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Key Takeaway: When your machine shop is not performing at the level you need, it is time to take stock of where you are at. Here are some things you can do to help improve performance.
A rising tide raises all ships. That may be true in the world of sailing, but machine shops aren’t boats. And even in a thriving economy, some machine shops fail.
Likewise, in a bumpy economy, some machine shops flourish. Ask yourself, what are those leaders doing differently?
No matter how your machine shop is performing right now, it is always appropriate to take an objective look at where you are, and where you are headed. Then the task is to turn your sights ahead and assess your ability to get where you want to go.
In the sailing world, it is simply watching the telltales and trimming your sails.
When the economy stumbles, there are market opportunities that can be advantaged. You may be able to buy a competitor for less than you could during a good economy.
A strategic acquisition might make sense. But to do that, you need cash or leverage. And probably some luck.
Start at Your Bottom Line
The place to start is your bottom line. If your machine shop isn’t generating the types of profits you need, how you want it, it is time to look at the two key components that drive your profitability.
If you have production capacity, redouble your efforts to pull in new business. Sometimes a simple revenue increase can change the look on your face when you are staring at the bottom line.
Next, check the margins on each order, and check the overall margins for each customer. You need to rank your customers in terms of percent of revenue they provide and the percentage of margin they generate.
You need two lists because your customers will likely occur a different rung on each of those lists.
Those customers who rank at the bottom in terms of percentage of margins need to selectively be replaced. I call that your selective replacement strategy. That works for customers as well as non-performing employees.
You need to single the low-margin customers out in terms of priority. If your lowest-margin customer is also your largest revenue-producing customer, you may want to think twice before making them the number one target for selective replacement.
Remember, there are two ways to replace those customers. One is to find a new customer with better margins. Once you have that new customer firmly in place, it is time to have a conversation with the low-margin customer that you’ve targeted for replacement. Explain the need for a price increase and stick with it.
If they won’t take the price increase, thank them for doing business with you and part company. You may want to carefully leave the door open giving them the option to return at a higher price.
When parting company, it is always important to remind the customer what you bring to the table and what makes you different. Price isn’t everything. If it is for that customer, then you are better off finding a new customer to replace that one.
Remember, this is about improving profitability, and, like your shower, there are two knobs to turn. In the shower, you turn the hot water and the cold-water knob. You adjust each to get the temperature you want. With profits, you can turn the revenue knob and the cost control knob.
Since we’ve covered the revenue knob, now it is time to focus on cost control.
If you haven’t exhausted your negotiations with your suppliers, this is a good time to continue that quest. If you’ve done all you can with suppliers, you might need to cut your spending rate.
So, where do you start cutting?
If you played sports growing up, or you were in the school band, you know there is always a difference in performance levels. There is only one first-chair saxophone player in the orchestra. There is only one first-string quarterback.
They are there because of their performance level. Likewise, there are those who play on the junior varsity because their performance doesn’t warrant a spot on the varsity.
If you haven’t ranked your associates by their performance for their position, that is a must. I always ranked my employees as A, B, and C performers. I always looked at what I had to do to help a B performer become an A player and what was needed to help a C player become a B player.
I would also have very candid conversations with them about their performance, why I thought they were the grade of player I thought they were, and what would need to change to get them to the next level.
At first, if you haven’t had those types of conversations before, they can be a little uncomfortable. I found that when I started having conversations about being an A, B, or C player in the interview process, they quickly adapted to the system once they were on board.
You’ve always got to have a personnel plan. You should always anticipate who is unhappy and may leave and what you might do to keep them. You also need to have a plan and a system that says, fall below this performance level for this amount of time, and it is time for a performance improvement plan. If that doesn’t work, it is time to part company.
Why Are We Talking About A, B, and C Players?
What is your largest cost? For most companies, regardless of business type, the answer is labor. We all want to avoid the discussion of cutting people from the payroll. But when it’s your largest budget item, you must face that cutting even 15% from your payroll can significantly impact your bottom line. There aren’t many items that have the impact of payroll reductions.
If you’ve reached this point, hopefully, you’ve already done talent ranking in your organization to know who I, B, and C players are.
If you’ve covered revenue increases, and vendor negotiations, the next step is to cost-cutting. At one point in my business career, we had to cut the janitorial service to save money. When everyone would go home, I became the best-dressed janitor in Marin County California.
Still dressed in my suit, I’d empty the garbage, dust the desks, and vacuum the floors. I never wanted to get to the point where I’d have to cut people or wages. Because my selective replacement approach to customers worked, I didn’t have to cut people.
If you are at the point of cutting, your first move is to cut your C players—those who don’t add
enough value to the organization to cover their salaries. Depending on how bad things are, you look at cutting the low end of your B players next.
You should do everything you can to keep your A players. You’ll need to rely on them to help you when the pendulum swings back into growth mode. And, it will swing back, it always does.
When you cut people, you need to have candid conversations with the rest of your team. Be honest and transparent. People deserve that. And it will help you get the most from those who remain. Managing the culture and the company atmosphere is one of the most important things a leader does.
Cutting people can impact the amount of work you can complete. You may have to look at doing fewer projects. While you are cutting people, you need to look at changing or cutting projects.
Well-made cuts are often described as being surgical. When cutting people and projects, you need to be as surgical as possible. The lowest-value projects need to go. The projects with the least impact on your customer base need to go. It doesn’t have to be all doom and gloom. Your leadership is the biggest factor in how all of this turns out.
One of the advantages of having a purpose-built, CNC machine-tending robot is that there is no additional cost. You can run 24/7 with no labor costs. It certainly helps with controlling costs. It is the one place where cutting staff won’t impact the amount of work that can be completed.
Part two of this blog will be posted in two weeks. In the meantime, you may want to go back and read the 3 part series “Differentiating Your Machine Shop – Why Making Parts is No Longer Enough.” That series has some key takeaways that tie directly to this post.