How to Deal with Shrinking Profit Margins

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Maintaining profits during all phases of business is the most important in order to survive in a competitive market. In today’s scenario, competition is increasing by the day and the cost of manufacturing is touching the sky, putting the manufacturers in a tough spot. They cannot increase the cost price of the product because that would mean losing some of its customers. Furthermore, they cannot shrink the margins of the dealers as that would only propel the latter towards fellow competitors. “A dealer’s trade involves getting a minimum guaranteed margin. If even that is threatened, then the loyalty of the dealer towards that product or brand is at stake,” says Kunal Supnekar, director, Tara Relays. Hence, it is a big challenge to maintain margins for manufacturers without losing out on business—existent and potential.

By Saurabh Sharma

Wednesday, May 20, 2009: Inventory management

A proper management of the inventory is pivotal to maintaining costs. Although inventory management itself is a paradoxical term as the cost of stocking the huge inventory is very high and that eats into the margins. Although, at times, when the cost of raw material goes up, the inventory helps in maintaining costs. The price of copper, which keeps on fluctuating from Rs 175 per kg to Rs 450 per kg and then to Rs 250 per kg, causes fluctuation in the cost of manufacturing of components using copper as their raw material. Insel Rectifiers Ltd, which makes rectifiers, thyristors, silicon-diodes, etc, has to deal with this situation.

“We don’t stock huge amounts of raw material and finished goods. Whenever prices of raw materials go up rapidly, we hold our supplies in order to prevent losses because it is better not to sell than to sell at a loss,” says Naveen Goel, director, Insel. According to him, if the customer is an old and major client, then he uses his inven- tory of finished goods and raw material efficiently to fulfil the order. However, he clarifies that this is the last order at this price if the cost of the raw material remains high. “We have a fixed price list of the products which we give to the dealers.

It is up to the dealer how much margin he wants to make on the product. Our margin is constant—we don’t play with that,” adds Goel. Today, electronic components have zero per cent import duty and only excise has to be given, so if the cost of manufacturing becomes high, then importing is also a valid option to cut cost and maintain margins.

Brand is the name of the game

Every player has a different take on how to sustain himself in the market. A branded product speaks for itself. If you offer unmatched quality, after-sales service and market visibility, then even if the competitor is offering better mar­gins or your prices go up, the consumer will still keep on buying your product. There is requirement of a fixed budget to promote your product in the market in order to attain that level of visibility. Quality has no match and should not be compromised on.

“OEM players and other big buyers like Kirloskar cannot undermine the quality of the products because at the end of the day customers recognise only quality,” says Goel. A branded product ensures an easy way out of the competition. “A company with a strong brand name, even if it offers a lesser margin than companies with weak brand names, fares better in the market” says Rajnish Suri, head, sales and market­ing, Artheon.

Skipping the middle man

Sometimes, removing dealers from the supply chain can also help in cutting costs. L R Katrat, CEO, Katlax Enter­prises, says, “In today’s era of Internet and e-commerce, the role of the dealer is getting minimised. Dealers are needed only when small quantities for experi­mental purposes are required.” Replac­ing dealers with the Internet will help in better connectivity with end-consumers such as OEMs. Communication errors will also be reduced, which, sometimes cause problems in the supply chain. “Only dealers with transparency in busi­ness, technical and financial resources will survive as it is extremely easy to locate products with the help of search engines now,” adds Katrat. Strategically removing some channel partners from the supply chain can result in better efficiency and lesser costs.

Trimming perks/workforce

There are defensive strategies as well to meet desired costs. Due to the current culture of high salaries, people intend to expect more compensation from the employer, which causes an unnecessary increase in cost. Companies always have the option of cutting down the perks of its employees or laying off the extra work force. “Our strategy is very simple—hire when there is more business and lay off the employees which are no longer required,” says Suresh Gupta, general manager, Comcon Industries.

Voluminising

When margins start going down, the most common strategy employed by manufacturers is increasing the volume of sales, which compensates for the loss in margins. This requires giving more value-adds to customers like flexible payment terms, credit periods, payment collection schemes, delivery boys, etc. This also requires an increased budget for advertising, since that also helps in increasing the volume of the sales. “What is important in the whole scheme of things is for a substantial sale to finally materialise. In case of such a scenario the other USPs of the product come to the fore to help cover up for the lower margins by an overall higher sale,” says Supnekar. Increasing the volume of sales is an aggressive and efficient way to cover up margins.
Tactics that will Help

A proper management of the in­ventory is pivotal to maintaining costs Importing is a valid option to cut cost and maintain margins

A strong brand name and market visibility

Strategically removing some channel partners from the sup­ply chain can result in better efficiency and lesser costs
Cutting down the perks of em­ployees or laying off the extra/ under-performing workforce
Increasing the volume of sales is an aggressive and efficient way to cover up margins
Innovating new products with advanced features and technolo­gies
Manufacturing components in­digenously

Relocating the office to less ex­pensive areas

Innovation pays

The current market trend is towards new and more innovative products. Products which overshadow previ­ous models with better qualities and features always gain the attention of the market. These products attract higher margins than traditional prod­ucts and require less pushing in the market. “Innovation is the panacea for all margin-related problems,” says Abhay Pandey, partner, Amit Technovision.

Manufacturing indigenously

If resources permit, then manufactur­ing components indigenously can also help in cutting down costs. Although the import duty on products is zero per cent and their small size does not involve shipping costs, manufacturing in India still offers some advan­tages, provided the production levels and demand are good. “Importing is a highly professional activity and it requires competent manpower. Also, one has to be financially sound to withstand different risks associated with this mode of business,” says Katrat. The highly volatile price of the dollar is amongst one of the big risks of import.

Relocation

Relocating the office to less expensive areas can help in cutting down cost too. “Factors like low rent help. Various enterprises have shifted their offices to Gurgaon from Delhi and are now shift­ing to Manesar, Noida, in order to bring down costs,” says Gupta.

These are some of the strategies employed by manufacturers to moni­tor margins in this competitive market scenario. However, sometimes nothing works because of hard-to-please con­sumers and tough market conditions. “Currently, margins are not decided by manufacturers but by the buyers since the latter have a vast pool of choice. The best remedy is to work with margins that can keep you in business and forget about targeted profits,” says Katrat.

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

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