Balancing Capacity and Sales for Profitabilityby Michelle Bomberger | January 12, 2011
Our guest blog post comes from Julia Robinson, Managing Partner at Steller Solutions, a consultancy that partners with organizations to improve profitability, lower operating costs, and develop loyal customers.
What’s the link between sales, profitability targets and capacity planning? How do you grow your sales, optimize capacity and maintain the level of quality and service that your customers require? Let’s start by looking at profit, which is simply your sales revenue minus your costs. If you increase your sales, but your operating costs go up, your profits decrease. If you increase your sales, keep your operating costs low, but low quality and service result, the increased customer service costs will take a bite out of the profits and often result in less future orders. Understanding the connections between sales, operating costs, capacity, profits and the drivers to improve each of these factors is critical in making a plan to grow or profitably sustain your business.
Grow your sales to correspond to your capacity. If you’re looking at increasing your capacity, make sure that you’ve considered how you’ll generate the additional sales corresponding to that increased capacity. We’ve seen businesses acquire a bigger space, new equipment and recruit talent to provide key production capabilities. But if there’s not a plan for bringing in the sales to take advantage of that increased capacity capability, it’s just increased overhead; a fixed cost. And if there’s anything that will hurt your cash flow and bottom line, it’s high fixed costs. Some questions to ask yourself are: How much market share is out there for the taking? Do you know what makes you better than your competitors? Do you have an executable sales plan? Do all your sales people have the talents and training to be a top sales performer? Make sure that you’ve laid the groundwork for getting that additional business so you’ll be reaping the benefits of your increased capacity in profits.
Know your optimum capacity and the effect of quality. Another common mistake is assuming you know your optimum capacity. Typically businesses have an idea based on their existing operations what their ideal capacity is. But before you base your target business goals on that optimal capacity number you’ll want to ask a few questions. What effect does quality have on your capacity? Has the waste been cut out of your operational processes? Have you defined value in the eyes of your customers? Every time a mistake is made or things aren’t done right the first time at any step in your process, that translates into wasted material, labor and time, which results in decreased capacity. In our experience, businesses that have gone through the exercise of improving their quality and cutting the waste from their processes, their optimum capacity significantly increases – often by 50-100%. And by coupling improving quality with increased capacity they are able to retain current business and gain new business. These businesses can produce more in less space, which allows for opportunities of either staying in current facilities, instead of moving to larger facilities or reducing the amount of space needed, sometimes allowing businesses to reduce the number of building required, reducing the fixed costs of the business.
Leverage your optimized capacity, high quality and sales for increased profitability. By utilizing a multi-pronged approach of optimizing your capacity, focusing on quality and executing a sales plan to increase sales; you are in position to operate more profitably. You can leverage your optimized capacity by lowering your prices, having a higher profit margin, investing in innovation, research and development or increasing your flexibility with customers. Increased flexibility with customers can translate into options in lot sizes, model types, multiple features or colors. Consider your market and what sets you apart from your competitors in choosing how you will leverage your optimized capacity.
Keeping your organization focused on the goals of target sales, optimized capacity, high quality and service enables your business to maintain competitiveness and increase profitability.