Issue No. 32 - December/January
5 steps to improve manufacturing margins
by Mr Chris Whelan
The Challenge: How can manufacturers add 2% to 5% to their net profit margin?
In other words, how can a manufacturer with sales of, say, $2 millon pa increase its net profit by an additional $40,000 to $100,000 per year?
The answer is to identify problem products and customers and potential products and customers.
Problem products and customers have low profit margins and high sales volumes, while potential products and customers are the reverse, with high profit margins and the likelihood of future growth.
Winning products and customers are those with high profit margins and high sales volumes. These products and customers are the foundation of a business.
The challenge for manufacturers is to identify problem products and customers and develop strategies to turn some or all of them into winning products. Implementing these strategies should improve profitability of the business in a relatively short term of, say, 12 months.
Developing strategies for the growth of potential products and customers should improve business profitability in the longer term of, say, more than 24 months.
The plan is to replace any remaining problem products with potential products.
The process to make this happen can be completed in five steps. CL Whelan and Associates has developed a package of services which includes specialized software, training and monthly reviews to assist manufacturers complete the five steps over a 12 month period.
1.Accurate product costing is an essential first step in the process. It involves calculating the cost of manufacturing products to the factory gate (that is, before customer costs) by considering such matters as:
•Material cost per product
•Direct labour hourly rate and production times per product
•Direct machine hourly rates and production times per product
•Overhead costs that can be specifically identified to products