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Executive Overview
Many management teams may know what they should do to improve their performance dramatically-not five or ten percent, but twenty-five, fifty or one hundred percent. However, like many individuals who know they should stop smoking, see a physician, start exercising, or begin dieting, the management team ignores, avoids, delays or simply acts contrary to what they already know they should do. Unfortunately, this contradiction appears to be more prevalent and common than anyone would care to admit.
A manufacturer of electronic components continued to perform at substandard levels of profit for five straight years. At one time this business was the flagship division of a larger corporation from which other, now more lucrative, businesses spawned. To compensate for the loss of product lines that spun off into new ventures, management grew the customer base. In time, a significant number of new customers were added. Unfortunately, as sales increased, profits declined. This trend was very gradual, however, and almost imperceptible over the years. Net profit continued to drop until the group president, frustrated by the negative trend, mandated that the business make whatever changes were needed in the next four months to achieve a better pretax profit.
When asked what the problem with the business was, almost every manager interviewed said, "We think we have too many of the wrong customers." They felt that the increase in customers was adding to indirect expense, but they could not verify that belief since the information reports didn't fully allocate the costs at the plant level. Some believed that efficiencies suffered because of the increased number of setups. Others suspected that material cost crept up because of the lower lot sizes and the special material that commanded premium prices. When asked if any attempts had been made in the past to address the issue, they said yes. Such efforts, however, quickly lost steam and managers succumbed to the belief that sales of any sort were a good thing.
Within weeks after launching a customer consolidation effort, it became apparent to the team that pruning the customer base was the right strategy to pursue, and that profit dollars could be tripled. The team, energized by the prospect of such dramatic improvements, implemented the needed changes and, in...