it’s a bit like a chess game with specific moves you need to make on a regular basis, but it works like a charm, just like the piggy bank. When you know the profit is covered, you can stay strategic.
Massive Mindset Shift #2:
When they learned how to build a proactive plan, they were able to easily drive “good” revenues and identify “bad” costs. Taking profit isn’t enough in a fast-changing world, you need to have profit levers you can pull to keep sales and costs where they need to be.
Just like you can spot what needs attention on your shop floor in an instant once you have a daily management system and great visual management tools, it’s the same with the rest of the value chain. Most businesses consider their P&L to be their profit plan, but it’s reactive, not proactive, and knowing you’ve missed the numbers doesn’t tell you how to get them back on track. It’s a bit like the old days when we waited for a faulty part to come off the very end of the line and then had to go into panic mode to re-work or re-do it so that an order could be shipped out on-time and complete.
Here’s what the Sales-Focused visual management system in their proactive profit plan included, and how it kept revenues on track:
- Customer Profitability: We implemented an easy, color-coded way to see which of their biggest customers were more or less profitable, linked to the specific behaviors that were driving profitability. Interestingly, many of the reasons that customers were costly had nothing to do with the customer! Instead, we found many “self-inflicted wounds” that the company was responsible for as a result of some of the “train wreck” initiatives above. Almost all the profitability issues were within my client’s ability to change… so we got busy assigning accountabilities to “move the board”, and celebrated progress every step of the way. The beauty of this approach is that once employees know what they need to do, the positive impact cascades across the entire customer base, and it’s sustainable.
Outcome: Their customer profitability ratio went from 2:1 to 100:1 within 2 years.
- Share of Market: We added an easy, color-coded way to see which customers were buying certain product lines, which customers would never have a need for a specific product or service, and which ones were not yet buying a certain product or service, but should be. Once again, it was just a matter of “moving the board” by helping the sales team harvest low-hanging fruit. We also developed an “Ideal Customer Profile” and added a qualification checklist to the new business development process so that all new business was good business.
Outcome: They increased sales by 87% within 1 year with strong margins.
- Marketing Investment: We customized an easy way to see what level of sales and marketing effort was being invested in each customer, so that it could be better matched to the value of the customer vs the “good ol’ boy” approach of providing perks to customers just because “we’ve always done it that way”.
Outcome: Marketing costs were reduced by 11%… which didn’t sound like much until they realized that every 1% had a 16% multiplier effect on their bottom line.
Here’s what the two Cost-Focused visual management systems in their proactive profit plan included:
- Supplier Management: 30% of costs typically go unexamined. So just as you might have a visual management tool for leaders doing Gemba walks, we developed a tool for F&A, to better manage their suppliers by systematically requesting innovative ways to reduce costs. The focus was not to grind them for discounts but to reduce waste.
Outcome: They reduced supplier costs by 17%… and did I mention that multiplier effect?
- Unnecessary Costs-to-Serve Root Cause: 70% of waste in the value chain is invisible. Here, we’re talking about breakdowns in the customer experience that trigger a customer service issue that needs resolution. Like most companies, they’d slapped a lot of costly band-aids on issues to make it right for the customer, but they never took the time to look at the root cause and fix the issue for good. As a result, there was a lot of time, rework, and compensation that were taken for granted as a way of doing business – all relatively hidden costs. So we built a visual management system to track what type of issue was occurring, and isolated the most frequent ones for a deep dive into the root cause. They learned not just to evaluate tangible breakdowns (i.e. conventional product quality problems), but to address the other four factors within the customer experience that lead to needless cost.
Outcome: They reduced costs-to-serve by 14% in one year.
Bottom line: They quadrupled profitability just by shifting small everyday behaviors, and built a new culture around looking for waste across the entire value chain, where people were empowered to make better decisions and to visually see the positive impact of their efforts. Now, they have a way to stay out of the train wreck and stay focused on growing their business strategically.