Everyone in business knows that you cannot keep successfully trading with only yesterday’s offerings. Customers are always looking for more innovation and for better service. If you only ever have the same products on the shelves, your competition will get ahead. In a product market, you need to carefully consider how you choose what the ‘best next product’ would be. First, you should consider market presence; how attractive is this potential new product to both prospective new customers and existing ones? Secondly, you must consider how difficult the new product would be to make. How much capacity will it require? How difficult will it be to add to your current capabilities? In between these steps is, of course, all of the design and the design for the manufacturing processes.
In this article, we are going to talk about industries which have it tougher than most; we are talking about commodity products. The challenge with commodity products is that the market does not view them as particularly high value. They are often a component or sub-component that goes into another product/assembly, or it might be a component that is simply readily available for many suppliers. A good example of having it tougher than most, is an injection moulding company which demonstrates an interesting mix of the two. Injection moulding companies often manufacture components rather than a finished product and they are rarely viewed as high value in their own right. For example, they might make the seat of a bar stool but not the legs, or the bumper of a vehicle but not the whole front wing. So, suppliers of injection moulded parts face the challenge that there isn’t much value perceived in the component they are producing relative to the fully assembled product (the finished bar stool/vehicle). The injection moulding manufacturing process is relatively straightforward. Plastic granules have a long shelf life and are freely available, they are relatively easy to buy and store. The manufacturing process usually comprises of one machine where the injection moulding is pressed through the tool and the shaped component is produced. When running properly, these machines are easy to manage; when they are running the business is making money. There are not many stages of operations to manage, it’s fairly straightforward.
The challenge for injection moulding companies is the tool itself. This tool forms the shape of the finished product. Often, commodity products cost relatively little in terms of raw materials and sell for a relatively little selling price per part and therefore each product generates a fairly low margin. So, companies make real money when they sell commodity products in volume and make a little bit of margin on many, many items. This is fine in production, but if you are considering launching a new product you will most likely require a new tool. The tool is bespoke for the product and injection moulding tooling cannot be easily modified for a second product. If they are, they are usually no longer suitable for the first product. This is the difficulty with tooling of this type. What’s more, a new tool is expensive; a company could spend tens of thousands of pounds/euros/dollars to produce a new product. A product which may only sell for pennies or cents per part. So, if you are going to invest so much money in this new product, you would need to sell huge volumes before that cost is recouped and the business is making real money from the product launch.
All of this means that commodity products, especially those produced by injection moulding companies need to be extra careful when considering what product to launch next or which new business to go after. As a result, it’s usually the customers of injection moulding companies who come up with a demand for a new product – not the suppliers, it’s too risky.
So, as an injection moulding supplier in the commodity market, the challenge is how do you position yourself to be head and shoulders above your competition in an industry that doesn’t have a lot of margin and the products aren’t viewed as value adding from a customer’s point of view? Considering other organisations competing for this business should also be able to make and deliver this product to the customer, the bit that makes you stand out is how you solve the client’s supply problems better than anybody else.
Injection moulded parts tend to be produced to stock. They are also stocked by the customer as a raw material for whatever products they are producing or assembling. So, typically these supply chains will have ‘finished goods’ inventory in the injection moulding supplier’s warehouse, and there will be raw material inventory in the customer’s warehouse. The ‘problems’ to solve then, to get ahead of your competition should focus on the inventory, rather than the product itself. Customers want high availability of these injection moulded parts; they need them available for either production or direct sales. They make their own stocking decisions. If they are making those decisions well, they will have neither too much nor too little. Too much leads to cash tied up in inventory. Too little and they will stock out and cause themselves production and sales problems. In cases where it’s difficult to manage, and consumption and supply varies, customers will often find themselves with too many or too few of the needed SKUs. For the supplier, too many means that the customer will disappear for ages (while they slowly consume the volume) and not place any more orders for a while as they have over-ordered in the first place. Too few means that they have stocked out and they will be pressing for additional deliveries. But here is your opening. In identifying these customers who have evidence of overstocks and understocks, you can add to your commodity product, a service level offering to help the client manage their inventory better; freeing up cash where they’ve overstocked and ensuring availability where stockouts occur.
So, the first thing you need to do is build a Decisive Competitive Edge (DCE) to ensure customers have better inventory turns, fewer stockouts and better availability on lower levels of inventory. For advice and help building your DCE get in contact.
The next problem that could be solved, is around rapid prototyping. In essence a DCE solves a problem for the customer so in an industry where the process for launching new products is slow, the second DCE focuses on rapid prototyping – having the ability to develop and launch new products faster than your competition will give you the edge on new business. Let’s explore that a little more. Often, when a customer needs a new product, they will send the specification and drawings out to a number of potential suppliers to procure quotes and prototypes. In order to separate yourself from your competition, you must ensure that those prototypes are done fast enough that you are always in contention to win the business. The absolute minimum is to ensure that your samples are in the mix with everybody else’s. Furthermore, in some cases, the customer will do better with their own sales if you can provide them a rapid turnaround on the prototypes so that they can win subsequent business themselves.
So, build the capabilities, and the market and sales intelligence to be able to identify those customers who need prototypes quickly and make sure they know you are an organisation which can provide a rapid prototyping service. The product itself is almost irrelevant in this case, it’s all about the speed you can deliver. In those other cases, make sure you are always on-time delivering prototypes to potential new selling meetings. This is how you can stay ahead. If you want the answers on how you can shrink your lead-times quickly and always deliver on-time, get in touch.
Finally, you need to look at the capabilities you have in-house. Many injection moulding companies will go to third-party tool houses to manufacture the tooling for new products, and also for repairs, dressings and modifications to existing tools. This is because they don’t have the skills in house which is understandable; they are plastic specialists not metal tooling specialists. But if you look at it from a strategic point of view, the reason new products are difficult to launch if that it is often cost prohibitive. In order to make a part that sells for 50p you might need to invest in a tool that costs £50,000. You need to sell many, many parts to cover the cost of the tooling. However, the tooling price is a purchased price, so when you buy it you are buying a finished tool at a margin. If the tooling capability was brought in-house, the actual cost of launching a new tool, plus the ongoing operational costs for hiring those people and keeping them inside the building, is significantly lower than the cost you would pay to use an external company. Couple that with the fact that when capacity is in-house you don’t have to live with the supplier’s lead-times for responding to repairs, modifications, etc. This would significantly support the rapid prototyping offer. If you want to be a supplier that can seriously consider taking all the best new business, whether through a DCE or not, you should seriously consider taking tooling capabilities in-house under your control, and not purchased as a third-party supplied component.
If you want to grow your business, you will need new products (unless you can significantly increase the consumption of the end user, which isn’t within your sphere of control). So, the best way to make more sales is to have more products to sell to more customers. Most of these products will be new, and even if they are transferred from other organisations (i.e. you win the business from another company, it is likely the tooling will need modification). In which case, do the math! How much is spent to date on tooling costs, both newly produced, and on repairs and dressings. Compare that to the cost of setting up the equipment and skills in-house and only paying material costs to the outside world. You might be surprised at how short the payback period is.
So, there you have it! In commodity markets it probably makes sense from a meta-level that very little of the competitive edge has to do with the commodity product (that’s why it’s a commodity!) but rather around the service or capabilities around having those products and being able to produce them. While we have used injection moulding companies as an example, this is true for many commodity products – some may or may not have the added complexity of the injection moulding tooling. Build a service capability which means your customers have to choose you above the competition. Shrink your lead-times to win new business and bring external capabilities in-house as far as possible. These steps will ensure that you stand out to your customers. For further advice on how to implement these offers, don’t hesitate to get in touch. You can call us on 01234 834510 or send us an email to [email protected].
By Phil Snelgrove, Lauren Wiles