A business will invest more money where the return is more tangible. Improving production efficiencies is tangible. Reducing material handling and shipping costs is tangible. Tangible returns are much easier to calculate with investments in Core Production.
A business will invest more money in their Core Production than they will in their Support Functions. And when the market gets tough, they may significantly reduce spending on Support Functions but increase spending on Core Production to increase efficiencies. We’ve heard recently that Wyeths are reducing the workforce in Newbridge by 250 due to greater automation improvements in their plant. This immediately reduces the overall personnel related costs and Support Functions of the business based on a significant capital spend on the Core Production of the plant.
If your business develops solutions or sells services that improve efficiencies in Core Production then your business should be stronger than those selling to Support Functions.
For example, a brochure Website for many organisations is not a critical spend and will invest a relatively small amount compared to an in-house system to improve their processes. Their Website is a Support Function.
Whereas if the business sells online or carries out critical customer service functions through the website then the website is firmly a Core Production facility and worthy of greater investment.
If you supply to Core Production then you:
Can likely charge greater margins for your services (depending on competitive forces)
Are likely to be more stringent in your own quality procedures
Are vetted much more thoroughly than supplying to a Support Function
Will require a greater level of Compliance. Try supplying to a validated business areas in an FDA regulated organisation
Will likely take longer to break into the market due to the barriers to entry
Enjoy a greater capital valuation on your business in the event of a trade sale, due to your business being more fixed-wired into your clients’ production
Another level of spend beyond Support Function spending is Discretionary Spend. This is when an organisation will only consider spending when everything else is in good order and they are looking around for areas to improve on. These are merely nice-to-haves in an organisation. A website is an example of this for many organisations, as I discovered this hard-way when trying to sell Content Management Systems in a down market.
Does your business supply into Core Production, Support Functions or Discretionary Spend?
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