If you examine the customer list of most small and midsize manufacturers (SMMs) you will find that the 80/20 rule applies; that is, 80% of their sales are from 20% of their customers (sometimes just one or two customers).
But what if one of these big customers decides to force discounts to the point that the SMM cannot make a profit? Or if the customer is like Wal-Mart, which compares the SMM's price to a Chinese supplier and force it to either match the Chinese price or lose the business? Or if the customer suddenly decides to source the products from Asia instead of buying from the SMM? Or if the customer operates in a cyclical industry which, like housing, drops during a recession and business dries up for several years.
The answer to all of these problems is market diversification.
Diversification is a strategy that should be adopted by all SMMs, as markets, industries and customers adapt to globalization. But you must have a well-planned diversification strategy, or you will find that there are many paths to many new markets -- and some of them lead to dead-ends.
The problem with going down a path when you don’t know where you want to go is best explained by Alice’s encounter with the Cheshire Cat, when the path she has taken diverges into three separate paths.
"Alice asks: 'Would you tell me, please, which way I ought to go from here?'
'That depends a good deal on where you want to get to,' said the Cat.
'I don’t much care where…,' said Alice.
'Then it doesn’t matter which way you go,' said the Cat.
'--so long as I get SOMEWHERE,' Alice added as an explanation.
'Oh, you’re sure to do that,' said the Cat, 'if you only walk long enough.'"
The point is that you must know where you want to go before you start down a path.
Here are three examples of how a variety of manufacturers diversified and found new market niches.
Davis Tool in Hillsboro, Ore.: Ron Davis, CEO of Davis Tool, saw the handwriting on the wall, as commodity job-shop parts were increasingly being sourced from Asia. Davis realized that, “If customers have the time, they can get anything they want from China for less money."
So Davis decided to change the company strategy to offer quick turnaround on custom or low-volume jobs. He knew that many of his company's customers were operating on a just-in-time basis and could not live with the uncertainties of using foreign suppliers.
One of Davis Tool's customers is Lite Edge Inc., of Tualatin, Ore. John Erickson of Lite Edge says, "We operate on a just-in-time basis, and we frankly can’t live with the uncertainties of ordering overseas.”
To support the new strategy also required that Davis Tool do the following :
- Consolidate - Davis Tool consolidated its five different locations into one building and auctioned off some of the old equipment.
- Vertically integrate – Davis Tool offers machining, fabrication, nickel plating, anodizing, laser cutting tool design, Solid Works, Pro-Engineer, powder coating, painting, and engineering design from one location. This strategy allows it to offer very quick deliveries and to control most processes.
- Profile customers - Davis Tool worked to identify which customers most needed the new service offering. The best customers were those companies that were operating just in time, and needed high-quality and overnight service.
- Diversify into new markets – The strategy also included a conscious effort to diversify into more market niches and industries. Davis Tool sells to the high technology, military, medical, and aerospace industries, as well as the many market niches and applications within these industries.
- Cross train staff – At Davis Tool, specialists in one operation are cross-trained to complete other operations. For instance, a machinist is also trained in laser cutting of sheet metal. That gives company managers the ability to move people around and work in back-logged areas.
As a result of the new strategy, Davis Tool has reduced its flow time (average time a work order is open) from 40 days two years ago to 17 days today. As well, it has diversified into many new market niches and customers.
Nimet Industries, South Bend, Ind.: A job shop in that offers proprietary anodizing and nickel finishes, Nimet employs 75 operators in a 60,000-square-foot plant. Its primary strategies can be described as follows:
- Market diversification – Nimet has consciously tried to diversify into industries such as medical, dental, pharmaceutical, food processing, fluid power and electronics. Within these industries, they serve many market niches defined by processes and application. “The advantage for us is that when one industry segment is down it’s hardly a blip in our sales, Vice President Guy Ellis says. "We really try to diversify as much as we can to minimize the impact of business cycles on our company.”
- Geographic expansion – Most job shops focus on local markets and customers. Nimet, on the other hand, has expanded its market to the entire country. Very little of Nimet’s work comes from companies located close to its facility.
- Sales organization flexibility – Nimet uses a combination of independent reps and factory sales people to call on their customers.
- Customer profiling – Part of Nimet's sales strategy is a conscious effort to not sell a large percentage of their capacity to any one customer. Ellis says, "If it looks like a job will take too much of our capacity, we won’t quote it as competitively as some companies might. Anything above 20% of total sales, we really scrutinize to try and make sure it makes sense for us.” This is a very progressive strategy because most job shops depend on two or three customers for the majority of their business and rise and fall with these customers.
- Proprietary processes – Nimet has developed NiTuff, a PTFE (Teflon) impregnated hard anodize finish that is also available in dyed black. They also offer NiCoTef, which is a co-deposition of nickel and PTFE. Both are proprietary processes that give them a solid competitive advantage in the market place.
- Low volume – “We don’t do big parts. We largely work with small components for industrial equipment," Ellis says. "We don’t do architectural parts, for instance, and we don’t do high volume." Instead, Nimet has focused on market niches that are low volume of 100 to 500 pieces.
- Quick deliveries – From its 3,000 active customers Nimet gets orders that average 100 to 200 line items per day. They are able to average 3.5 days from the time an order is received until it is shipped.
DECC COMPANY INC. in Grand Rapids. Mich.: For many years the DECC Company was a contract manufacturer applying coatings almost exclusively for automotive components. Company CEO Fred Mellema and Sales and Marketing Coordinator Mike Michalak decided to focus on diversification as a means for growth. Whether pursuing business in industries as diverse as military or commercial laundry, the company found that it could pick and choose which markets it serves based on the near universal need for coatings.
The automotive sector still accounts for approximately 30% of the company’s current business, and Mellema says it is still the biggest driver of growth. However, DECC executives do not want to depend just on the auto industry, so they have embarked on a market diversification strategy that Mike Michalak calls “casting a wider net.”
The focal point of the strategy is the company website which provides enough information to generate hundreds of leads on new applications. On the site, prospective customers can ask what kind of coating could be applied to their products. If the lead turns into a request for quote, Mallema and Michalak begin to examine it as a potential new market niche.
For example, through the website, they discovered an application in the commercial laundry industry: rubber gloves and other plastics often get mixed into the laundry and melt to the interior of the dryer drum. This results in hours of costly downtime, as maintenance crews are forced to shut down an entire dryer to scrape the plastic from panels. A laundry company asked DECC if there was a coating that would prevent the plastics from sticking to the drum. DECC supplied a non-stick abrasion resistant coating that dramatically reduced downtime and decreased the drying cycle by up to 20% when compared to non-coated dryers.
After this success, Michalak learned of the Clean Show, an industry trade show that is specifically targeted to the laundry industry. They developed some specific literature, attended the show and began gathering leads. From this initial marketing effort, they connected with some of the OEMs who manufactured the commercial dryers and began providing their coating service to them directly. As a result, DECC now has an arrangement with one of the largest manufacturers of laundry systems in the world to be their exclusive supplier of coated dryer panels.
Executives project 2015 to be a record sales year in DECC’s 50-year history, with revenues topping $9 million.
The diversification strategy used by DECC is a great example of identifying a new application from a lead, quoting the application, successfully testing and applying the product, and then tailoring marketing needs to the specific customers in that particular niche.
Since 2008, the firm has grown from around 50 employees to about 85 people currently. Executives project 2015 to be a record sales year in DECC’s 50-year history, with revenues topping $9 million. Mellema said over the next three years, he is looking to experience 15% growth.
There are two objectives in adopting the strategy of diversification. The first is to put the company into a position of not allowing a few customers to dominate your business. The second objective is to find more customers and market niches for growth.