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Costing, product and price analytics should drive operational effectiveness efforts

MANUFACTURING INSIGHTS  | 

With challenging economic conditions likely to continue for the foreseeable future, growth remains difficult for many manufacturers and wholesale distributors. Most have already completed headcount adjustments, and now are looking inward to improve their operational effectiveness in order to remain competitive in today's economy. While each company's circumstances are unique, as we've worked with clients looking to boost financial performance, we find the following three-pronged approach useful – understanding costs, rationalizing products and evaluating pricing.

Over the past decade at least, most manufacturers have embraced some form of costing method in an effort to accurately apportion costs throughout their organization to individual products so that they can make informed strategic decisions. And, while many companies now do a better job tracking direct material costs and labor costs, they still do not have an accurate picture of costs on a product category or SKU-level basis. If companies don't understand what truly drives their profitability at a more granular level, they can't make fact-based, informed decisions to improve profitability.

For example, do unique specifications, materials or sourcing requirements disproportionately affect some products' costs? What about costs incurred after the product is sold? What service and warranty commitments do you have to each product? Does a product have complex packaging or bundling requirements that add to its costs? Does it require special shipping or set-up arrangements, or even unique invoicing practices that eat up hours? Do your customer service personnel tend to spend more time supporting customers with certain products? These are examples of costs that often might be overlooked or inappropriately apportioned.

Ability to capture, report and analyze data is vital
Optimizing cost systems and processes across finance and operations is vital to providing the visibility necessary for effective management decisions. Understanding what data to capture is a first step. Making sure you have the right systems in place to capture and report that data is the next.

As we work with clients, we sometimes see that, even if they have identified the data they need, their current systems are not well positioned to capture and report that information in an effective manner. They then either end up with inaccurate or incomplete data, or they must manually work around their own systems to collect the required data. In either case, efficiency and the accuracy of conclusions are negatively affected.

Such issues can arise because the company does not have appropriate systems, because the system and processes have not been configured or optimized, because personnel have not been appropriately trained or, often, some combination of all three issues. Therefore, a key step in any operational effectiveness effort is a strategic review of your current system's ability to efficiently capture and effectively report the data your managers and executives need to make timely and appropriate decisions.

Once companies have identified what data to capture and made sure they have the right systems in place to make the best use of it, they must ensure they have the right skill sets to analyze and report that information at both product and strategic levels. Effective dashboards can be powerful reporting tools to provide managers at all levels with that visibility. In today's economy, an organization's ability to define the data it needs, effectively capture and report that data, and then quickly and strategically analyze that information is a key differentiator between manufacturers that thrive and those that struggle.

Product and price analysis
Once a company has comprehensive cost data in place, the next step is a disciplined examination of its product mix or portfolio. This examination needs to go far beyond just production costs and pricing in order to understand true margins and value drivers.

For example, in addition to considering margin and volume, manufacturers also need to look at issues like slow moving inventory items, space and resource utilization requirements, and other drivers that affect working capital. Market concerns come into play – perhaps a relatively poorly performing product also directly affects sales of other, higher performing products. Is the market for the product growing? Shrinking? What is the competitive landscape for each product?

Decisions to discontinue products can be hard to make, but having too large of a product portfolio can lead to real opportunity costs, and can divert attention and investment away from your most rapidly growing or higher margin products.

In the end, a truly disciplined approach backed with accurate and timely data is vital.

Companies also must continually evaluate pricing. The mantra among most manufacturers is that they cannot pass costs on to their customers -- that their customers are too price sensitive in this economy. And that viewpoint often holds true. But companies also cannot afford to sell products at minimal margins or even at a loss. Be sure to constantly track competitor pricing and to appropriately value any differentiating features your products may offer. Of course, pricing issues will tie directly into product mix decisions.

Don't forget procurement
While accurately tracking and reporting costs is vital, companies can also reduce costs with more affective attention to procurement and strategic sourcing. The 2011 McGladrey® Manufacturing & Distribution Monitor highlights this as a strong potential area for improvement.

When asked about priorities for supply metrics, 41 percent rank on-time delivery highest, while vendor cost savings topped their lists only 18 percent of the time. It seems apparent that many may be under-valuing the importance of cost savings through more effective measurement and management of the procurement process.

In a world in which rising commodity prices are perceived as a high risk to continued business growth, the importance of monitoring procurement cost savings seems clear. Yet only 40 percent of all respondents have formal measurements in place, and only 18 percent of those who do measure procurement cost savings feel they have effective spend analytics tools.

For more information, please contact McGladrey Managing Director Greg Maddux at 816.751.1845.