How can SMEs compete with large firms & yet emerge profitable?

Small and medium-sized manufacturers generally sacrifice business profitably for market share. They undercut their larger counterparts on the basis of cost and volume. In the short run, this appears like a winning strategy but in the long run, this impacts their already razor thin profit margins. Eventually, the business lands in trouble. It either shuts down or barely stays alive on an artificial respirator, which just prolongs its death.

To become and stay profitable, a small manufacturer must design small and efficient processes. This is not difficult, but requires diligence and insight.

It’s crucial for a small manufacturer to stay abreast with the requirements of its target audience. Large manufacturers cannot meet certain requirements which do not match their minimum order quantity (MOQ). They focus on bulk orders which justify their cost of production. This leaves an avenue wide open for small manufacturers to pounce on and fulfill.

To take advantage of this lacuna, identifying MOQ is the first step. Every other business decision is directly connected to this metric. Which orders are left unfulfilled by larger players? Are their MOQs higher than 1?

To achieve the targeted MOQ, the next aspect to consider is manpower. Smaller players must consistently be able to source required manpower when needed, while staying lean. Highly skilled manpower is generally unaffordable for smaller players. A small manufacturer should identify the required level of skill of manpower, and how much manual intervention is needed. This is why a demandingly low MOQ is unrealistic. Its cost of production is too high for small businesses to sustain.

Manpower includes the core team, the management and labour, all of which should be reliable for the business to flourish. Thus, processes designed must be people-centric and focus on pragmatic methods to hire and retain them.

A close eye on stock sold is also important. A story goes where an automobile manufacturing plant in Detroit discovered a sedan which was reportedly lost, in their warehouse while clearing their inventory. It’s funny. But it’s not something a small manufacturer can afford. For them, dead stock is a sunk cost and a business killer. They must ensure that what they produce gets sold quickly. Over time, inventory specifics become clearer, and might require that the MOQ figure be revised accordingly. It’s also why small manufacturers must understand their target audience’s needs deeply.

The costing of manufactured products must also account for the profit margin along with cost of production (which includes overheads). A profitable small business scales faster. Due to its reputation and efficiency, it also gets financial help from banks and NBFCs more easily. This financial is useful when an unexpectedly large order comes in, the fulfillment of which requires temporary investment, or the SME wants to scale in a methodical fashion. Better profitability margins are available in a niche. Small manufacturers must try venturing into niche segments quickly. These segments ensure MOQs don’t stall businesses, manpower is available and inward business is consistent.

MOQ might appear like one decision which linearly leads into the other. But this is rarely the case. Each metric gets revised when we change connected metrics. Small manufacturers might first set an MOQ figure, only to revise it later after considering investment, manpower and inventory numbers. However, through well planned and designed processes, small and medium manufacturers can take on their larger counterparts in niche sectors. They can also build sustainable businesses which grow by design, not chance. And they can eventually grow into large conglomerates and become key players in the manufacturing industry.

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Hardik Harsora is the co-founder of Effex Business Solutions