Is the wrong talent looking after your margin? Blog

An out-of-focus corridor with a red push bar door on the left.

In 2017 and 2018 the year on year growth in South Africa’s manufacturing production declined substantially. In 1994 manufacturing accounted for 20% of GDP. It now stands at 14%.

In February 2019, local utilisation of available manufacturing capacity was sitting at 80.8%, leaving 12.2% capacity unused.

In a sluggish economy, where demand is weak, margin management is a business imperative.

Manufacturing executives often think they know how well their company is managing margins, but they often fail to rigorously quantify internal and external factors that affect profitability:

1. Customer margins:

All customers are not created equal, especially when it comes to margins. Some analysts estimate that the top 20 percent of customers (by profitability) generate more than 120 percent of an organisation’s profits—while the bottom 20 percent account for more than 100 percent of company losses.

2. Channel margins:

Manufacturers can sell across a wide range of sales channels today, from conventional wholesalers, distributors and retailers to direct sales via the company or third-party websites. Effective margin management requires a thorough analysis of the cost structures for each channel, and their respective profit potentials.

3. Product margins:

Many middle market manufacturers fail to track margins by SKU, which leaves executives at these firms in the dark regarding which high-margin products to invest in—and which low- or no-margin products to discontinue. This lack of data not only damages profitability today, but limits growth tomorrow as capital and resources are directed at the wrong opportunities. Better understanding of variable and fixed costs at the product level helps managers make more informed decisions. Additionally, understanding buyer behaviours regarding strategic low-margin SKUs through deeper understanding of customer analysis is critical.

4. Hidden costs:

As a product moves to market, an assortment of hidden costs can eat away at margins. While these costs always have an impact on the bottom line, they are rarely linked to specific customers, channels and products, making them difficult to minimise or control.

Most manufacturers are also improving margins by improving operational efficiency in offices, factories and supply chains. High-performing processes require highly-skilled individuals but their ability to manage margins makes them a smart business investment.

Many middle market companies plateau because they outgrow their internal talent.

Operations improvements should also enhance agility and flexibility so an organisation can rapidly respond to new competitors, changing economic conditions and emerging opportunities. These fundamental changes in business models also require new talent—and new technologies. Paradoxically, sometimes the best way to increase margins is by subtraction. Executives need nuanced margin analyses that permit them to discontinue underperforming product lines or exit unprofitable markets, or to amend or cancel contracts with low-margin customers—freeing resources for higher-margin growth.

As South Africa’s manufacturers profits struggle to grow, is it time to relook who is looking after your margin management?

Although there are significant pressures on margins in manufacturing in South Africa, there are numerous winners in the manufacturing space—companies that manage to innovate on cost reductions and premium service enhancements to make great returns. Smart financial strategies are at the centre of most of these successful companies, providing focused and actionable insights, which help them fine-tune operations, and create opportunities to increase prices. As South Africa’s manufacturers profits struggle to grow, is it time to relook who is looking after your margin management?

Rowan De Klerk – CEO, South Africa & Group COO, Asia-Pacific

A highly strategic business professional with 25 years working as a Financial Director and Managing Director in multiple blue chip companies, both locally and globally. Highly experienced across financial & business strategy; sales & marketing; operations; systems design & implementation; management & board reporting; coaching & mentoring; investment appraisal; M & A activity & exit planning.

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