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SHAPING STRATEGY


Do You Measure These Risk Averting Numbers? Client Percent of Profit


MARK MEHLING, MANAGEMENT ADVISOR E


very business leader recog- nizes risk management. Entire industries close with shift-


ing technologies. Political elections can foreshadow influential budgeting changes, both positively and negatively. Legislation also is a relative unknown that can quickly affect clients. Some of these are beyond the abil-


ity of management to influence. But others can be tracked and managed inside the metalcasting facility. Tis article is about three of those.


Client Percent of Gross Client Percent of Gross measures


the risk of one or two clients becom- ing critical to the survival of the business. Hundreds of examples in other business environments show where this has been fatal. Huge retailers are well known for this trick. Tey tease the vendor into supply- ing huge amounts of goods, only to shift that production away when the vendor cannot continually reduce the price. Most suppliers go bankrupt when that one big customer suddenly leaves. Te metalcasting industry has similar examples.


Businesses that fail to adequately


diversify their client lists are routinely shuttered when a primary buyer shifts to another source. Remembering the “Loyalty Myth” (clients are only as loyal as you work to build constantly eroding loyalty), this shift could be for price, delivery or any number of reasons. It may even be beyond the control of the foundry. But the results are the same. I know metalcasters who rely on


a single client for 20% or more of their output. That isn’t necessarily wrong, as long as the plant can take a 20% revenue hit if the customer goes elsewhere. Tis is an area where a common


number for every plant does not exist. For most, a maximum of 10% should be the goal. Business size may dictate a different number, but when was the last time you actually measured it?


To really see the risk to long-term business health, consider the more advanced Client Percent of Profit. Tis is more indicative because the high- est contributor to gross is not always the highest contributor to profit, and vice versa. When you identify a high revenue, low margin customer/client, it’s a red flag. For an effortless, instantaneous


number, divide Client Percent of Gross by Client Percent of Profit. If all things are equal (and they usually aren’t), every client would be a “1.” Tis means a client with 8% of revenue also contributes 8% of profit. Te variance indicates greater relative margins when the computation is less than 1 (ex. Client Percent of Gross of 5% and Client Percent of Profit of 10% = .5) and lower relative margins when it is more than 1 (10% of revenue, 5% of profit = 2). (Tis ratio compares clients against each other. It will recognize “better” clients even if your margins are inadequate for survival. Margins should be tracked separately by client, as part of Client Grading to enhance the effec- tiveness of the Client Percent of Gross/ Client Percent of Profit ratio.) Tis is a computation that should bias your client grading. (See the March 2014 Shaping Strategy column). Tis ratio will help you quickly understand the biggest aren’t the best and the smallest aren’t the worst.


Market Percent of Gross Te last risk management tool we


will discuss is Market Percent of Gross. Tis is a measure of the economic risk based on the diversification of clients. For example, if a metalcaster had 80% of its output going to the wind energy sector, it probably either scrambled or shut down when this latest bubble burst. Te same can happen with 50% dedicated to the oil sector. When that economy slows, it historically comes to a quick and grinding halt. Can your business take a 50% hit and continue? Unless yours is a dedicated shop that doesn’t allow the option, diversifi- cation can save the business.


Merging Client Percent of Gross and Market Percent of Gross


If Client Percent of Gross and


Market Percent of Gross converge, it can be dangerous. If the foundry has 30% of its resources dedicated to a single client in one market area, the risk is doubled. Now, a shifting economy, changing tech- nologies or client financial issues line up to threaten the metalcast- er’s long-term health. If either of the variables had been diversified, risk is lowered. Every metalcaster will have


different risk aversion levels. If the business can take a 20% hit, then maybe 20% in one sector can be a livable situation. But moving to a more balanced mix, just like financial diversification with stocks, can soften the downs as well as help reduce the risks of chasing the highs. I recently spoke with an industry


leader who diversified into other areas that were “sisters” to his main business. His choice to diversify into international areas could soften the blow of a U.S.-only recession. Offer- ing new, refurbished and used equip- ment allowed him to be the go-to shop for anyone, regionally, nationally or internationally. Market Percent of Gross, Client


Percent of Gross and Client Percent of Profit are advanced assessments for leadership who have implement- ed a base dashboard and now want to gauge the risk of economics on the business.


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March 2015 MODERN CASTING | 73


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