To keep your business operating into the future, it is essential to understand why this is happening and how it can be fixed. Since there are so many potential reasons a business could be struggling to increase profits, it is important to approach this question from a number of perspectives to identify all issues present in operations.
For example, it can be helpful to view these issues through both costing and sales lenses, combining these approaches to make impactful changes to profits. In practice, this might involve the following techniques:
- Eliminate work that is not profitable. The first step to getting rid of work that is not profitable is to identify which products aren’t making as much money. This can be accomplished by performing an activity-based cost analysis on current activities. Activity-based costing identifies and assigns costs to activities in an organization according to their actual consumption. This method of costing often is used when organizations are looking to eliminate products that are unprofitable and focus on those that are more lucrative. For example, let’s say a company makes three products, Products A, B and C. Product A makes up 20% of gross margin, B is 40% of gross margin and C is 12% of gross margin. Taking into account Selling, General & Administrative (SG&A) expenses at 15% added cost on each, Product A now provides 5% margin, B is 25% and C is -3%. When looking at the products this way, it is clear that Product C should be eliminated as it is essentially costing the organization money. Or, the company might decide to pursue additional business with customers that require more of Product C to increase its share of revenue. This process of breaking down costs and identifying the products that are not making money often is referred to as “finding the dogs,” or bad products, within your business. While in reality there might be hundreds of products or machines or materials at a facility that need to be evaluated using this model, the benefits of “finding the dogs” are worth the time invested.
- Sell to open capacity. In a similar vein, an organization should strive to identify and fill any open capacity within operations. For this example, let’s look at three pieces of equipment in a facility, Machines 1, 2 and 3. Machine 1 is 50% utilized, with Machine 2 being 90% utilized and Machine 3 being 10% utilized. Knowing this, the organization should aim to sell more of the products that are made on Machine 3, as it has a lot of open capacity to fill. It is important to note that manufacturers should not invest in any new capital if they have open capacity existing in the plant they need to fill.
MEET OUR EXPERTS
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.
Senior Lean, Costing & Project Management Consultant
Rob Stauffer has been a Program Manager in The Center's Lean Business Solutions program for 10 years. He has trained and mentored Michigan companies in the entire portfolio of Lean Sigma strategies and methods specializing in financial analysis, costing, strategic planning and Lean applied to the healthcare industry. He also works with clients on product development, product launches, transactional office processes and sales of technical programs.
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.