Dec 162011

Understand the value chain and make more money as a result

For every product that is sold it has to pass through a series of steps before it is ready to be placed on the shelf of a store. Here is a typical list of the sort of stages that might be experienced:

  • Research and development
  • Raw materials purchase
  • Manufacturing
  • Sales & marketing
  • Finished product delivery
  • Wholesale provider
  • Retail sale
  • Delivery
  • Installation
  • After sales & support
  • Administration

Running a small business should be an ever-evolving process and expanding your horizons in relation to the value chain is one area that can bring real rewards.  At nearly every one of these stages value is added to the basic idea which means that there is an opportunity for making money.  Many small businesses are focused on only a single stage of the process but it could be worth considering expanding your influence up and down the chain to help increase profits.

Let me give you an example.  One of my clients runs a business applying powder coating to bare metal components for machinery (yes, he really does produce ‘widgets’!).  For the majority of the last 20 years that’s where he has focused.  But recently we have expanded up and down the value chain to help him improve his bottom line.

We have done this in to ways.  First, he has taken on a machinist and bought some basic machining tools.  In the past he would have outsourced the production of the parts to a machine shop.  This took time and meant that he was at the mercy of the tooling company; plus, he had to pay for the machine shop profit.  Now, he does this in house.  This allows him to have more control over the process and it means that percentage of the overall profit that would have gone elsewhere stays with him.

Once powder coated the widgets used to then be sent direct to the companies requesting them where they would assemble them.  However, it was realized that he could add value by doing some sub-assembly work for the customer, thus helping them and improving his profits at the same time.

Another benefit of increasing the capabilities of the company has been with advertising the business – the increased capability is attracting better results and more customers from his advertising.

The overall cost of achieving this move up and down the value chain has been negligible in relation to the improvement in his profit level and we’re now looking into other ways that we can make even more money and – at the same time – improve the service to his customers.