Growth still the fastest way to profitability

Posted on 5 Apr 2017 by The Manufacturer

Tony Hague, managing director of PP Control & Automation, discusses how OEMs can use outsourcing as a strategy to grow sales and, importantly, profit.

Tony Hague, managing director, PP Control & Automation.
Tony Hague, managing director, PP Control & Automation.

All manufacturers aspire to protect and grow profitability – “profit” is and should never be considered a dirty word.

The ways in which machinery builders pursue profit growth is vastly different, depending on both their culture and the markets they serve. In essence, there are only two ways to achieve this ‘holy grail’ and the first one typically focuses inwardly on cost cutting.

This could be through reducing materials costs by supply chain leverage, improving internal efficiencies and processes thus optimising direct labour costs or perhaps reducing costs associated with fixed overheads. All ‘levers to pull’ when considering an impact on the bottom line.

However, many OEMs don’t always stop to think about the startling impact that revenue growth can have on increased profits, often because they’re too quick to accept the perceived barriers that exist to prevent significant growth.

Assuming the market potential is not the constraint, then this strategy can deliver results that even the best cost cutting exercise in the world could not provide.

Imagine a machine builder that produces 10 machines a month, each machine sells for £200,000 with an average profit of 10%. If that company could build and sell 12 machines a month – with the same overheads and direct costs – this would put £40,000 a month on to the bottom line.

Take a step back and that’s close to half a million pounds a year of additional profit and that’s not taking into consideration the improvement of % margin proportional increases.

Profitability- Strategic outsourcing can act as a catalyst for unlocking growth potential in a manufacturing organisation – image courtesy of PP Control & Automation.
Strategic outsourcing can be a growth catalyst – image courtesy of PP Control & Automation.

The maths is undeniable and when you speak to most OEMs and ask the question… “If you could build more machines faster and better – could you sell them?”

The answer, in our experience, is almost always ‘yes’. The market and growth potential is very rarely the constraint.

Strategic outsourcing

This is where strategic outsourcing can act as a catalyst for unlocking growth potential in a manufacturing organisation. Let’s consider the typical barriers that exist for growth:

  • People – numbers of skilled workers available, training requirements, the availability of new, young engineers, an ageing workforce and the associated loss of key tacit knowledge
  • Space – simply not enough physical space to build additional machines
  • Production Lead Times – all lean exercises have been done, obvious waste eliminated and still struggling to build machines any quicker

So, the next step is to consider changing your whole supply chain and production strategies. Review all processes that you currently undertake and determine which processes are genuinely core to your business, those processes in which you need to invest, develop and ultimately protect.

Now consider those processes that are non-value add, those processes that are not a core competence, those areas that probably cost you money instead of generating it. They may even create bottlenecks in your business.

Over the past six months, the firm has been steadily recruiting new members of staff across the business - image courtesy of PP Control & Automation.
Most OEMs could sell more machines if they had the capacity to make them – image courtesy of PP Control & Automation.

Imagine having strategic outsourcing partners that can provide you with solutions in these areas of non-core activity, partners that can carry out the processes better than you because it is “their” core competence and they have all the right investment and skills to do it better than you could ever do it?

These outsourcing partners don’t stop there. They can also develop the process, have an inbuilt desire to improve design and functionality and more often than not will help reduce future cost and improve product performance.

So, not only is the machine builder gaining back additional capacity, utilising their internal direct resource on true core value add activities, they will be able to assemble machines with greater speed, reducing production and sales lead times and improving productivity.

Meeting economic challenges

Machine builders in the UK are generally optimistic about the current and future trading conditions, albeit the ‘post-Brexit’ landscape is yet to be realised and there has been a couple of recent negative impacts that have adversely affected profits and confidence.

Rising costs, whether material prices driven by weak sterling or increasing employee costs driven by new living wage rules, pension regulations and the Apprentice Levy all have to be paid for. Strategic outsourcing can also provide a solution to easing these areas of pain:

  • Combined purchasing leverage – economies of scale
  • Creating a fixed cost of ownership – price stability
  • Minimise direct costs that are rising and reducing financial risk & exposure, especially in markets where demand can change quickly
  • Provides an extension to your own engineering, supply chain and production support capabilities – allows you to leverage off their knowledge and optimise your own fixed overhead costs in these areas.

So, we have now created a scenario of increased capacity, shorter lead times, greater production agility, reduced total cost of manufacture, increased sales revenue, a higher degree of fixed cost of ownership and an element of ‘de-risking’ if market conditions change. There are still more advantages to come.

Many don’t stop to think about the impact revenue growth can have on profitability – image courtesy of PP Control & Automation.
Many don’t stop to think about the impact revenue growth can have on profitability – image courtesy of PP Control & Automation.

What if that outsourcing partner could help develop your technology platforms, assist with design for manufacture, offer specific advice on product design or approvals required in new sales geographies, such as UL compliance for North America?

What if that outsourcing partner could connect you to other best in class suppliers, partners they work closely with that could further support your product design and performance to create a real and measurable advantage over your competitor? What impact could this have on your business?

It’s clear that strategic outsourcing, if done properly, offers an infinite amount of possibilities for machine builders who are prepared to question their own core capabilities and not just accept that because ‘we have always done it this way, it will always be the best way’.

Historical processes and emotional attachment have to be challenged, but for those that are prepared to do it, the rewards on offer are more than worthwhile.

PP Control & Automation is one of the world’s leading providers of strategic sub-contract manufacturing solutions to OEMs in a diverse range of industries, including machine tool, printing, packaging, food processing, scientific, semiconductor and medical equipment.