When job shops are busy, owners feel successful. The phones are ringing, machines are humming, RFQs are coming in, and customers are happy; what more could you ask for?
The key is to recognize the difference between a busy shop and a lucrative shop. Being busy can provide a feeling of accomplishment. But is your endless activity also driving profits? Are you seeing tangible returns from your nonstop work?
Or are you running at a breakneck pace with little to show for your efforts?
Turn Busy into Business with the 80/20 Principle
If, as anticipated, our economy enters a recession during the first two quarters of 2023, manufacturers are expected to land on their feet, potentially even enjoying a boom as the year progresses. In the meantime, shop owners need to prepare for ongoing economic fluctuations.
To survive and thrive for the long haul, you must step back and honestly evaluate your customer base, your team structure, and your shop itself. One data-driven tool for making impactful change is the 80/20 principle.
What is the 80/20 principle?
The 80/20 principle, also known as the Pareto principle, was developed in the 19th century by an Italian economist and avid gardener named Vilfredo Federico Damaso Pareto. Pareto noticed that a mere 20% of his plants were responsible for 80% of his garden’s production. This discovery led to Pareto’s subsequent revelation that 20% of Italians held 80% of the country’s wealth.
Notice a trend?
How to apply the 80/20 principle to your CNC machining business
Although Pareto’s precept is not a mathematical law, you can find examples of the 80/20 principle throughout your business. Do a bit of internal research, and you’ll likely find that:
- The top 20% of your customers place 80% of your shop’s orders
- The top 20% of your team members perform 80% of your shop’s work
- The top 20% of your machines are used in 80% of your shop’s production
But what do you do with this information? There are two effective ways to leverage what you learn from analyzing your shop’s 80/20 examples:
Identify Areas of Investment
Let’s look at how the 80/20 principle can help you decide where to invest your shop’s resources. When considering how to invest, you’ll want to focus on the top 20% of your results—the high-impact, high-performance areas.
Invest in customers
Don’t take your top-spending customers for granted! Know who they are and how they spend, and find opportunities to nurture those relationships, starting with these ideas:
- Give your VIPs a VIP experience. How can you ensure your big spenders feel big love from your shop? One simple solution is to assign top-performing team members to your VIP customer accounts, ensuring consistently exceptional service and products.
- Nurture your VIP relationships. Proactively reach out to your shop’s top customers yourself, if you don’t already. Some may enjoy a call; others a simple email. The point is to let them know they are valuable—a message that hits harder when it comes from the owner or CEO.
- Craft targeted marketing and messaging. Marketing efforts may reach a wide audience but should target your ideal customer—because that’s whose wallet keeps your shop in the black! By marketing directly to your ideal customers, you’ll weed out most of the “wrong” customers and attract more of the “right” ones.
Invest in team members
Your top-performing team members deserve recognition, appreciation, and compensation for their contributions to your modern machine shop’s success. You can find top-performing team members in all areas of your shop, including salespeople, machine operators, accountants, buyers, supervisors, and more. Put your personal touch on these ideas:
- Recognize your top-performing team members. There’s a reason many businesses still recognize an “employee of the month” (or week or quarter)—it works! You might even choose to recognize that employee’s contribution in a special spotlight on social media or in your monthly newsletter.
- Appreciate top performers with advancement opportunities. Outstanding employees are often eager learners. Give them a chance to enhance their skill set by leveraging NTMA’s online and in-person training initiatives.
- Compensate top-performing team members. Salary increases should always be on the table, but they aren’t the only valuable form of compensation. Consider thanking individual employees with one-off awards such as bonuses, gift cards, and personal gifts of all sizes. Talk to your financial department about working compensatory awards into your shop’s budget.
Invest in your shop
Of course, you already know the importance of maintaining your machines and keeping a well-equipped facility. But are you prioritizing properly? Hone in on these options:
- Upgrade your critical equipment. If the majority of your shop’s work requires a lathe, consider upgrading your lathe or adding another lathe to your shop. You can’t increase production if your most in-demand equipment isn’t reliable.
- Add new services. Do your top customers frequently ask, “Does your shop offer X, Y, or Z?” If so, it’s time to look at adding X, Y, or Z to your service lineup. You may want to begin by outsourcing. Once you’re certain you want to add the new service, you can make the necessary purchases and hires.
- Leverage NTMA’s group buying savings. Even small shops can enjoy bulk-buying discounts with NTMA’s members-only access to industry partner and affinity partner offers. Connect with every type of product supplier and service provider, and get the best prices on modern machine shop solutions.
Identify Areas of Improvement
Now, let’s review how the 80/20 principle can help you improve your shop.
One well-known example from 2002 occurred when Microsoft applied the 80/20 principle and discovered that 80% of their customer complaints stemmed from a mere 20% of their product’s known bugs. The software giant was able to address 80% of its customers’ concerns by resolving only 20% of its known software issues!
Here’s how an improvement-focused perspective can serve your own machine shop:
Improve your customer base
Your customers deserve great service and personalized attention, but there are always a few customers who abuse service-centric businesses. We’ll call them “problem children.”
These types of customers will keep your shop busy-busy-busy until you go broke-broke-broke.
Your business should draw clear boundaries that protect your shop from problematic customers who waste your resources. Consider these straightforward solutions:
- Raise your rates. One of the fastest ways to eliminate tire-kickers from your RFQ inbox is to stop being the cheapest shop in town. An excellent first step is simply to raise your order minimums.
- Establish a “no discounts” policy. You’ve (presumably) researched and established your pricing based on your own overhead and growth goals—as all smart CNC machine businesses do. If a customer wants to pay less, they should choose a shop with lower prices. And if you really like giving discounts, raise your prices to accommodate them.
- Remove the weak links. Yes, this means you may need to “fire” customers who are costing your company more than they’re bringing in. No need to create a scene. Simply notify your customer that your shop no longer provides that service, offers that pricing, or accepts those order quantities.
Improve your team
Occasionally, you will encounter a truly neglectful employee who needs to be released to work elsewhere. But we also recommend exploring ways to elevate your low-performing employees.
- Review your hiring approach. Did one manager hire all of your lowest-performing employees? Were your poorest performers all hired in a rush? Have you struggled to attract qualified candidates? Look at how your hiring process itself could benefit from an overhaul.
- Be a better boss. This isn’t optional: you need to invest in your own growth and learning! Stay active in your NTMA community online and in-person, attend industry events, and challenge your long-held business beliefs. And make these opportunities available throughout your leadership team, too.
- Find out what’s missing. Learn directly from your lower-performing team members what isn’t working for them. Do they need more training, an incentive system, or improved communication? If you can successfully bridge learning gaps and navigate personality differences, you’ll have a strong, healthy team that consistently performs at a high level.
Improve your shop
Shop improvements almost always require shop investments—like the ones we outlined previously. To determine which improvements should take priority, identify the source(s) of your problems:
- Does one machine constantly break down?
- Does one division consistently deliver sub-part parts?
- Is one capability noticeably undersupported?
You’ll likely find that by addressing these singular issues, you’ll solve a large number of problems that have been eating away at your resources.
Invest and Improve to Increase Production
NTMA wants to see your shop succeed today, tomorrow, and 25 years from now! The future of US manufacturing is bright, and we aim to help each and every one of our members achieve ongoing success.
Be part of our movement. Join NTMA today!