Benchmarking and Profitability Analysis
Situation and Challenge
The owner of a mid-sized machine shop was concerned with business performance. The business had struggled through the economic downturn of 2008/2009, but had failed to regain strength in the ensuing years.
Management was feeling a squeeze on margins. The limited number of suppliers of specialty items increased prices leaving the company little room to negotiate. Meanwhile, customers were aggressively shopping products and driving prices down. The company had increased shop floor efficiency and saw limited room for additional improvement.
We were asked to benchmark the company to identify areas for improvement as well as provide recommendations on how the company could improve profitability.
We trended company performance, completed a benchmark study and analyzed profitability levers. We found that the company appeared to be run efficiently and had good liquidity. However, operating profits were well below industry standards due to depressed gross margins.
We isolated the impact of various factors affecting profitability: price, volume, labor efficiency, material costs and expenses. We demonstrated that small to moderate increases in sales volume, price and/or labor efficiency would raise the company’s margins to exceed industry norms.
We suggested that the company focus on increasing sales volume by hiring a salesperson or otherwise proactively soliciting the market. We also suggested selectively increasing prices as well as executing some latent plans for improved labor efficiency.
We also noted that the company was deploying two market strategies which challenged internal operations: a high volume/low margin strategy which required economies of scale and efficient operations and a niche strategy for specialty products which required highly skilled labor, advanced technology and excellent customer service.
We suggested that the company articulate its market strategy and develop a sales and marketing plan to execute its objectives.
As a result of our work, the company intensified it effort on increasing volume while continuing to serve its niche markets. The additional sales have improved margins and overall profitability. The company is now approaching parity with its industry peer group.