This case study describes a business currently on track to increase year-on-year profits by more than 300%. 80/20 concepts were a significant factor in identifying the focus necessary to drive this turnaround.
This company has a turnover of $30m. It is a long-established wholesaler of its own product range and broker of third party products. A characteristic of this industry is high volume, low margin business. There are eight employees: the owner, a broker, three sales people, and three support people.
The central issue is that the company was under-performing. Whilst it was profitable, the profits were not in line with either the volume of business or the level of business risk. The assignment was to improve business profitability.
A study of the company from an 80/20 perspective identified the key issue was gross margin percentage. In a high volume, low margin business a single percentage point on gross margin can change the quantum of gross profits by 15 – 20%, which in turn falls straight to the bottom line. Thus, there is a huge multiplier effect. The 80/20 analysis revealed that of the eight employees only two were really critical to the turnaround in the company i.e. that would have a significant impact on the gross margin. That is not to say that the other six employees are not critical to the company – of course they are important, but they are not the drivers to change.
The first person we identified was the owner of the business. It is not necessarily always the case that the owner is the key driver, but in this case it was. The reason - he is very hands on with the business and sets the tone. A key function of this role is setting prices, and planning the week.
In this regard he was flying blind as far as reliable information, particularly feedback on how the previous week had gone. It is a feature of this industry that both inwards and outwards prices change constantly. Setting prices is not as simple as it might seem to the causal observer, and there are many permutations.
The second person was the broker, who sells parcels of product in the same way that a sharebroker might act. A client will have a need for certain products – through a network of contacts the broker secures the product and takes a margin. This role is also the eyes and ears of the company in the market.
This role provides market intelligence for pricing, and a wide range of the contacts to secure deals. This role can be differentiated from that of the sales people, who are primarily desk-bound order-takers working from an agreed pricing schedule. This role provided the best avenue to increase the level of business.
At the time of writing (August 04) the company is six months into its financial year. The analysis and implementation began shortly after the start of the financial year. The company is currently on budget, which will see it improve year-on-year profits by better than 300%. How can you also achieve these benefits?
To understand how these ideas might be used to dramatically improve profits in your own business please contact Geoff Vautier, principal of ‘The 80/20 Consulting Company’ Geoff Vautier