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Increasing product margins without increasing prices. Can you?

August 5th, 2008

How many executive meetings have you attended and heard that mandate “I want product margins increased by 5%” or “We need to cut our product costs by 10%”?
There’s a few potential outcomes. If you don’t have the reporting you might think that these might be reasonable achievements, but lacking the ability to affirm or deny. If you have the appropriate reporting in place you can pretty quickly play to your role of advisor indicating whether the goal is achievable, but with certain risk contingencies, or that the goal is unachievable due to current market conditions and/or internal considerations.

In order to provide the necessary level of advisory support, the information systems you have in place are critical. The considerations need to start at the structure you have in place for your general ledger and the granularity it will provide you in your reporting. While some of the itemizations below would seem elemental to most world-class manufacturing operations, I’ve been surprised by the number of firms that need to work towards this level of detail.

1. Do you have your general ledger segregated according to the individual product lines? This should be at both the cost of goods and revenue levels.
2. Are the labor costs also segregated by department and can you effectively track labor absorption & OT at both a product line & consolidated level?
3. Do you have the ability to allocate costs according to the product lines and do you have an appropriate allocation method in place?
4. Are you capturing all peripheral costs in your product costing? Are you able to tie service or warranty expenses to the appropriate product line?
5. Do you have a product offering that is project-based, and if so, are you appropriate tracking change orders and 3rd party cost elements accurately?
6. Are you able to accurately track your monthly variances on prices, material, and labor? What are the trends?

This is by no means a comprehensive list of what needs to be considered for determining if you can achieve certain forecast targets, but if you can answer these then you likely have the tools to answer the other questions that will likely be raised. Unless you’ve adopted a system that is already in place and only needs ongoing maintenance, the work to get to this point is extensive, and often a bit painful. However, knowledge is the key and with the appropriate info we can continue to play our effective role of trusted advisor and make recommendations that are based on hard data and not gut instinct. Do you have the necessary data to accurately answer the question – Can you increase your margins without raising prices?

Thanks for reading . . . .

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