How to Control Your Margin Slippage
In our last blog, “The value of a cost study to the bottom line,” we addressed the importance of correcting costing problems that can lead to margin slippage. In this blog, we’ll take a closer look at the three areas in which you can make changes to help alleviate margin slippage in your manufacturing operation: finance, operations and your costing system. Let’s start by taking a look at your financial processes.
It is essential that you review the profitability of your products by analyzing each one on a monthly basis to determine which ones are generating income and those that are not. How profitable is each product line? By simply deducting your direct cost from your selling price, you will be able to identify low margin products. This will allow companies to focus their marketing efforts on high margin products and begin initiatives to fix low margin products. By sticking to a monthly analysis, you will be able to put a plan in place for those products that are reducing your margins.
Do you have unneeded steps in your manufacturing process? A lean initiative can help you trim lead time, improve on-time delivery rates, streamline the process, improve forecast accuracy, improve workplace culture, and overall, promote a more efficient use of resources. Your employees are a critical part of your processes and should be engaged in process improvement as they are often the ones closest to the problem. You may want to consider linking process improvement as a component of your incentive program to encourage employees to come forward with ideas that will help eliminate problems that lead to margin slippage.
When was the last time you analyzed the inputs to your product costs? For example, you should ask, “Which vendors are we buying from? When was last time we pushed back to get better pricing? Are we getting volume discounts?”
If you’re using multiple vendors for the same product, you may look at consolidating for better pricing. From a cost standpoint, it could also make sense to outsource certain steps of the manufacturing process versus completing in-house. A high-level costing analysis should be completed at least annually to ensure no changes need to be made.
Marcum’s manufacturing team understands that optimization of your business processes is critical to the success of your manufacturing operation. Our experts provide process costing studies that identify missing opportunities and give you the peace of mind of knowing that you’re operating most efficiently.