The rise of e-commerce has led to increased competition and significantly increased customer expectations, especially in the price of goods. Therefore profit margin becomes the key, and companies need to devise strategies for improving margins.
1. Customer Margins, Product Margins, & Channel Margins
An in-depth understanding of the customer base and the cost-to-serve them enables companies to target segments that maximize margins. Vertical and horizontal segmentation of customers and utilizing the Pareto Principle, or “80/20 Rule,” can provide a robust framework to achieve business objectives. CGN Global’s approach, using extensive market research, gives clients the ability to identify potential segments with opportunities for growth and the maximization of margins.
An underrated strategy is narrowing the scope of the business to eliminate low margin and non-profitable departments and goods. Tracking margins by SKU can reveal products that are posting unacceptably low-profit margins while taking up a considerable part of the operating costs. The investments can be re-channeled to high margin products. Narrowing the scope of the business in this manner will significantly increase profit margins.
Driven by Amazon’s success, more companies are removing intermediaries by adopting a direct-to-consumer strategy, which is shown to increase profits. More companies are embracing the omnichannel strategy that allows for seamless integration across all channels; traditional, e-commerce, and multi-channel strategies. Effective inventory management across each channel is imperative to ensuring product availability and customer retention.
2. Mergers & Acquisitions
Mergers and acquisitions can transform companies overnight by strategically re-positioning them to achieve domination in their sectors and outperform completion, through increased revenue and reduced costs. Improved customer service, economies of scale, and consolidation of assets are possible through well-managed merger and acquisition activities. Post-merger integration of operations of the two companies is critical to achieving the desired targets and outcomes. CGN Global has extensive experience in this area and can help clients achieve a significant reduction in supply chain costs by creating and optimizing network models for the parent and acquired firms.
3. Winning in the Aftermarket
Aftermarket sales and services are a high-margin business, and according to Harvard Business Review, 45% of the gross profits of companies come from the aftermarket, although it accounts for only 24% of revenue. According to research firm Aberdeen Group, aftermarket sales, and service amount to 8% of US annual gross domestic product at around $1 trillion. However, most companies fail to realize the full potential, due to 1) wrong forecasts, 2) high inventory carrying costs, and lower turns 3) in-efficient supply chains.
Adopting a service-based business model, by locking in customers with service agreements at the time of original purchase, will ensure that OEM’s can be the sole providers of parts and services for the machines. Using digital platforms will enable OEM’s to collect real-time data and plan better for parts and services. CGN Global helps clients become more profitable in the aftermarket by optimizing the supply chain through digital enablers, improving agility, and optimizing inventory positioning to enhance service levels.
4. End-To-End Supply Chain Planning & Control
End-To-End supply chain planning and visibility to the total cost of operation (TCO) enable companies to make decisions that have a positive impact on profit margins. Good forecasting practices combined with a robust S&OP process is critical to maintaining service levels while keeping the cost of raw materials at a minimum. Integrated S&OP provides co-ordination between inventory planning, manufacturing, and operations, as well as finance and strategy, thereby ensuring alignment of goals across the organization. Collaborative supply chain practices protect companies against market volatility while maintaining optimum service levels. Transportation optimization, combined with packaging cost optimizations, allows for reduced logistics costs. The rapid advancement of technological innovation has been fundamental in efforts to streamline the business. Digital overlay of the end-to-end supply chain enables companies to make better decisions to support dynamic planning, collaboration, and control.
5. Create a Lean, Agile Enterprise
Companies will have to do more for less to remain competitive and profitable. Eliminating waste and empowering employees to maintain the utmost quality standards ensures maximum delivery with minimum resources. Contrary to commonly held belief, lean thinking is not confined to shop floor activities alone but rather across all business functions within a company.
The one goal of all businesses is to churn out profit for investors. No investor will buy into the purposes of a business unless they result in a profitable investment. Furthermore, a company needs to make money to stay afloat and advance its agendas while achieving its goals. Therefore, even incremental increases in profit margins are worth working towards.