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When sales wipe out profit

The year 2019 is drawing to a close and thus many players in the print industry are asking themselves what went well this year and what they should do differently in the future.
Apenberg & Partner has a suggestion: take a closer look at your sales.

That’s because in recent years we are ever more frequently encountering printing company owners who have this irrepressible urge to chase ever bigger sales without critically questioning the volume enough in qualitative terms.

We believe that this impulse stems from an era in which the printing companies earned good money with every order and more sales meant even more profit. Yet these days are long gone. The increasing competitive pressure and the oft-cited overcapacity in the market have led to a situation where more sales by no means guarantees bigger profits. In fact, the opposite is often the case.
In eight out of ten consulting projects over the past three years, we carried out detailed analysis and established that our client would be able to make a bigger profit if they discontinued sales that are not suited to their company. Adjusting the portfolio accordingly – by between five and ten per cent of the original sales figure – results in a dramatic improvement. In several cases, it made the difference between losses and a profitable year.

However, our print business consultants regularly encountered forceful resistance when we suggested such portfolio adjustments. This resistance falls into two categories: subjective emotions and real challenges. In the case of subjective emotions, we keep on hearing the same arguments, such as:

‘We would be offloading customers who contribute to our profit margin!’
or
‘We cannot reduce sales – the company would no longer be profitable!’

In our opinion, such statements are based on a failure of the companies to confront the real challenges. It may be a human reaction, but in business terms it is not productive!
This subjective perception stands in the face of the three following challenges:

Firstly, reliable data must be extracted from the company as a basis for sound analyses, because for every order you need robust data from the costing analysis to assess which orders have ‘gone well’ and which ones haven’t. More specifically, you must know the following parameters for every order:

  • Order number
  • Customer number/name
  • Product group
  • Sales generated, external services and material costs (giving the gross profit / DB1)
  • Itemised production costs
  • Additional administrative and sales and marketing costs

 

The company’s own production activity is often a critical aspect, because outdated hourly rates frequently distort the profit figure here. If your available data does not enable you to make reliable statements about the quality of individual orders, it is impossible for you to know which customers contribute to your profit or loss. The same applies to different product groups within your company. If this is the case for you, then you have defined the first important and large-scale project for 2020: bring your data infrastructure up to date to enable you to make reliable assessments.

The other two challenges arise after the data analysis and thus as a consequence of adjusting the portfolio:

On the one hand, a rethink is required from the sales team, because sales must now be assessed more critically and only ‘valuable’ sales come into consideration for achieving targets, which are correspondingly more challenging to secure. Powers of persuasion are required here in order to make it clear to all employees the important protective role played by the sales team on behalf of the entire company. We know of no company that does not achieve good results by protecting itself from bad sales and doing everything in its power to chase valuable sales. Conversely, there are only a small handful of companies who neglect this protective role and nonetheless get by over the long term.

On the other hand, it is always a considerable challenge when the extent of the portfolio adjustment has an impact on the size of the business. This is the case, for instance, when the resulting gross profit no longer sufficiently utilises the capacity of the business and the size of the business must be adapted accordingly.

Admittedly, both of these are no easy exercises, but that certainly is not an argument against adjusting the portfolio. On the contrary, the longer you delay before discontinuing damaging sales, the more extensive and serious the adjustment will ultimately (have to) be. In other words, while respecting the actual challenges involved is understandable, the resulting reluctance to implement change can often even be dangerous.

This is contrasted with the good news that a thorough analysis of order data automatically presents you with many of the key questions that you should be asking yourself anyway if you want to get your company in good strategic shape for the future.

So why not end 2019 with a professional analysis of your order data in preparation for 2020 and start the New Year reinvigorated with a clear focus on valuable sales.

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