This is a common tale among manufacturers. While revenue experiences a huge boost, net profits remain stagnant or nosedive. The potential issues driving this imbalance are endless, with anything from improper planning, constant schedule bumping or steep overhead costs often holding profits back. Regardless of the reason, net profits are not as high as they could be.
Fortunately, there are many ways to get profits back where they should be. One such method is to focus on increasing gross margin by substantially reducing the Cost of Goods Sold (COGS). If done effectively, this transformation can eliminate major costs within your operations, resulting in higher profits than you previously thought possible.
Which Costs to Cut: The Biggest Offenders
With so many expense areas available to target, this wide opportunity for improvement may leave you wondering, “Which areas should I target first?” or “What should I focus on to get the biggest returns?”
When it comes to cutting your COGS, here are five of the best areas to target to ensure your company sees an increase in profits:
- Estimated vs. Actual COGS. Are you meeting your estimated COGS? Or are your predicted COGS simply impossible to meet in the first place? This variance in budget could be the source of some major losses in your net profits.
- Schedule Bumping. Changes in your schedule should be kept to a minimum. Constantly being interrupted in the middle of a project or task with a new task to complete, whether it takes two minutes or two hours, can immensely impact productivity and decrease value added. The associated costs with this consistent starting and stopping of work can be substantial.
- Changeover. Lengthy changeover times are often contributors to decreased productivity and production. Are your changeovers as effective and fast as they could be? It is worth analyzing your changeover processes to ensure they are not a source of excessive costs.
- Scrap and Rework. Another large contributor to waste and slower production is scrap and rework. Failure to fully capture scrap and measure rework can result in budget issues. With these aspects under control, some variations in profit can be resolved.
- Direct and Non-Direct Labor. Are your operators being set up for success? It should be a priority of non-direct employees to support all direct labor (operators) within your organization. Get them the assistance and help necessary from other workers to ensure they can add as much value to production as possible and maximize productivity – and profits.
For a first-hand look at how to boost profitability for your company, register for a free Strategic Planning workshop at The Center. See our upcoming line-up of workshops here.
MEET OUR EXPERT
Business Leader Advisor
George Singos is the Business Leader Advisor for the Michigan Manufacturing Technology Center. He has accumulated more than 30 years of manufacturing experience in Business Development, Sales & Marketing Management, Project Planning, Quality Management, Costing and Scheduling. Prior to joining The Center, George worked in International Business Development, where his primary focus was growing International Sales in Europe and East Asia while supporting North American, South American and ASEAN operations.
Since 1991, the Michigan Manufacturing Technology Center has assisted Michigan’s small and medium-sized businesses to successfully compete and grow. Through personalized services designed to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at www.the-center.org.