How Can I Protect And Enhance Margins?
Where did my margin go? Here today, gone tomorrow …
Where do our profits come from? And why do they disappear?
“Our business isn’t interested in margin – we only ever talk about volume.”
“You don’t need to know exactly how much margin you make – you just need to know whether it’s high or low.”
“We didn’t make as much margin as we thought we would … I am not sure why …”
“I don’t get to see how much margin we generate.”
The actual margin contribution generated by a transaction, product group or customer can be an alarming discovery for even the most commercially focused business owner.
Every manufacturer is increasingly conscious of rising overheads, demands on resource and the need to do more with less. But in addition to the transparent costs affecting margin contribution, there lurk a number of less visible causes of margin erosion within every business.
Raw materials and finished stock write-off levels, incoming raw material rejects, production yields and batch size can all impact productivity based margin within an existing asset base.
The actual costs associated with winning and retaining specific pieces of business can be subject to creep. Packaging redundancy as a result of changes to design and specification, an ongoing failure to uphold minimum order quantities, rebates, settlements and free of charge samples can erode the margin associated with a heroic commercial win – before the opening order has even left the factory gate.
Even when monitoring systems are in place to mitigate against margin erosion, lapses in concentration and tactical commercial decisions can be costly.
How can I protect and enhance margins?
As well as generating incremental margin through top line growth, there are multiple levers to pull in terms of improving productivity. Cost reductions, efficiency improvements and activities to enhance gross margin at product level are all important margin enhancement opportunities within an existing asset base – and all require a cross-functional approach in order to be implemented successfully. The perennially unpopular price increases and discount reductions can also reap significant rewards -even when implemented at a relatively gentle level if carried out across the board.
Improving the sales mix, however, and being disciplined about slow moving and negative margin SKUs, can deliver transformational results. Despite being a deeply challenging process for any Product or Sales Manager, conducting a robust review of a product portfolio and customer base can deliver improvements in operational efficiency - and margin - even when reducing a SKU list by over 40% and consolidating the customer base by 50%.
Here’s how …
- Increase visibility of actual margin through trust and good management - and the actual costs associated with particular pieces of business
- Reward the team on margin contribution – not just sales volume
- Take control of hidden costs of servicing an existing customer base through simple checks and process
- Ensure a clear focus on margin and profitability at all levels throughout the business
- Margin contribution must be understood to be a key measure of commercial success – and the difference between contribution and percentage margin must be made clear
- Margin must become a key metric within the sales review process
- Introduce - and uphold - controls to avoid margin erosion. In a typical manufacturing environment these will include;
- New Product Development Gatekeeper Process
- New Product Pricing Authorisation
- Minimum Order Quantities
- Redundancy / Write-Off / Stockholding
- Slow Moving Stock / Range Rationalisation
- Sales Promotion and Marketing Activity ROI Check