Last week, we discussed how the “maximum capacity utilization” edict has potentially driven profits DOWN in several industries. We outlined four tactics that can help you move away from this philosophy:

• Improve communication between supply and demand groups
• Estimate demand based on data, rather than roll-ups of sales forecasts
• Consider total costs of your supply chain, including moving output to higher-demand areas
• Using software to optimize your business’ profitability

This week, we’ll focus on “improve communication between supply and demand groups.”

My company has been in the pricing business for more than 26 years. Although we started in the airline industry, in the past 13 years, we’ve developed specific disciplines and practices in the manufacturing, distribution and services industries.

During the recent economic downturn, an airline we know simultaneously lowered prices and reduced capacity, effectively lowering margins even faster than warranted. The groups that control pricing didn’t speak with the groups that control capacity! They were both acting in the best interests of their company, trying to preserve profitability in a down market. However, their joint actions actually worsened the situation. This represents a prime example of poor communication.

I’ve seen the same situation in manufacturing companies. While it’s sometimes tough to break down silo walls, it’s clearly a very worthwhile business exercise.

At the manufacturing company we referenced in last week’s blog, changes started with increased communication. The company created a strategic team focused on total margin, including people from production, marketing and sales. Simply seating the team in the same area – and building a cadence of communication – started to drive very productive behavior.

Over time, the team worked in a coordinated manner, selecting strategies and communicating the strategy effectively to the constituents in production, sales and marketing. As the strategies were implemented, the various teams had the confidence they were acting in concert, so actions counter to prevailing ‘local’ wisdom – e.g., lowering capacity utilization in a plant – were accepted.

As profitability increased, the team gained even more confidence and took bolder actions, creating a self-perpetuating cycle. As they were seen more in the industry as a leader, their competitors started to question their own actions, thinking twice if they won a deal on price.

Wouldn’t you like to be in this situation? It’s worth your time to reconsider the prevailing wisdom of “maximum capacity utilization” as the highest profit strategy for your company.

If you’re looking for guidance, let us know. Our experts stand ready to help.

 

Doug