Improving Profitability in Manufacturing
At the turn of the current decade, nationwide CPA and consulting firm Clifton Gunderson LLP posted five proven strategies for improving profitability in manufacturing firms. Rereading them now, we’re reminded of just how sound the strategies are:
- Benchmark and gap company-wide margin importance.
Before starting any initiatives to increase company margins, it would be useful to know if your company has a history of tracking above or below industry averages. If industry standard gross margins are at 50 percent and your company has been tracking at 30 percent, you will know to set your improvement targets fairly high. However, if you have a history of being a leader in high margins, your expectations may need to be tempered by the fact that you are already a high performer.
- Examine and understand product and customer proﬁtability.
There are many manufacturers that, in moments of proﬁt pressure, reach for all the wrong levers in hopes that the proﬁt picture will improve. Typically, these levers might include reducing work force, stretching payables, or even delaying expansion or plant improvements. These options might be correct, but many ﬁrms react to the symptoms rather than the underlying problem.
- Review and rationalize your highest impact area: purchasing.
On average, manufacturers spend 50 percent to 58 percent of total manufacturing costs in the purchasing of production materials. Any improvement and/or reduction in the overall pricing can have a substantial impact on proﬁts.
- Reduce and better manage your company’s capital base.
While its not always apparent, maintenance of plant, equipment, and inventory reduces proﬁtability. Firms that consider ﬁnished goods inventory as a sunk cost fail to see the true problem.
- Involve, measure, and share the beneﬁts of improvements.
No matter what type improvements are attempted, the best way for them to take hold is for all levels of employees and departments to be involved. The poorest method for reducing costs is an executive mandate that produces disjointed and often unrealistic goals. The programs that often create the best results are ones that lay out an overall company-wide goal. Within that context, individual plants, departments, and business functions work together to ﬁnd improvement areas.
While these strategies are straightforward, they point to the importance of integrating internal and external management information across an entire organization, which is the function of Enterprise Resource Planning (ERP). ERP is the tool that can inspire your company to innovate and think differently about your business, so that you can ultimately deliver inspiration to your customers.
Epicor ERP is business software that can open vistas of possibility not previously imagined. Serving 20,000 customers in more than 150 countries, Epicor’s ERP software provides a single point of accountability that drives increased profitability, whether you’re operating on a local, regional, or global scale.
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