There are only four ways to increase margin dollars in a business:
- Increase price, difficult to do
- Increase volume, difficult to find more customers
- Reduce direct costs (Raw materials, carrier charges etc), difficult to do
- Change product mix in favour of products that deliver more margin, faster. Whilst difficult, it is a degree easier than 1 to 3 above.
This phase is all about manipulating your sales and work mix to further increase productivity and revenue. This means getting more control and influence over the type and volume (both total and relative to other types) of jobs you are working on, in each period.
Consider the possibility that high margin jobs are not always the most profitable for the business. Taking on new jobs which require an already constrained resource only puts more pressure on the system, cause surges and expediting, slowing down overall flow and output. Lower margin jobs which only require resources with free capacity or require little constraint capacity can move freely through the system with little disruption.
A business in Phase 9 understands the type and volume of work that best supports their profit at any given time. Their sales people ‘sell to the boards’ meaning they can look at the visual control boards and determine what they should and shouldn’t sell to maintain high delivery performance to the customers. Sales targets and strategies are set based on status records of the visual control boards. They know the patterns that tend to occur and the optimal sales mix that will fit with the expected demand and resource availability.
Businesses in Phase 9 not only understand the margins on job/ customers but also the throughput velocity. In other words, how fast a job/client generates money at the constraint. A ‘high margin’ job may not be better than a ‘low margin’ job if it uses significantly more constraint time. The key is “how much profit does this job or client generate per minute of constraint time?”. Sales strategies are set to target high throughput velocity rather than high margin jobs and clients.
Businesses in Phase 9 understand that low margin jobs have their place. Most businesses have a fixed labour cost, staff are paid the same whether they complete 10 jobs or 1000. If there is idle capacity, it may as well be filled with lower margin jobs to improve total business profit. Think of it like ‘auctioning the spare capacity’. Traditionally KPIs punish this approach by allocating overhead costs to product margins and then declaring these low margin jobs not profitable. Total business profits reduce as a result.
Building on the above logic, a Phase 9 business will have a hole-filler process. A system where an upcoming short term gap in demand is identified and filled. This is usually done with pricing or service incentives to customers who make an immediate decision to buy. This is done without compromising overall pricing or service terms.
Conversely there should also be offers in place to provide additional value to customers who are happy to pay a premium. This is on the basis that all goods and services have more than one price, for the same thing. Where there is added value beyond the standard service there is a structure to charge for it. Prices should be higher than the market standard and customers will be happy with the premium, even remarking that you seem too cheap. This could be an express service, more visibility, customised requirements, or a number of other things.
Finally, a Phase 9 business strive to create regular reliable throughput in excess of operating cash. Repeat business each week, month, or year is enough to cover the operating expense of the business guaranteeing a profit. From here they are free to pursue opportunities of growth, offer premium service options, and develop better processes and systems. Best of all they can pick and choose the customers and terms they will do business under. Businesses without this situation must divert time and effort to ensuring they can make enough sales to pay the bills, often leading to discounting and unfavourable commercial agreements.
EXAMPLES OF PHASE NINE
Below are some examples of how this phase is supported.
- Visual control boards provide feedback to sales people
- New measures and reports are constructed to provide information of resource availability and throughput velocity
- Sales terms and pricing is adjusted to incentivise different jobs under different conditions
- Sales KPIs and targets changes to incentives jobs/clients that maximise revenue rather than margin
- Sales people look at current operational state and actively change their focus to more appropriate prospects/job types
- Increase total revenue and profits
- Increased productivity/output
- Better cashflow
- Reduces stress on Owners, Managers, and Staff.
- Better brand value and recognition
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