The term “margin” evokes a visceral response within manufacturing executives. Profit margins can make or break companies. Margins are key deliverables, yet sometimes managed as haphazardly as the break room coffee and as well understood as a Higgs Boson. “We’ve got to improve our margins” is about as actionable as “I’ve got to get healthier.” Clearly, a business needs to treat margin development as a science. Our industry lags some others when it comes to profit margins. There are aftermarket brands that won’t sell a thing for under 40 percent, while OEM suppliers might be satisfied with half of that. Keep one thing in mind about margins, though. A high percentage of nothing is still nothing. Destroying value to improve margins is a risk no company can afford.
First let’s start with some definitions. According to Investopedia, gross profit margin reflects the relationship between gross sales revenue and cost of goods sold, ignoring other variables that may have less to do with selling merchandise. Net profit margin takes into consideration the costs of taxes and interest payments, and it provides a more detailed view of financial health than gross profit margin. Today we are talking about gross profit margin not net profit margin or other business metrics. The two components of gross profit margin are cost of goods sold and price, and this discussion will focus more on price.
Powersports manufacturers are lumped in the Consumer Discretionary category by stock market analysts and in some ways a margin comparison with other companies in this category can be useful. CSImarket.com reports that the average gross profit margin for the consumer discretionary sector was 25.55 percent for Q3 of 2015. Even closer to home for powersports suppliers was the average automotive suppliers gross profit margin which was 17.57 percent for the same quarter. Now let’s look at ways to improve margins via price.
Develop value-added solutions: A piston ring is a commodity, but an engine is art. The more value is added to an assembly, the fewer the competitors and the higher the margin. “Shoot and ship” parts will always be mired in a price war, but complex assemblies can put a company in some rarified air. Having capabilities in specialty technologies can really pay off. Differentiation equals security.
Pass on costs openly as separate fees. This is normal practice in other markets, but in powersports very few costs are itemized during business transactions. We are accustomed to paying extra for everything from another gigabyte of mobile data to having the rental agency refill the gas tank on a rental car. However, for a supplier selling to an OEM adding fees is not so simple because all that is discussed in typical purchase agreements are piece price, tooling, and development with vague and unenforceable notes regarding deviations from the agreement. However, reasonable fees should be charged for engineering change orders including charges for obsolete inventory, re-work, overtime and the like. In theory fees such as these would not have to come from a budget owned by the buyer. Perhaps, for example, the Marketing Dept. could absorb the true cost of frequent product plan changes. Other costs that can be ethically forwarded include: Unique certifications for a particular customer, drops in volume from what was quoted, new technology requirements being forced on the supplier, changes to validation plans and specifications, etc. Obviously recouping these costs is much easier said than done, but always remember that it is easiest to ask for these provisions right up front at the time of the bid. Propose a low price but add more conditions. Then, consider the next suggestion…
Defer the OEM margins and generate aftermarket margins. So many suppliers get tied up in landing the OEM business that they ignore the opportunity to make money in the aftermarket. Perhaps define the tooling rights in such a way that the supplier can also sell the components in the aftermarket. If your company has no B2C sales channel, investigate online web portal sales in parallel to service parts sales to the OEM. Margins are higher in the aftermarket. A little chrome, adding a heating element or some LEDs and presto! Your company could be an aftermarket rock star. Or at least a front band.
Contract with remote employees, and investigate automated web-based tools: A remarkable diversity of services can be automated, web-based or outsourced. Outsourcing can be as much as 100 percent domestic if a company is so inclined. You already outsource products and services with every single supplier your company has so expand that thinking by hiring a specialist with a home office or deploying a web tool. I am a firm believer that success is often more about the people and tools than their location. Outsourcing can make all of the sense in the world and it could improve your company margins.
Educate: It’s a good idea to discuss with each employee exactly how they contribute to the company’s profitability. Bring one to a sales call every now and then so they can tell others. For example, design and manufacturing engineers of injection-molded parts may not understand how much elements like cycle time, process flow, and scrap rate affect the ability of the company to quote competitively and land new accounts. Drive a lean-principled continuous margin improvement philosophy throughout the company. Small improvements add up over a 12-month span.
More best practices: Use a COTS (catalog, off-the-shelf) part instead of a custom one. If your company purchases unrelated sub-components bundled together for the sake of ease, consider taking some of the items out of the bundle and quoting them to find lower-cost suppliers. A good example is purchasing the voltage regulator and starter solenoid as part of an engine package – these items can typically be sourced separately. Disassemble items for shipment to reduce freight costs. Design weight out to reduce raw materials costs. Get rid of conflict metals or highly-controlled minerals like some of the rare earth variety. Back out of your least-profitable accounts and products – the fact is, some customers might not be worth it and there is a healthy, but low, level of customer churn in every business.
We often get into powersports because of our passion for it, but we can’t stay in it unless we turn a profit. There is a way to increase company margins in 2016. Focus on this goal and watch everything from employee morale to revenue grow. Just don’t put cheap coffee in the break room. People never forget things like that.
G-Force Consulting provides supply chain solutions in lighting, powertrain, instrumentation and more to OEMs and everything from primary market research to OEM account management for suppliers. Powersports consultant Gary Gustafson is president of G-Force Consulting. Learn more on the web at www.gforceconsulting.com