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Diversification As A Primary Strategy

Wed, 03/24/2010 - 6:04am
Mike Collins

A more hopeful scenario comes courtesy of SRC Holdings in Springfield, MO. When the company first started (following the recession of 1983), it was doing engine remanufacturing and had taken on $8.9 million of debt.

“When we were starting out in the 1980s, more than 75 percent of our labor hours were in the truck market,” says CEO Jack Slack. “We did some investigating and found out that the truck market has a recession every six years. So we had to ask ourselves what we’d do if we had a recession.

“We thought about what goes up in a down market,” he continues, “and we discovered that automobile parts go up, because people keep their cars longer and fix them. That’s how we got into the automotive aftermarket business. That kind of thinking became part of our culture and our way of doing business.”

Slack knew the more the company diversified, the safer it would be. SRC Holdings is now a mini-conglomerate with 26 businesses and 1,200 employees. They make automobile engines, refrigeration units, agricultural machinery, irrigation pumps, and much more.

These may seem like extreme examples, but it makes the point that in the new global economy SMMs must defend themselves and consciously avoid a concentration of customers that can put them out of business. Better to go on the hunt for new customers who will see the value of your price and products than to continue accepting losses. The answer to bad customers who control the majority of your sales is diversification.

To make this problem more understandable, evaluate your own large customers. Take a few minutes and print out a list of the largest ones controlling 80 percent of your sales. Profitability is one factor, but not the only one to consider. To make an overall judgment on each, answer the following questions with a “yes” or “no”:

  1. Is the customer profitable?
  2. Do they have potential for significant future revenues?
  3. Do they truly value what you do well?
  4. Are they a springboard to other like customers?
  5. Can you serve them better than competitors?
  6. Is this customer financially healthy?
  7. Do they pay their bills on time?

Mark the customers with mostly “yes” answers with a plus. These are the best customer profiles—the kinds of customers you need for future sales. The NAICS codes for these customer profiles will help you find more like them.

Mark the customers with mostly “no” answers with a minus. You and your company are entitled to a fair margin. And good customers (even tough ones) will recognize that you, too, are entitled to make a profit. All manufacturers should be working at ways to further reduce costs through new manufacturing methods; this is another way for you to improve margins. Those who will not let you make a reasonable margin, or who don’t really value you as a supplier for whatever reason, are probably not customers you will want long term.

You need to think about replacing these bad customers before they drive you into a bad financial position. After all, if this happens, you’ll find yourself forced to replace them. This is definitely an instance where being a little proactive goes a long way.

Mike Collins is the author of Saving American Manufacturing.

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