The Case Study Crypt
Hidden treasures of management experience - hiding in plain sight!
'TARRYMAN MACHINERY' - Solving a key issue
Tarryman Machinery builds special purpose machinery for the plastics moulding industry, and is finding increasing competition and difficult cash flow issues. Founder James Thompson wants his sales people to sell harder the benefits of their products, while son Tony wants to increase gross profit by adding a range of imported over the counter tools from China.
The cash flow problems indicate a serious profit deficiency. That is not always the cause of cash problems, which sometimes reflect poor negotiation, payment and collection practices, but in this case with profits falling, it is almost certainly true. In any event, a company with eighteen staff, thirteen of them in the workshop could expect no less than $2M in sales, and a net profit of $200,000 to $240,000 in a very average performance year. With recent history of $89,000 and $67,000 over two years, the enterprise is in serious trouble.
In many respects, this organisation is displaying all the symptoms of denial and stagnation referred to in the book review for this month.
Cost and the customer
The competitive edge enjoyed by Tarryman in the early days derived from it s use of special purpose machine tools that enable it to make its standardised subassemblies more economically than other in the field. Despite James Thompson's assertions to the contrary, Tarryman was able to be successful because it was a low cost supplier. It did produce good quality products, but this is really a 'hygiene' factor - clients would not have bought from Tarryman unless the quality was good.
There is no doubt clients would have chosen Tarryman back then because they could be sure of getting acceptable quality from Tarryman, and at the most competitive price. Tales of customers being dealt with badly by competitors are almost invariably misleading. They are standard fare for an organisation in denial - one which cannot contemplate that it needs to change, and change radically.
Others in the market have become successful, having started as copy-cats by reverse engineering many of Tarryman's special sub-assemblies. That these competitors remain strong is attested by the continued references to them by customers, and the consistent loss of business to these competitors. We can conclude that customers still demand the benefits of these items based on standard sub-assemblies, but find that others offer a satisfactory source at better prices.
So Tarryman has to reduce its cost base for all those standard subassemblies they rely on. In this case, the change has to be dramatic, and long lasting.
Tarryman had begun by offering special purpose items that no-else could offer. Now they are seeing a demand for completely custom built items that cannot use their standardised sub-assemblies. This indicates that Tarryman is competitively priced when it comes to specific engineering projects for individual customers. Competitively priced, but unprofitable.
In common with just about every small business, the full cost of this kind of special purpose product is not recognised. Standard small business accounting procedures fail at this point. More complex techniques are required, like The Red Zebra 'Full Value pricing'. The practical effect is that Tarryman is subsidising the cost of its specially engineered sales with revenue from its declining 'standardised sub-assemblies' sales. Ultimately, this leads to destruction of the whole enterprise.
Pricing up its special design projects is key to the survival of the company.
What to do?
James has resisted all the pressures to implement new technology in the workshop. Evidence seen in competitors' successes demonstrates that new technology offers the cost relief Tarryman so desperately needs. In fact, CNC(computer-numerically-controlled) machining provides speed and flexibility at low cost, as others have discovered. It is time to investigate what machine will best suit the company's needs, and how it can be financed.
Armed with such a reduction in its cost base, a fundamental shift in pricing strategy will see these benefits translated into lower prices for the original items that have been overpriced for too long. The flexibility conferred by these new machining techniques will also translate into faster, more flexible deliveries. Tarryman can expect to see its sales efforts succeed at last, after a long period of rationalising failure to maintain its position of pre-eminence in an industry it created.
Identifying the full costs of the special purpose engineering projects, and reflecting them in pricing may lead to loss of that work. More likely, it will see some reduction in that work as others are more successful from time to time. This confers three benefits on Tarryman.
First, it allows Tarryman to focus more keenly on its core business,
and where its underlying skills have been developed and honed - that is, where its relative competitive
advantage is strongest.
Second, it allows Tarryman to profit form the engineering work it does continue to attract, eliminating the drain it has been on profits generated elsewhere.
Third, it will complicate business for those competitors who do attract more of the complex jobs in future. If played well, this card can be of great benefit to Tarryman by shifting the engineering cost burden to others with less sophisticated pricing mechanisms, who will, in turn, repeat the mistakes that originally hurt Tarryman.
And the standard tools from China?
There is no evidence that Tarryman has ever developed the skills needed to be a trader, or has a showroom that suits over the counter sales, or has a sales organisation that can generate OTC (over the counter) sales. Its sales rep can profitably cover the territory, as long as the sales value is high per customer. This is achieved with the core business at Tarryman, but is typically not the case with OTC sales.
The most likely origin for this idea is the desire of Thompson the Younger (Tony) to stamp his own mark on the business. Until now, James has resisted the re-equipping program otherwise advocated by Tony. If James would not allow Tony any influence on the core business he (James) had founded, Tony simply found another way of boosting gross profit which did not challenge James' long time 'baby'.
As a business strategy it simply misses the underlying problems. Following this path just makes a bad situation that much worse.
Can father and son agree?
A big part of this issue for Tarryman is that James and Tony are not making progress on debating the issues, and so they are not coming to the desperately needed decisions.
Not much is likely to change here, without third party intervention. James and Tony may find help in any one of a number of places - their accountant, lawyer, trusted friend, business advisor. We can only hope that the third party they choose is skilled at mediation, and ensures that a sound decision is reached - one they both actively support.
* This case study and its solution are based on issues and solutions found or provided by McNicol Williams in typical cases. All the characters and situations described are entirely fictional, and any similarity to any person, living or dead, is entirely coincidental. This advice is general, and should not be relied on in any specific situation without a full consultation.
© Copyright 2012-2016 - Hallmark Crest Pty Ltd trading as McNicol Williams Management & Marketing Services. All Rights Reserved.
© 2012-2016 - Hallmark Crest Pty Ltd
trading as McNicol Williams
Management & Marketing Services.
All Rights Reserved.