For manufacturing firms, managing product lines to maximize gross margins while maintaining quality and safety standards is the key to profitability and success. In this industry, it is critical to have clearly defined profitability measurements and a plan for tracking, analyzing and integrating that data to inform the financial and operational decisions necessary to sustain and improve a business.
While most companies track this information at a high level, so many fail to go deeper to fully understand the true costs associated with their product lines, which directly affects their bottom line. The good news is that there is a systematic, four-step plan for maximum gross margin.
Step 1: Define the metrics and key performance indicators (KPIs) for each product line. For any given product, companies need to ensure they are using the right criteria to accurately set prices, track associated costs, and ensure quality and safety along the way.
Three suggested areas to look at include:
1. Gross margin analysis (GM):
- Determine if the products are priced correctly in the market.
- Ensure the correct direct costs, indirect costs and allocations are properly accounted for and consistently applied.
- Evaluate whether the correct ratios (such as inventory turns in mass production) are being examined.
2. Overall Equipment Effectiveness (OEE):
- This multi-dimensional metric can be used to indicate the overall effectiveness of a single piece of equipment or an entire production line.
3. Safety Incidents (MOD rate):
- This value represents the number of health and safety incidents or near misses that occurred over a specific period of time.
Step 2: Set target values for each metric and KPI. In this step, a company creates quantitative values to measure the performance of a business strategy or system.
- Targets generally embody a range of performance to indicate if a metric or KPI is performing on, above or below target.
- In manufacturing, target values may be related to speed of processing, number of items produced or reduction of errors in production lines, to name a few examples.
- When setting targets, keep in mind the SMART principle and keep them specific, measurable, achievable, realistic and time-bound.
Step 3: Create a tool (e.g., dashboard) to analyze products based upon the metrics and KPIs.Once the metrics and KPIs are decided upon and target values are set, create a tool to visualize and track the data.
- Utilizing the right tool can help businesses save time, save money, align strategy and set and meet goals.
- Two popular dashboard types provide different views of performance. Operational dashboards tell a business if they are on target today, while Analytical dashboards help set targets for the future.
- Select the right tool for the business problem at hand.
Step 4: Implement product improvement procedures that add the most value to gross margin.Now it’s time to put this valuable data to work to improve the success of your business.
- Decide upon what gross margin improvement changes can be made from a Return on Investment standpoint.
- Integrate positive changes within the manufacturing environment to produce improvement metrics.
- Strive for continual improvement within the manufacturing environment by utilizing the most important metrics.
The primary goal is to maximize gross margins while ensuring quality and maintaining safety standards. By following this systematic plan, your manufacturing activities will be better aligned and responsive to market trends and production challenges, which translates into a more profitable bottom line.
Kurt Ostermiller is a Consulting CFO in the Austin office. He is an experienced CFO, Certified Executive Coach, and senior financial executive with extensive background in corporate turnaround, profitability maximization, operations management, budget development and taxation. With more than 25 years of corporate financial and executive management experience, Kurt has proven success achieving profit, revenue and business objects for clients across multiple markets and industries. To contact Kurt, please email him at email@example.com.