I’d like to take a brief step beyond the world of wastewater to discuss a term that affects all of us in many aspects of our lives: “margin stacking.” Margin stacking describes a situation that’s the opposite of the adage we’ve all heard “eliminate the middle men.”
It’s an easy term to understand when you’re describing ‘finished goods’, or ‘things’ that you buy. Every time a manufacturer or reseller buys a component and resells it at a higher margin, they are margin stacking. Each vendor involved typically has their own margin, so the final consumer pays a price that includes these ‘stacked’ margins. If you buy a pencil, for example, you’re paying a price that includes margins to the retail store, the distributor or wholesaler, the pencil manufacturer, the wood supplier, graphite supplier, paint supplier, eraser supplier, etc… The process has evolved over time and is close to the most efficient way to get a pencil to the end-user. In many industries, the supply chain is virtually optimized and processes are highly efficient and repeatable at each stage of the supply chain.
The optimized state only remains true if all of the channels involved in fulfilling a product sale or service provide an improvement to the overall value. As the world progresses, new technology, products, or methods can render some of the channels obsolete. For example, I am sure you buy some products direct from manufacturers on the Internet. Companies like Wal-Mart, Amazon, and Home Depot have made their mark by bringing technology to the supply chain, completely changing the way business is done, and reducing the non-value added tasks to get you your desired products.
There are also opportunities in the wastewater management industry to avoid margin stacking. We’re so used to working in a certain way that we often overlook possible cost savings opportunities in this area. Technology has started to infiltrate our industry in a big way as more attention is given to its importance, yet our supply chains are virtually unchanged from decades ago. Many of us buy at least some items through manufacturer reps, make decisions through engineering firms, contract jobs, and even sub-contract jobs. Don’t get me wrong, I’m not saying to get rid of these 3rd parties or I’d be out of a job! My point is that we need to ensure that each partner/supplier involved in a supply chain is providing real value that substantially improves the end product or service.
Here are some tips to reduce expenses by way of cutting down on margin stacking:
- Evaluate by asking questions such as:
- Can I accomplish my goals with fewer partners or vendors? Can I consolidate my spending to leverage economies of scale?
- Is there technology that can simplify the wastewater management processes that saves time, money, resources, or allows me to gain control?
- Do all of the vendors in my supply chain add value?
- Self perform: Look at opportunities where you can do work in-house that are a good fit for your labor force for less money.
- Buy direct: Look at opportunities where you can buy direct and eliminate the complexity of interfacing with a 3rd party.
- Consolidate: Try to source multiple items, activities, or jobs from a single entity capable of performing (ideally without sub-contracting).
- Eliminate unnecessary manual transfer of products or information between partners and vendors to decrease costs, time, translation errors and inconsistencies.
- Focus on core tasks that are critical for you to perform and are critical to optimize operations and cost savings.
One benefit of these tough economic times is that we’ve been forced to take a hard look at our spending and trim some fat that we’d have always been better off without. RedZone has attacked margin stacking with our internal operations, but as information vendors, we see it too often with our customers. We always say that information must be useful, and in addition to being accurate, complete, centralized, and standardized, it’s best served fresh! As you manage reduced budgets, do not underestimate attacking margin stacking as a simple way to save money and get better results. When it comes to asset management, this approach will allow you to obtain the most useful information to make good decisions about your valuable buried infrastructure.