Segmenting Leads to Increased Operating Income and Reduced Labor Costs for Company

September 2020


CLIENT SUCCESS STORY

Customer Challenge

A multi-billion dollar, publicly-traded entity’s $500 million DEF Division producing and distributing highly engineered products mainly in North America was struggling with serving its “blue chip” customers. The organization was concerned about losing business to off-shore competitors and reached out to BDO’s 80/20 team to increase their agility in the market.
 

BDO Solution

According to the company’s customer data, their top five major customers represented over 75% of their revenue, with hundreds of other clients representing the remaining 25%.  The company was handling after-market distribution and 90 different product lines, 30 of which accounted for over 95% of their revenue. The company was struggling with completing new product development (NPD) projects and on-time delivery was 85% overall.

BDO divided the DEF Division into three segments, each with their own leader (Large Customers, All Other Customers, and Distribution). Segmenting provided each area of the business with dedicated plant space and personnel, engineering, customer service, and sales. Sales and customer service were aligned to “overserve the best” while each segment developed its own P&L’s, clearly showing true profit levels associated with the high-volume portions of that segment.
 
The increased visibility allowed for clarity in pricing negotiations. Each segment developed a dedicated strategy based on type of business, marketplace positioning, etc. The previously consolidated 80/20 data was re-run by segment which revealed that the “All Other Customers” segment had ample opportunity to grow (100%+) with their top-tier customers. Prior to segmentation, these customers were overshadowed by the large customers. Also, the “Large Customer” segment data revealed that these customers were demanding a tremendous amount of product complexity that couldn’t be successfully transferred to off-shore competitors, thereby creating a value proposition within those relationships.
 

Results and Benefits

The new organizational plan focused each segment’s engineering staff on the five highest valued NPD projects. Product line simplification initiatives were launched within each segment involving all areas of the business with the over-riding goal of a 20% reduction in SKU’s in Year 1. Overall segmentation benefits included:
  • Doubling the operating income (from single digit to double digit)
  • Reduction in the labor cost per unit by 25%
  • Improved on-time delivery within the first three months by 25%
  • Protecting over $100 million of business by leveraging existing product complexity in major customer pricing negotiations
  • Simplifying the product line, so that NPD was more focused, and the business became more agile

Next Steps
Based on the successful results of segmenting and focusing efforts in the DEF Division, the company is implementing similar efforts in the remaining divisions. The organization is working on reducing labor costs and simplifying product lines in other parts of their business too.