CHEMICALS SUPPLY: MARLENE WILLIAMS, ANDERSON CHEMICAL CO., LITCHFIELD, MINN.
Sound business sense requires a review of new-business cost vs. return on investment. The balance sheet for new textile services would include costs of customer needs for equipment, level of service expertise, and frequency of service required to provide good-quality product and customer satisfaction. These costs should be balanced against the profits generated by anticipated product sales.
Other factors may enter into an unbalanced, but desirable equation. These would include anticipated increased future sales, entry into non-textile products offered by your company, transportation or delivery logistics, and numerous account-specific exceptions.
LINEN SUPPLY: STEPHEN MARCQ, GENERAL LINEN SERVICE, SOMERSWORTH, N.H.
I like to think of this as two separate questions, the “what” vs. the “where.” Does the account make sense on its own merits, and then does it make sense to send a truck there?
On the “what” side, consider the following:
- Profitability/pricing — Does this account fit into your overall growth strategy?
- Your target markets, and the account’s prominence in it. Name recognition can help your sales team’s ability to gain other business in that market segment.
- Are the delivery and billing parameters compatible with your company requirements? If they are so different that they affect your ability to provide good quality and service, you may want to avoid it. Better to not start what you know you can’t do well.
- If margins are low, are there other compelling reasons—name recognition, contribution to overhead, etc.—to do it? It can make sense to service accounts selectively that don’t make economic sense in and of themselves. Nothing occurs in a vacuum.
- Consider the competitive ramifications of taking or not taking the new business, i.e. strategy over profitability. You may not want it, but that may be outweighed by how much you may want your competitor to not get it.
On the “where” side, a common concern comes up when you are presented with an opportunity to service an account in a more distant area, or one you are not in. I like to consider the following:
- Estimated account revenue — The economics of traveling improve with account revenue, of course, but an unintended consideration is that you could become tied to it. Many companies would consider 10 $200 accounts to be better than one $2,000 account for this reason.
- Evaluate growth potential in the area. Use a modeling approach for a quick and dirty analysis of your growth potential there, by comparing the number of accounts and/or total revenue per capita for the potential area vs. an existing, better developed one. If you service 30 accounts in a similarly sized town, that should give you an indication of the potential in the one you are considering.
- Is there any connection between your existing business and this new business? There may be times when you have to service a location to keep an existing customer happy, and prevent any competitive intrusion.
There are definitely times when not serving a new account makes sense, but with new business so hard to come by, it’s better to look for creative ways to get it into the fold. Painful as it may be, if you know an account is just not going to be a good fit, don’t take the business and tell its principals why. Often, there are one or two things that are major concerns, and if the customer wants what you offer badly enough, it might be more willing to negotiate a better outcome.
UNIFORMS/WORKWEAR MANUFACTURING: STEVE KALLENBACH, AMERICAN DAWN, LOS ANGELES, CALIF.
There are basic and not-so-basic questions that need to be answered in the area of new business before the final sale. Companies need to decide if they are in a growth mode or a profit or maintenance mode.
Growth modes can drive sales with lower margins, as companies are willing to “buy” certain business to penetrate target markets. That being said, some companies may proactively decide to use low margin pricing in special targeted markets, while maintaining standard, more profitable pricing in other core markets.
Other key questions or criteria to settle when evaluating new, possibly marginally profitable business include:
- Is the product already part of your core offering or are you adding it to your line? If it’s an additional product, your merchandise cost will be higher (by percentage) until you reach critical mass.
- What is the customer’s quality/replacement expectation? Does it expect “first wash” perfect visual quality on every delivery, or is the market standard OK?
- Based on pricing, does the return on investment (ROI) meet your normal standard? Can you get enough turns to pay for the merchandise and all related costs, and still make a profit? You’d be surprised how some pricing programs will analyze if you put them through a life-cycle assessment.
- What is the contract length? Do you have enough time to “profitize” the account? Is the contract length the same as your other business, or shorter/longer?
- What are the payment terms, and what is the credit history of the account? You can write the largest account on the planet, but if it doesn’t pay its bills on time, you don’t make money and actually incur hidden costs (carrying its money).
- Does your plant need more volume in certain product(s) in order to make your operation more efficient? Let’s say you write a good-size account in non-standard new product. The account is great and pays its bill, and the price is decent, so you are making money. But the production and flow is not enough to run full loads, so you have hidden costs in special handling, inefficient loads, or even merchandise wear-out due to less-than-capacity mechanical action.
- Are the new-business logistics within range of your current business, and can the route handle it efficiently? For instance, you can pick up a high-priced $100 account with standard product, but it’s an hour from any stop. The two-hour turnaround to service this account actually costs you revenue in opportunity loss.
- Where is the competitor in this scenario? Does taking a piece of business at a lower price keep it out of the area? Does turning down a piece of business at a lower price send a signal to the market that you and your business are about sensible marketing? Does taking a piece of business at a lower price displace a competitor?
- Are you taking the entire account, or is this piece of business just a portion? Does this smaller piece of business provide you an opportunity to wedge into a competitor’s account?
- Will the account require normal maintenance or high maintenance, in terms of visitation, entertainment, service levels or other activities? All of these areas are generally overlooked cost drivers.
You should weigh these factors when going after any new business, much less new business with new products in new markets. This is all part of strategic marketing. Especially in new markets with new products, it is company leadership that needs to “run the numbers” to stay profitable.
Yes, there are times when it makes sense to buy business at lower prices, and other times when it’s best to turn and walk away.
HEALTHCARE LAUNDRY: SCOTT BEATON, KAISER PERMANENTE NORTHERN CALIFORNIA
Many textile service linen companies use the same basic criteria when evaluating a potential customer relationship. The relationship needs to be fiduciary in order to provide a sustainable valued service to the customer while making a fair profit for the provider. There are a number of key factors to consider when conducting a profitability evaluation for new business including:
Transportation Cost — Due to increasing transportation costs, perhaps the greatest factor to consider is the distance of the client from the processing plant. A service radius should be established with concentric circles emanating for the plant. Special pricing and exceptions can be made for customers that accept fewer deliveries per week and or agree to store additional linen to lessen the “windshield” time involved to service them.
Volume of Potential New Business — How does the potential client fit with your current production flow and product mix? If you are a large COG (customer-owned goods) laundry, it may not be feasible to service smaller accounts due to soil-sort configuration, tunnel load sizes, physical layout, and finishing-equipment capabilities.
Available Product/Linen Inventory — Whether rental or COG, an adequate agreed-upon par level needs to be purchased and maintained.
Production Scheduling — It is vital to consider whether your laundry’s current operation can handle the additional pounds without increasing the number of employees and/or hours of operation. How does it fit into the current schedule? Can it be processed by acquiring additional, more efficient equipment or will you need to hire and train additional labor?
Product Mix — Does the potential client have specialty products and linens that will require more expensive processing and handling? Customers may require that linens be folded and packaged in a particular way. Ensure that the equipment you have can process the linen to the customer’s expectations and needs.
Retention/Satisfaction of Current Customers — There’s nothing wrong with looking at ways to expand your business, but not at the expense of losing existing customers. It is much cheaper to retain customers than to constantly turn them over.
Make sure that you are proactive and maintain the customer service to which your current customer base has become accustomed. When considering expansion and growth, take a long, hard look at your plant’s current operations. Additional volume may allow you to make improvements in equipment and processing, and this could increase your productivity and reduce labor hours in the long term.