Supply Chain Management

Don’t get caught in the “profit contribution trap“

mSE Solutions

„Trust me, you should get rid of this customer project. Profit contribution is way too low and you’ll never be able to cover the fixed costs. Be smart, get out of that business, invest your money elsewhere.“

If you ever hear this advice from your management colleagues, don’t jump the gun. We have all seen products, businesses or customer projects that look really promising in the beginning. Planned profit contribution at 40 to 50 %, healthy customer, long term project, technical challenge within your standard performance range – no problem. It’s an easy decision, just do it.

Very often, however, you are in for a rude awakening when your controlling department issues their first figures. After a few months of real-life production, profits are nowhere near the targeted contribution. You lose money with every single unit going out the door. What happened?

Well, the problem might not be the product itself or the planning procedure. In most cases, defects in the actual process of the supply chain or outside factors, like exchange rate hikes or changes in transportation laws, play against you. Now what? Give up? Raise prices? Look for a different customer? Maybe not, if you fix your supply chain issues first and make sure you minimize your exposure to outside influences.

While you have no direct control over exchange rates, you can always react with several options like contractual adjustments, hedging etc. Also, changes in transportation laws, the most recent example of which was regarding air transportation of lithium batteries, can hardly be influenced directly. But there are certainly ways to prepare for the unexpected and put the burden on more than one shoulder.

The main task facing you will be to analyze your supply chain from a to z, end to end, on a global basis. Look closely at all processes and organizational structures starting from the customer side. Include vendors as well as your own operations. You will also need to call customers’ and sales teams’ forecasting procedures into question. Closely scrutinize stock levels along the value chain. Are you buying the material quantities necessary for low purchasing prices? Do you carry overstocks along the production line? Is the production plan set up without too many disruptions? Do you have unnecessary overtime hours for rush jobs? We all know that there are a lot of hidden profit killers. You need to uncover and fix them.

Key is to develop an innovative SCM strategy, transform existing processes and organizations, even if changes overstep the comfort zones of people involved. Transparency, feasibility and efficiency are important ingredients for sustainable success. Transform your supply chain into a transparent process with clear roles and decision-making responsibilities and don’t be afraid to share the processes openly with your customer. They need to be an integral part of the whole concept.

Although smart SCM concepts will not cure all your profit contribution problems, it will set the stage for running a successful business.

So your answer should be “NO“ to colleagues who tell you to get rid of the customer project or business. Be smart, get a professional partner who is able to support you all the way from concept to implementation. Talk to us, that´s what we are expert at.