Breaking Up is Hard to Do Print E-mail
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Written by Susan Mucha   
Thursday, 28 July 2011 15:35

Why are bad customers so hard for EMS companies to shed?

When implementing operational improvements, most electronics manufacturing services companies focus on optimizing processes on the production floor, reducing inventory turns or other key metrics. One area that often doesn’t get enough continuous improvement focus is customer base composition. Most EMS companies have a few customers that either don’t fit their business model or are so out of control in terms of forecasting or receivables that they cost more than they bring in.

Why do these customers exist? Three reasons. First, most customers don’t become bad customers overnight. Typically, their attractiveness diminishes over time due to strategy changes in their sourcing patterns, staff changes or financial difficulties. Second, downturns followed by component availability challenges on the scale we’ve seen in the past year tend to mask the process of a good customer becoming a bad customer because all projects are facing demand volatility and asking for favors. Finally, EMS companies are scared. The recession hit hard, and there is fear that de-booking customers today may take away needed revenue in the event of continuing market softness.

The fallacy is that bad customers often consume program management, procurement and operations time that could be better used on customers with the potential to grow. In some cases, opportunities for growth are missed because a bad customer is occupying too much program management mindshare. Plus, a program that ships dollars with every board makes low margins even smaller.

So, should you rush to de-book your bad customers all at once? The better solution is setting up a continuing process that helps better qualify both good and bad customers, and developing an account growth planning model. [Ed.: For more on this, see Mucha’s book.] The rationale is that when program managers analyze and develop roadmaps for each account, they will have a baseline with which to measure customer quality.

A good account growth plan doesn’t have to be wordy, but at a minimum should include:

  • List of the customer core team.
  • Current business description.
  • Core value proposition analysis – why does this company need your company?
  • Service enhancement needs – what do they need that you are currently selling them?
  • Growth opportunities – other divisions or products that should be pursued.
  • Competitive issues – who else do they source to?
  • Revenue/profitability trends.
  • Near-term goals.
  • Strategic goals.
  • Overall account assessment.

Develop an assessment for each customer that can be reviewed quarterly to analyze trends in the account. In some cases, part of this plan may be shared with the customer. In other cases, it may be used internally. Management can also review the plans in making capital equipment or staffing decisions.

A second area that helps separate good customers from bad is the business review meeting. Depending on customer preference, these meetings are held quarterly, semiannually or annually. It is a good opportunity to discuss what is working and not working in the account. It also provides the opportunity to introduce new capabilities to higher levels of the customer core team. From an agenda standpoint, customers normally want to focus on performance metrics, corrective actions and cost-reduction initiatives. However, EMS providers shouldn’t miss the opportunity to include some of their preferred topics in the agenda as well. These topics can include:

  • Accounts receivable status.
  • Status of component substitution approvals.
  • Open action items that the customer needs to address.
  • Forecast variance issues.
  • Long lead time component approval status.
  • Review of the quarter’s past successes.
  • New business opportunities.
  • Corrective actions that the customer should address.

Having these types of topics as standing agenda items helps build the concept of partnership in the relationship. It also eliminates the feeling of “finger pointing” that can arise when topics such as AR or component approvals are only brought up when there is a major issue.

The customer’s behavior as these topics are discussed is also a good indicator of whether you are growing a strong partnership or winding down a troublesome relationship with little chance of improvement. And, when you have a customer facing temporary business difficulties, these types of meetings can provide a nonthreatening way to better understand their situation and their probability of recovery.

When you’ve decided which customers to show the door, what are your options? First, try to give them choices rather than ultimatums. One option is to gradually increase pricing on bad fit business to encourage them to move elsewhere. Another option is to develop relationships with smaller EMS companies that might be a better fit and refer companies there. In that model, there may be an established handoff process that makes the transition smoother. The final option is simply to tell the customer why the business is no longer a fit and discuss whether or not changes in the project could be made that would make it a better match. If account behavior can’t be changed, a reasonable deadline for transfer should be established. A benefit of having a good contract in place is that the termination process and cost liabilities should be clearly spelled out. Like a good prenup, this makes breaking up a lot easier to do. In all these scenarios, the goal is to make the transition for exiting customers as smooth as possible. It is a small industry, and a disgruntled customer can share their version of the bad breakup with a lot of contacts at potentially good customers if things go badly.

Susan Mucha is president of Powell-Mucha Consulting Inc. (powell-muchaconsulting.com), and author of Find It. Book It. Grow It. A Robust Process for Account Acquisition in Electronics Manufacturing Services; This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Last Updated on Monday, 08 August 2011 11:13
 

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