Q: About 20% of my company's business comes from new customers, and 80% is from repeat orders. We are a manufacturer of steel fabricating machines, and I worry that our ratios need to be closer, perhaps 60-40, so we're not so dependent on existing customers. Are there guidelines for manufacturing ratios?
---- J.D., St. Louis
A: Your worries are probably well founded. Experts say that 20% new business is too low to sustain a manufacturer, unless you have a bullet-proof technology and you're in an industry with very high barriers to entry for potential competitors. As a rule, says Bob Loderstedt, president and CEO of the New Jersey Manufacturing Extension Program, healthy manufacturing companies strive for at least a 40-60 ratio of new customers to repeat orders.
According to data from the benchmarking database of the Michigan Manufacturing Technology Center (MMTC), the top 10% of manufacturers have at least 60% new customers, and at most 40% repeat. The top 25% of companies surveyed by the MMTC in 1999-2000 had a 40-60 ratio, and the top 50% had 25% new and, at most, 75% repeat orders. The survey showed "a moderate correlation between growth, profitability, and the proportion of sales to customers not served three years earlier," says Dan Luria of the MMTC.
While your cost of sale is lower for existing clients, and in theory your company achieves a higher margin by concentrating its sales efforts there, you can quickly become too dependent on established customers and put your company at risk. "There are too many threats when you have a ratio of old customers as high as 80%," Loderstedt says. "Contacts at your existing client companies change, things happen that put you out of favor, competitors improve and tend to infiltrate your accounts."
Your competitors may be offering lower prices, warranties on their equipment, and technical support that you simply can't match, for instance. Or your clients may consolidate their operations or outsource some of their manufacturing functions, lowering the demand for your product.
LEAN AND MEAN. Shaking the cobwebs off your salesforce and putting them out on the street to dig up new business can have many unanticipated benefits for your company. You may have been focused for years on two or three market segments, for instance, while ignoring new applications and technological innovations that have occurred in other industries. Aiming for a broader client base will increase your company's market intelligence, product innovation, and quality of service, and at the same time it will turn up the pressure on your competitors.
For the long term, expecting a large majority of your business to come from repeat customers is especially risky, Loderstedt says. The concept of "lean manufacturing" -- reducing waste in the manufacturing process so that companies function more efficiently -- is taking hold among the 381,000 small manufacturers across the country. Companies that employ lean-manufacturing techniques and principles reduce their utilization of existing machinery, so you can expect their order volume to drop over the next several years. "Where you used to sell new machines every 8 or 10 years, if your customers are moving in the direction of lean manufacturing, they may not be buying new equipment for 10 to 20 years," according to Loderstedt.
Before you start chasing new business, make sure your company is geared up for expansion and has the manufacturing capabilities and distribution channels to handle orders for new clients. Loderstedt recommends that your management team do some strategic planning aimed at ensuring the company's health over the next decade. Brainstorm some ways to turn that 20-80 ratio around -- and bring in some outside consulting help if you find that you need it.
The U.S. Commerce Dept.'s National Institute of Standards & Technology sponsors a national network of manufacturing consultants who provide technical assistance and training to small manufacturers. For more information about the Manufacturing Extension Partnership, and to find an office near you, check out NIST's Web site -- www.mep.nist.gov.