The profitability analysis is essential in manufacturing Companies. Know the total cost of the product and understand how their cost elements flow is vital for other purposes as are:
- Eliminate non-value added activities
- Optimize installed capacity costs
- Establish performance indicators per process, departments, etc. in cost terms.
- Define prices and rates strategies based on real profitability per product, customer, channel
- Target Costing in low margin products.
- Planning, Budgeting and Forecasting based on activities and processes (beyond profitability)
In companies that do not have a good allocation of costs, expenses and investments, the distortion of the product price may vary from 30 to 35% of the total cost.
The cost analysis of activities and processes is critical to make smart decisions about how to optimize business costs. Here are the example of a wine company and how it changed the approach to the information generated to make decisions, from a traditional analysis showing the past, to a strategic one that allows to visualize the present and predict the future.
Having a profitability analysis through different dimensions such as product, customer and channel allows a clear view of the elements which contribute positively to increase the business profitability and which do not, making decisions easier about what actions take to maximize the profits.
Cumulative Profitability per Customer (ordered from the most to the least profitable)
Typical disclosures in Manufacturing companies when implementing initiatives of Profitability and Cost Management
- From 5% to 20% of the costs of the organization do not generate value.
- The biggest and with most benefits customers are not the most profitable.
- The company is highly efficient in operating costs but very inefficient in administrative and logistical processes.
- Between 10% to 40% of the products or services that are commercialized are subsidized by others (they are not profitable).
- In all areas there are activities which do not add value (reworks, inspections, etc.), which are expensive and must be eliminated.
- Proposals for continuous improvement (Kaitzen) and acquisitions (insourcing vs. outsourcing) should be evaluated in terms of cost and profitability since, in many cases, they are not efficient.
- Taking actions of the above points, companies have managed to improve the profitability from 5% to 15% in the first year.