Each customer business function is a mix of costs and opportunities. Can you optimize the customer's mix—that is, can you enable it to more nearly deliver its optimal contribution to profits? If you can learn how to master the mix of customer costs in an industry's manufacturing process, for example, you can ensure your role as the industry's standard-bearer.
All customers allocate certain resources to each of their businesses and their functions. This is their asset base—actually, their cost base. Some of these resources are supplied internally. They consist of their own people and the capital they use. The rest of their resources come from outside—the products, services, and systems that are acquired from a variety of suppliers. Taken together, these internal and external resources form the customers' current operating "mix." In order to partner, you will have to help create a mix that can contribute higher profits.
All customer businesses operate with a mix. Some mixes are simply conglomerations of products. Others add services such as training or maintenance. Still others are composed of systems that, in turn, are composed of subsystems or, when amalgamated, contribute to networks. You must determine where you fit in every mix, what value you can add to it, and what the worth of that value can be to you and a customer.
The mix becomes your market. It is where you fit, where you operate, where you belong. It becomes the arena of your expertise. You must know how to make it produce profits in the most cost-effective manner, and you must know this better than anyone else. You must master the mix so well that you can position yourself with customers as their industry's "mixmaster."
Customer mixes usually lag behind the optimal mix. They frequently represent a sizable investment. They are also hidebound to a customer's learning curve. People have learned how to operate the current mix and have become familiar with its capabilities and its quirks. Training programs have been built around it. Cost and production schedules are established for it. Psychologically, it has become "the way we do things around here," a part of the gruel of corporate culture. It must be approached remedially but respectfully. You must not want to run your customers' businesses. You must want to partner with them so that they can run them better.
There are three main strategies for optimizing a customer's operating mix:
You can supplant one or more elements in the current mix. If the mix is labor-intensive, for example, you may be able to reduce labor content by substituting an automated process or eliminating an operation altogether. Or you may be able to combine multiple processes such as forecasting and inventory control, thereby eliminating overlapping and duplicated costs.
You can substitute your product or process for a competitive product or process that is part of the customer's current mix. The basis for your recommendation must be that improved financial benefits will accrue to the customer if the mix is altered—not simply that more advantageous performance benefits will be realized.
You can manage the mix internally as its systems integrator or facilities manager, working under a profit-improvement contract with a customer. Alternatively, you can manage the mix as its outsourcer.
The specific strategies for partnering by means of optimizing a customer's mix depends on the industry you serve. If you sell personal care products to supermarket and drug chains, you can penetrate by optimizing the mix of the number of facings that stores allocate to your products compared to competitors', the locations of your facings, and the type of displays. The proof of your optimization has to be quantified in financial benefits, such as profit improvement per square foot, overall improvement from personal care department contribution per store, or improved profit contribution from related item sales. Or you may propose to optimize a customer's mix by taking on the role of manager of the personal care product category.
If you sell financial services such as stocks and bonds, insurance, real estate investments, or money market funds to affluent individuals, you can optimize the mix of their portfolios in terms of growth potential, risk, and current payout. The proof of your optimization has to be quantified in dollar benefits, such as higher earnings, lowered taxes, or increased net worth.
Customers are preoccupied with growth. In business, you grow or die. Without growth, costs overtake you, new technologies outmode you, and competitors outmarket or outflank you. Customer managers take partners precisely to hedge against these risks.
All consultants discover that it is easier to reduce a customer's costs than to expand sales, and it is a good deal easier to quantify the resulting improvement to profits from cost reductions. But consultants quickly learn that no customer business exists to control costs. Customers are in business to make money, and the only way to make money is through sales. A consultant who is positioned as a cost reducer can be important to a customer. But a consultant who is positioned as a sales developer is vital.
New profits from increasing customers' volume at the same margin or increasing margins at the same volume are the stuff of which growth is made. As a result, customers can control more of a market and become the profit leader if not the leader in market share. There is nothing wrong with being low-cost producers. But if consultants are expert in cost reduction, they should learn how to translate their impact into its effect on revenues so that they can be positioned as growth contributors.
All cost reductions can be translated into their sales equivalent. A reduction in the cost contributed by unnecessary inventory expense can be interpreted as the equivalent of a corresponding increase in sales revenues. This is equally true for a decrease in the cost contributed by scrap from off-specification production, from rejects or rework, from failures to make same-day delivery, from late billing, and from late collection of accounts receivable. If these costs are reduced, their earnings equivalent is the dollars saved or avoided: How much profit on how many dollars' worth of how many units sold over how much time stated as "the equivalent in profits from the sale of 500,000 cartons each week—or 1,000 carloads every seventy-two hours—or ten additional aircraft operating each day at an 80 percent load factor."