Supply Chain Trends and Issues: Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  

- Oct. 31, 2013 -  

Supply Chain News: Mid-Market Margin Management

Understanding Where Profits Really Come from Critical in Increasingly Complex Supply Chain World

by SCDigest Editorial Staff  

When the late Steven Covey was releasing books about building corporate mission statements and the like, he counseled that none of that was possible unless a company was solidly profitable.

"No margin, no mission," he was fond of saying.

SCDigest Says:
Balanced scorecards are employed by only 31% of firms, activity-based costing by just 20% of firms, and cost-to-serve models and economic value added analysis by just 14% of respondents.

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That's true for all companies, but the challenge may be especially great for so-called "mid market" companies that lack the sophistication of the larger firms they are often competing with – and when it comes to margins, supply chain of course is at the heart of the action.

A new study from the National Center for the Middle Market, an organization affiliated with Ohio State University, looks at margin management in the middle tier, which it defines as under $1 billion in sales all the way down to $10 million. The research effort had the support of GE Capital and the Council of Supply Chain Management Professionals (CSCMP) as well.

It was also the subject of a well-attended breakout session at the CSCMP annual conference in Denver last week, moderate by Mike Regan of TranzAct Technologies.
The middle sector accounts for one-third of all US jobs and GDP, and is the source for most US GDP growth, the report notes.

The report defines margin management as the ability to understand where money is made and lost in a business. That sounds pretty straightforward, but sometimes even larger firms have trouble well understanding how the total bottom line got that way.

The report notes that "85% of middle market executives cite the ability to maintain margins as a somewhat to highly challenging issue. Quarter after quarter, margin maintenance is ranked as a top concern among middle market companies, second only to the cost of healthcare," in the survey the organization does every three months with its members.

There are a number of margin management approaches. Those include more basic ones such as contribution margin and contribution margin calculations to more advanced techniques such as cost-to-serve, activity-based costing, and supply chain segmentation techniques.

Key findings of the report include the following:

Middle market companies use margin maintenance metrics to address supply chain complexity: Globalization and general supply chain complexity have hit most mid-market companies as well as the large ones.

(Supply Chain Trends and Issues Article - Continued Below)



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That complexity can make it more difficult for effective margin management - and thus puts a premium on using more advanced techniques.

Interestingly, use of the more advanced tools tends to be greater among younger firms, publicly held firms, and firms for which private equity maintains a majority share. Older firms are generally less progressive in this area.

Margin maintenance metrics and tools are useful for managing margins: Almost all the tools included in the survey were ranked highly in terms of usefulness, but that often does translate into deployment.

For example, even though 73% of respondents said activity-based costing was useful, just 20% said they were using ABC. Similar ratings were generated for cost-to-serve, economic value-added, and balanced scorecard methods.

External constraints affect a firm's ability to manage margins more than internal constraints: In general, external constraints, such as the ability to raise prices, lower costs, forecast demand and others that are somewhat are largely outside the control of a company, are perceived as presenting greater hurdles to margin management than internal, more controllable factors.

Respondents indicated that internal constraints - such as access to technology and capital - generally do not hinder their ability to manage margins. Frankly, however, that seems somewhat contradictory to other data in the report. Companies may be over rating their abilities in this area.

Opportunities exist for middle market firms to embrace more sophisticated margin management tools: While just over half of middle market firms feel they have sufficient tools for margin analysis, the research shows that some of the highly effective margin management methods are used only sparingly.

Balanced scorecards are employed by only 31% of firms, activity-based costing by just 20% of firms (as noted above), and cost-to-serve models and economic value added analysis by just 14% of respondents.

Not surprisingly, firms that use more advanced tools are way more confident in their margin insights than those that use only more basic tools.

Because mid-market firms tend to be relatively fast growing versus larger firms, margin management might be even more important, the report notes, to help ensure that top line growth translates into a healthy bottom line.

But here there is a lot of variation, as shown in the chart below which illustrates which margin management tools are being used by what percent of mid-market companies.


Which Margin Management Tools are Mid-Martet Companies Using?



Source: National Center for the Middle Market

Naturally enough, what business sector a company is in impacts which tools it uses.

The report says that the usage of various margin metrics and tools varies based on where a company lies within the supply chain. Manufacturers are somewhat more likely to use basic tools such as cost per unit and functional cost. Given a sensitivity to inventory holdings, wholesalers are more likely to use cash-to-cash cycle.

Wholesalers are also more likely to use activity-based costing and balanced scorecard and to track profit by customer. Raw material suppliers appear progressive on contribution margin, profit by product by customer, and economic value add.

The report concludes by noting that "Findings from our focus group research indicated that those firms using methods like cost-to-serve modeling and balanced scorecard, among other advanced methods, believed that their use served as a source of competitive advantage when rivals failed to employ similar methods."

Why? Because understanding where a company's profits really come from can lead to better business strategy and investment decisions.

The report adds that the research "confirms that margin maintenance remains among the most pressing challenges for middle market companies."

Should Mid-Market Companies Use More Sophisticated Margin Management Tools? Let us know your thoughts at the Feedback section below.



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