This is article is part of a series of monthly articles produced by Harbour Results for PMA’s MetalForming Business Edge e-newsletter. Click here to view the full collection of articles.

Are They Paying for Your Jersey?

Results of the recent Harbour Results 2021 Benchmarking Survey points to a new trend suggesting manufacturers are having a harder time making a profit. Though it began two years before the pandemic, today the return on capital employed for the industry average has fallen below the corresponding weighted average cost of capital. Driving up returns with profitable growth will require a sound strategy to compete successfully. But too often businesses develop a competitive strategy that is one-dimensional, which may produce some wins, but fails to deliver the profitability levels enjoyed by others in the industry. To illustrate the four dimensions of competitive positioning to drive greater profitability, let’s use a sports analogy

First: Are you pro material?

Competitive positioning begins with understanding what game you should be playing and whether or not you have what it takes for that game – are you pro material? In sports, an individual has to have the necessary physical attributes, skills and knowledge of the rules to even step onto the court or field. In contract manufacturing, this means having the right equipment for the opportunities, skillsets in the business to best use that equipment and an understanding of the market’s needs and requirements. For example, injection molding door panels or stamping quarter panels for cars requires equipment, skills and market knowledge that not all manufacturers possess. 

Unfortunately, many businesses read a book on strategy and stop with this single dimension to define their competitive direction. But similar to how not every tall kid who plays basketball becomes a superstar in the NBA, just having the right skills and equipment pointed at a market doesn’t produce profitable growth.

Second and Third: How do you perform on the field?

In sports, individuals that may be pro material get sorted out just from playing the game. Those that make it have the physical skills to excel and “their heads in the game.” In other words, a professional quarterback not only has the arm to throw and the legs to run but also understands the flow of the game, knowing who is going to be where to make split-second decisions on the best move to make.

Similarly, contract manufacturers get sorted out on the field, which is defined by two seemingly simple dimensions: time and materials – the next two dimensions of competitive positioning. For a manufacturer, this is the realm of operations management. And these two dimensions are important enough to explain further.

The materials dimension

Materials are always a significant factor in the cost of a manufactured good. In some cases, manufacturers can select or recommend materials for better performance or lower cost. But in other cases, materials are specified by a customer or the particulars of the application. Regardless of the constraints or freedoms, a manufacturer has to select a material based on price, that is not this dimension of competition. The competition really begins once the material is selected and the customer has an expectation for what they are willing to pay for that material. Even though people in purchasing and estimating departments talk about “dollars per pound,” that is NOT how operations should be measured. The materials dimension of competition is all about “pounds per dollar for materials sold.” The customer is willing to pay a certain amount per order in which a certain amount of material will be delivered. Now the question is, what quantity of material is required by the operations to deliver that order?

I can’t tell you how many meetings I’ve been in with a metal former manager who receives feedback on a quote and states, “The customer is lying.  We can’t buy the material for that price!” But what should be happening is the revelation that their competitor is winning because they figured out how to use less material in the process to make the same product! In metal forming, metals are a global commodity with global prices. If two companies are quoting on the same material, the price per pound is going to relatively the same for everyone. The difference in prices quoted is the amount of material wasted in their respective manufacturing processes.

The time dimension

When you get to the heart of it, contract manufacturers are selling time on their machines and time with their people. The variables of this dimension are the right combinations of machines versus labor and the costs and prices for each. This in itself can be an operations research problem to find the optimal combination to win the business. But once the business is awarded, it becomes the same game for every competitor; how many hours of the labor-machine combination will it take for the manufacturer to earn each dollar committed by the customer for filling the order. For operations management, it becomes a race against that time: minimizing wasted labor hours, minimizing set-up or change-over times, increasing up-time on the machines. In the end, you are competing on how many labor-machine hours are consumed to deliver the value-add portion of the revenues. So the perspective you want to take for operations is “hours per dollar,” or perhaps in high-volume manufacturing, “minutes per value-add dollar.”

Fourth: Are they paying for your jersey?

Managing pounds per materials sold dollar and machine and labor minutes per value-add dollar, or the similar metric Net Value Add dollars per full-time equivalent heads, will drive good operations. Manufacturing operations excelling on the “time and materials” playing field will generate new business. Similar to how the pro athlete who works hard at both body and mind of the game can enjoy a solid career. But there are countless athletes who have professional careers and never make “the big bucks.” The greatest financial rewards go to those athletes who have the licensing deals with advertisers and merchandisers, creating full stadiums and arenas with fans wearing their jerseys. These are the players with “star power” who bring a little something extra to the game.

Let me clarify, I am not telling contract manufacturers that your customers have to be fans of your company. In fact, I am not even saying that the customers even have to like you. What I am saying is that your business needs to rise up above just competing on the time and materials dimensions playing field to one where you deliver a profit-generating added value.    

This is the crux of a solid competitive strategy that drives not just growth but profitable growth. That dimension of value may have nothing to do with the equipment or operations or even the product that is delivered. It has everything to do with delivering a value proposition for which the customer is going to pay, eagerly or reluctantly or, delivering value in such a way that allows you to profit from it more than your competitors. 

Excelling in all four dimensions

Building and executing a good strategic plan addresses all four dimensions of competitive positioning. Knowing your core competencies and selecting markets where they matter is only the first step in competitive positioning. Driving operations to excel at managing both time and materials used to deliver a quality product or service on time is a critical factor in winning the game and not leaving money on the floor. It’s important to remember that real profitability happens when you rise above other equally competent competitors on the playing field to deliver something really special in a way that enables you to spend less to produce or get paid a premium. It’s similar to the star athletes who get paid for playing the game, just like other athletes, s but pocket a little extra money every time a fan pays for their jersey.

About the author: 

Jason C. Brewer, a director at Harbour Results, helps clients develop competitive business strategies based on sound studies of their existing and potential markets, aligning their go-to-market activities and driving their operations to meet or exceed benchmark performance. In addition to over a decade of experience consulting manufacturers to drive profitable growth, Jason has held management and executive positions in business development and strategy. He is a certified Strategic Management Professional (SMP) by the Association for Strategic Planning.