Tight Control and Tough Competition

April 27, 2009 by Susan Sills

Measuring technology by Mettler Toledo (Photo: Mettler Toledo)

Mettler-Toledo

The Mettler-Toledo Group specializes in precision instruments (laboratory, industrial, and retail) for professional use. Mettler-Toledo International was incorporated in 1991 and is headquartered in Greifensee, Switzerland.

With GDP growth shrinking steadily, industrial output plummeting, and oil wealth hemorrhaging, the global recession has hit Russia hard. For Yury Makarov, Director Business Development at Mettler-Toledo C.I.S., Russian subsidiary of the global Mettler-Toledo Group, this has meant a radical change in the company goals of sales expansion and control.

Customer caution is the order of the day. In the current atmosphere of fear, customers are very careful about making major investments in weighing equipment. A number of projects that were expected to start in early 2009 have been postponed six months or more. “These postponements can create havoc in our balance books,” says Makarov. “So we have to fill the gap.” Now the sales staff at Mettler-Toledo is concentrating on short-term projects that pay up within the month, or at the latest, within the quarter.

“Our days of negotiating big projects with long payment periods are temporarily over,” states Makarov. However, the focus on short-term projects does not automatically ensure smooth sailing for the company. The domino effect of the recession means that the Russian company is directly affected by the financial woes of its customers. In recent months, some customers have told the company upon delivery of equipment that they can not make the second payment – and occasionally have even offered to break their contracts.

“Our sales reps did a great job and got them to pay up in the end,” says Makarov. “But all this takes time – and so is another cause of delays in payment.”

Keeping the ruble rolling

Yet even if customers are solvent, even if they are prepared to invest and willing to pay, the recession continues to cast its dark shadow on the company. In addition to the unpredictable fluctuations in exchange rates of major currencies worldwide, the ruble and other local currencies have been steadily depreciating since October 2008.

“If we are prepaid in rubles,” explains Makarov, “we can buy currency and pay the respective Mettler-Toledo production plant in the required currency.” Post-payments, however, pose a problem due to the length of the delivery times: By the time payment is made, it will have depreciated against the euro or the dollar amount needed to pay the plant, eating into the company’s profit. “Our only option is to be very cautious in our project evaluations.”

And here Makarov’s eyes light up. “Things would undoubtedly be a lot bleaker,” he says, “if we didn’t have the SAP Business One solution. It’s helping us adapt to this harsh new economic reality.” Originally the company had purchased the software application to help it expand its sales as well as control its expenses. “Now our priority is to keep business risks under control. And SAP Business One is as helpful here as it was when we were using it to support our strategic goal of expansion.”

A case in point is the so-called “true discount” calculations, which show the real loss in margin. When a sales representative gives a customer a 5% discount, the loss in gross margin is higher, as the final price contains the fixed amount of additional costs, such as shipment, taxes, and certification. The question is how to estimate these additional costs.

The standard way of calculating them – estimating annual sales and costs and then dividing one by the other to ascertain markups on products – does not work for the Russian subsidiary. Some of its very expensive products can have relatively minimal transportation costs, whereas other fairly inexpensive large products are costly to ship.

In addition, the company is operating in several countries with varying transportation costs, and the Mettler-Toledo Group has production plants worldwide. And the number of items for sale – 30,000 – is staggering.

Easy project valuation

“As a single project usually consists of many various products, we were finding it almost impossible to rapidly investigate and evaluate projects. So we implemented a special procedure in SAP Business One that calculates the true discount automatically,” explains Makarov.

“Now we have a very simple and very good mechanism for project evaluation.” Moreover, the software application allows Mettler-Toledo to connect to the true-discount calculation exchange rate, thereby reducing its risks on currency losses.

Reports for a clear overview

The company also implemented a strict control on payments in SAP Business One to counter the time- and money-consuming problem of delayed payment. “Now we prohibit shipments to customers with overdue payments,” says Makarov. “To get a clear overview, we generate reports on a weekly basis – which, of course, also enables management to make informed decisions.”

Whereas growth was the pre-recession goal for Mettler-Toledo, it is now close control and observance of cash flow. “It’s a new economic reality with a new focus,” says Makarov. “Cash is king. Pre-payments are desirable, and approval of post-payments requires a much higher level of authorization. The present counts much more than the projected future.”

With fewer customers who have less money to spend, competition is becoming increasingly tough. But the bright side is that the less efficient competitors will be forced off the scene. “We hope we’ll be able to take over their market share,” say Makarov. “SAP Business One will help us here, because it keeps us agile and lets us control finances rapidly.”

Survival of the fittest – and the fastest.

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