How Has 3M Managed To Consistently Improve Its Margins Over The Past Five Years?
3M‘s (NYSE: MMM) adjusted EBITDA margins have improved from 29.8% in FY 2013 to 33.1% in FY 2017, with growth reported in each of the years. While many conglomerates are having a tough time realizing incremental improvements, the same hasn’t been the case with 3M. Despite entering into new markets, and shifting strategies, the company has ensured its structure has remained lean, and its operations have continued to be efficient. Much of the growth in the metric has been a result of pricing increases, rolling out of the ERP software, and higher levels of automation that is driving productivity.
We have created an interactive dashboard detailing 3M’s revenue and EBITDA breakdown for the past five years. You can click here for our interactive dashboard on What Is 3M’s Revenue And EBITDA Breakdown? to view how the different segments have contributed to the company’s growth.
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Reasons For Margin Improvement
1. Economies of Scale: With a recovery in the global economy, the demand for 3M’s products has grown significantly. This growth in production volumes has resulted in manufacturing efficiencies, which has led to lower costs.
2. Launch of Innovative Products: The company’s heavy R&D focus has resulted in innovative and unique products. Such products enable 3M to receive premium returns. Since 3M frequently introduces new products in the market, its ability to charge premium rates for products has led to an increase in margins.
3. Declining Energy Costs: Costs such as oil and natural gas, required for manufacturing various products, had been declining. This has helped to reduce 3M’s operating expense and boost margins. Coupled with continuous pricing increases, this has had a positive impact on the company’s bottom line.
4. Higher Pricing: 3M has delivered strong pricing growth which has helped it to offset other cost headwinds such as transportation and input costs. In FY 2018 alone, selling prices for the company were up 70 basis points, 110 bps, and 120 bps in the first three quarters.
5. Roll-Out of ERP Software: 3M has been in the process of rolling-out ERP (Enterprise Resource Planning) software throughout its organization, which can help it to improve productivity, increase efficiencies, decrease costs, and streamline processes. The company has largely completed this process in Europe, and is in the middle of implementing it in the U.S.
6. Increasing Automation: 3M has incorporated automation into its manufacturing processes to a large extent, which has been one of the main factors driving productivity. This not only improves the quality of sales, but also results in a reduction in the COGS (cost of goods sold).
7. Using Data Analytics: Incorporating data analytics has helped to get better visibility on data across the supply chain. This has resulted in driving efficiencies in terms of planning the production operations, and operating the supply chain, leading to increased productivity.
8. Changing Organization Structure: Since 2012, 3M has gone from six sectors to five business groups, and has pruned its businesses or divisions from 40 to 26, thereby improving customer relevance, productivity, and speed, through a leaner operating structure. This has resulted in SG&A savings of around $250 million.
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