If you examine the customer list of most small and mid-size manufacturers (SMMs) you will find the 80/20 rule applies. In other words, 20% of their customers account for 80% of their sales volume. In fact, it is common for only 10% of the customers to account for most of the supplier manufacturer’s sales volume.
This is a dangerous situation for two reasons. First, if the large customer decides to offshore or give the business to a lower cost competitor, the company will be in jeopardy. Second, growth will be totally limited to the business that these customers allow the supplier.
Real security for manufacturers is to develop a diverse group of customers and a portfolio of market niches that will help the company to be able to “ride-out” cyclical nature of many industries and the fickle nature of many customers.
Diversification as a Strategy
A good example of diversification is SRC Holdings which is located in Springfield, Mo. When the company opened for business,following the recession of 1983, its area of expertise as engine remanufacturing. The company had taken on $8.9 million of debt.
”When we were starting out in the 1980s, more than 75% of our labor hours were in the truck market,” says CEO Jack Slack. “We did some investigating and found out that the truck market has a recession every six years. So we had to ask ourselves what we’d do if we had a recession.”
”We thought about what goes up in a down market,” he continues, “and we discovered that automobile parts go up, because people keep their cars longer and fix them. That’s how we got into the automotive aftermarket business. That kind of thinking became part of our culture and our way of doing business.”
Slack knew the more the company diversified, the safer it would be. SRC Holdings is now a mini-conglomerate with 26 businesses and 1,200 employees. They make automobile engines, refrigeration units, agricultural machinery, irrigation pumps, and much more.
SRC Holdings is not an unusual example. It makes the point that in the new global economy all manufacturers must defend themselves and consciously avoid a concentration of customers that can put them out of business. The answer to bad customers who control the majority of your sales is diversification.
Why can’t we just ask our sales reps to find new customers and markets?
Many manufacturers still think that it is the job of the sales organization to find new customers and markets. But, an audit I did in the 1990s showed that most sales reps don’t do this function and 90% of the manufacturers were unhappy with their sale coverage. Currently most sales reps are not going to make cold calls without a lead. Independent reps and distributor salesmen simply can’t afford to make these kinds of calls because they are only paid when they get an order.
The plan to define what kinds of customers and markets are the targets as well as a lead generation program to help find the prospects should be designed by the manufacturers. Trying to make the sales organization find new customers and market opportunities on their own is like trying to make a pig dance. The pig is not built to dance and when you try to make it dance it just gets mad.
This article will examine some practical approaches to finding new customers and market niches. They are based on insight, instinct, common sense and a good portion is frequently intuitive. You don’t have to use academic approaches like market segmentation to be successful. The following real-life examples will show you how other successful SMMs went about finding new customers and market niches and will prove that niche marketing does not have to be complicated to be highly effective.
Here are some approaches companies can follow.
Hiring Your First Outside Sales Manager
For many job shops who have always used inside sales people, the answer may be as simple as hiring their first outside sales manager.
The Plastics Group (TPG) is a high tech injection molding shop specializing in the development and manufacture of critical plastic products and components. The staff consists of a team of manufacturing professionals ranging from well-trained operators and assembly people, through expert molding and laboratory technicians to seasoned engineers having a wealth of experience with plastics and their applications.
In the first three years of the company, sales and margins were erratic and one large customer dominated the company. They did not have a focus in the marketplace and the large customer was always demanding changes that continuously eroded margins.
TPG management decided to take a totally different approach to the market. They decided to fire their largest customer and hire their first outside sales manager. They wanted to develop a way to find the right customers and markets that fit their core competencies, and decided to create a brief marketing plan. The marketing plan was very succinct (6 pages) and included the following:
- One page on the company profile
- One paragraph describing the marketing niche
- One page showing the sales goals and a four-year sales projection
- One page showing the “Criteria for Most Valuable Customer”
- One page describing the marketing strategy for finding new business and customers
- One page describing the sales force and potential channels of distribution
Once the customer criteria were established the sales manager developed a list of several hundred potential customers in Georgia. He called all prospects on the phone and most were sent mailers. After an account was qualified, a visit was arranged for personal contact and a verification of needs, usage, and potential. With this qualification process, they reduced the large list of prospects down to 12 companies with the best potential. All of these companies had personal visits from TPG management and the company gradually began to get sales contracts from them.
The company moved from a small financial loss on $1,100,000 in sales in the first year to a solid profit in the second year. Their marketing plan and new focus on specific types of customers began to payoff with new sales and solid growth. The company grew from 16 employees to 42 employees and to nearly $3 million in sales in 3 years.
Using Vertical Integration to Define Customers and Markets
Ron Davis, CEO of Davis Tool, also saw the handwriting on the wall as commodity job shop as customers began sourcing more and more parts from Asia. “If customers have the time, they can get anything they buy from us for less money in China," Davis explains.
Davis Tool decided to change their strategy to offering quick turnaround on custom or low volume jobs. Davis knew that many of their customers were operating on a just in time basis and could not live with the uncertainties of using foreign suppliers as long as the deliveries were quick.
Part of the new strategy was to profile their customers to find out which customers best fit the new service offering and where they could gain a competitive advantage with their offering. The best customers were those companies that were operating just in time and needed high quality and overnight service. One of their customers is Lite Edge Inc. of Tualatin,Ore. John Erickson of Lite Edge says: "We operate on a just in time basis and we frankly can’t live with the uncertainties of ordering overseas.”
To achieve this goal Davis had to vertically integrate his company. This required offering machining, fabrication, nickel plating, anodizing, laser cutting, tool design, Solid Works, Pro-Engineer, powder coating, painting, and engineering design from one location. This strategy allows them to offer very quick deliveries and gives them control of most processes. Davis also invested heavily in the latest and most efficient machine tools
The strategy also included a conscious effort to diversify into more market niches and industries. Davis Tool sells to the high technology, military, medical, and aerospace industries; as well as the many market niches and applications within these industries.
The result of the new strategy is that they have reduced their flow time (average time a work order is open) from 40 days ago to 17 days today. They are working 3 shifts, 5 days a week.
Using Proprietary Processes to Define Customers and Markets
Nimet Industries is a 65-person job shop that offers proprietary anodizing and electro-less nickel finishes. One of their primary strategies is to offer proprietary processes in finishing. Nimet has developed a family of NiTuff products: a PTFE (Teflon) impregnated dyed black hard anodize as well anodizing in clear, blue and red. They also offer NiCoTef, which is a co-deposition of nickel and PTFE. Both proprietary processes provide them a significant competitive advantage in the marketplace. They plan to continue the development of these special processes and expand their current twelve product lines.
Nimet has consciously tried to diversify into industries such as medical, dental pharmaceutical, food processing, fluid power, and electronics. Within these industries, there are many market niches defined by processes and application. Guy Ellis, vice president says, “The advantage for us is that when one industry segment is down it’s hardly a blip in our sales. We really try to diversify as much as we can to minimize the impact of business cycles on our company.”
As Nimet began to produce these PTFE impregnated finishes for other companies. Eventually they signed a license agreement with a company in Switzerland that was making fluid power components. They now have 5 licenses and provide their NiCotef finishes on bronze, steel, stainless, and other substrates besides aluminum. Nimet has also licensed a new technology from a company in the Netherlands. The new technology is a multi-color anodizing process that is a third proprietary process to offer their customers
Identifying an Emerging Market Niche
This is being able to identify new or emerging market niches. Back when I was the sale manager of a company who built palletizers, a new application emerged that demanded new high-speed methods and equipment to handle the cartons of copy paper with out damage. This special request was about handling Xerox type copy paper without damaging or marking the cartons on 24-hour a day converting lines.
I visited Nekoosa Paper Co., and found that they were installing a new German high-speed sheeter manufactured by E.C.H. Will of Hamburg, Germany. A sheeter is a huge production machine that converts large rolls of paper into sheets of photocopy paper. Will's new sheeter could run three times faster than equivalent American machines and I thought there would be opportunities for the new sheeters in many American paper companies with converting operations.
We designed a new variation of our standard heavy duty palletizer to connect to the new sheeters by adding a new "turntable" device that would gently turn the Xerox cases in either direction without touching the sides of the cases. This simple line extension gave us a unique competitive advantage, and we received an order for nine machines from a large paper company.
In researching further, I found that the copy paper segment of the paper industry was growing 10% to 15% a year and that many large paper companies had special converting lines and contracts to make copy paper. From several paper industry associations we acquired lists of all paper and pulp mills in the U.S. The total was less than 200 companies, and my marketing job was to find out which of these mills were installing new converter lines.
E.C.H. Will had already done a good job of examining the U.S. market and had targeted many paper mills as candidates for new lines. I had a good contact at Will, so we just followed them wherever they installed a sheeter. This niche strategy worked well for both E.C.H. Will and Columbia Machine. Between 1975 and 1984, 100 Will sheeters were installed in the U.S., and Columbia Machine received 99 of the palletizer orders for these new lines.
Entering a Market where Customers are Known
Manufacturer of sawmills, paper mills, concrete block plants and bottling plants are all known markets where all customers and prospects are well defined. Finding new customers in a new market that is very defined is much easier then the previous examples.
For instance if you have a product that may have applications in sawmills there are forest Industry trade directories that list about 3,000 sawmills in the U.S. The market for automated sawmill machines can be further sub-divided into a segment of 300 to 400 large sawmills. Since virtually all sawmill locations are known, it makes sense that the best method to find new prospects for sawmill equipment is to have direct sales reps stay in contact with each plant. In this case lead generation is not the primary method – or even the most cost-effective method – for finding new projects.
An example is the Black Machinery Co. with annual sales of more than $100 million. They could afford to hire a factory direct sales force. They used five salesmen in the Southeastern U.S. and five on the West Coast.
All sales people were assigned to geographic territories with a specific number of accounts to cover every year. This sales force coverage and the prospecting was so good that the company regularly was able to bid on more than 95% of all projects occurring in the United States. Finding the projects was not a problem. Their challenge was closing enough of them to make their forecast.
Finding new industrial markets and new customers seldom begins with sophisticated computer models and statistical techniques. In most cases, it’s a matter of experimentation, and trial and error with many customers and markets. A good portion of it is frequently intuitive and commonsense. Successful manufacturers start out with a large list of potential prospects that might be interested in buying. They gradually narrow their focus (reduce the number of prospects), by systematically eliminating prospects that don’t fit their customer and market profiles. If they are persistent in their sales prospecting, the focus eventually defines the right customers and markets.
These are just some of the practical methods used to find new customers and markets. The next issue will explain how to find new customers using your own internal information.
Mike Collins is the author of "Saving American Manufacturing" and the Growth Planning Handbook. He is also the President of MPC Management.
