Product & Customer Profitability Mysteries
In the data age, ignorance is your most expensive mistake.
If you're running a manufacturing company and can't pinpoint which products or customers are the most profitable, you're basically flying blind—and the costs of that ignorance are sky-high.
According to Alithya’s 2022 Manufacturing Trends Survey, 20.2% of manufacturers don’t know which products are driving their profits. Worse still, 22.3% are clueless about their most profitable customers. And here’s the kicker: these numbers are actually getting worse. Back in 2020, only 9% were unaware of their most profitable products and 8% of their most profitable customers. By 2021, the figures jumped to 12% and 16%, respectively. So, what’s happening?
We’re sliding in the wrong direction. If this doesn’t scream “We need more visibility into our data!” I don’t know what will.
Let’s break this down strategically and tactically to explore what these knowledge gaps mean for manufacturers and, more importantly, how they can turn things around.
The Strategic Side: Why Visibility Matters
You’ve heard the saying, "You can’t grow what you don’t know," and it's spot-on. Without knowing which products and customers are boosting your bottom line, how can you make smart decisions? The lack of visibility cripples your ability to:
Focus resources on winners – If you don’t know which products are making you the most money, you might end up investing in the wrong areas. It’s like putting rocket fuel in a tricycle.
Optimize pricing strategies – Without a clear picture of which customers are the most profitable, you might undercharge your VIPs or overcharge those teetering on the edge of churn. Not all customers or products are created equal. Segment your customers based on profitability, loyalty, and growth potential. Similarly, categorize your products by margin, market demand, and lifecycle stage. This strategic focus allows you to allocate resources where they'll have the most impact.
Plan for growth – Scaling operations requires investing in the right products and nurturing the right customer relationships. If you’re in the dark, you’re throwing darts blindfolded. Make data literacy a core competency across all departments. Encourage decision-making based on data rather than intuition. This cultural shift starts at the top—lead by example and champion data usage in meetings and strategic planning.
The Tactical Side: How to Turn It Around
So, what can you actually do about this? Here’s where manufacturers can start taking action:
Integrate MES and ERP Systems: Implement a Manufacturing Execution System (MES) like Critical Manufacturing and integrate it with your Enterprise Resource Planning (ERP) system, such as SAP ERP or Microsoft Dynamics 365. This integration combines real-time production data with transactional data, offering a comprehensive view of your operations. By merging real-time data (like machine performance, production rates, and quality metrics) with transactional data (such as sales orders and financials), you gain granular visibility into product costing. This allows you to accurately attribute costs to specific products and customers, revealing true profitability. For example, you can identify if a particular product has higher scrap rates or longer setup times that eat into margins.
Deploy Advanced Analytics Focused on Profitability: Utilize advanced analytics tools like Microsoft Power BI or Tableau, but go beyond basic dashboards. By focusing analytics on profitability rather than just forecasting demand, you pinpoint exactly where you're making or losing money. This enables targeted strategies to boost profits, such as adjusting pricing, renegotiating supplier contracts, or discontinuing unprofitable products. Implement specific analytics models that focus on:
Profitability Analysis: Break down profits by product line, customer segment, and even individual SKUs.
Cost-to-Serve Analysis: Understand the total cost involved in serving each customer, including hidden costs like returns, complaints, or customized services.
Margin Erosion Detection: Identify where margins are slipping due to factors like increased material costs or overtime labor.
Leverage Machine Learning to Uncover Hidden Patterns: Implement machine learning algorithms using platforms like Azure Machine Learning or TensorFlow to analyze vast amounts of production and sales data .Machine learning can reveal insights that aren't immediately apparent through traditional analysis. For example, you might find that products manufactured during a specific shift have lower defect rates, leading to higher profitability. By recognizing these patterns, you can standardize best practices—essentially templatizing successful processes to replicate them across operations. Focus on:
Pattern Recognition: Identify correlations between production parameters (like machine settings, shift times, or material batches) and product profitability.
Customer Behavior Analysis: Discover patterns that make certain customers more profitable, such as order frequency, product mix, or payment terms.
The Power of Understanding: Making Informed Decisions
In today's manufacturing landscape, data isn't just a byproduct; it's a strategic asset. The more you understand about your operations, the better decisions you can make. Ignorance might be bliss in some areas of life, but in manufacturing, it's a costly liability you can't afford.
Don't let your lack of insight be the anchor dragging you down. Embrace the tools and strategies that turn data into your most valuable asset. Transform ignorance into intelligence, and watch as informed decisions propel your business to new heights of profitability.
Remember, in manufacturing—as in life—knowledge isn't just power; it's profit. So let's turn the lights on and get to work.
References
Alithya - 2022 Manufacturing Trends: Navigating Change Through Technology: PDF Download
