Here are some things companies can do to immediately raise profits now:
I. Stop Taking the Lowest-Profit* Orders Now
by:
• Stop selling money-losing products and product variations
• Stop accepting money-losing customizations
• Remove money-losing products from the portfolio
• Stop wasting product development resources on products that are least
likely to make money
* Many “low-profit” orders may be lower than realized or actually losing
money when all overhead costs are quantified and figured in.,
• How to Identify Lowest-profit Products and Take Action Now
• Some of these SKUs may have enough consensus to take action right away.
• Don’t rely on the typical cost system to generate meaningful data on
profitability. Cost systems will not be able to plot products by
profitability unless they are a total cost system that can quantity
all overhead costs
• If the cost system can not identify money-losing products, then conduct a
poll to quickly identify difficult-to-build products for scrutiny. Just ask
the following question to everyone involved in building products, procuring
their parts, and performing custom engineering or configurations: “What
products or variations cost us more, and delay us more, than we think?” Then
plot out the results and start scrutinizing from the top of the list.
• Other hard-to-build products may require investigations to determine what
to do about them. For suspect products, the company may have to investigate
their last build and compile all their costs and evaluate empirical insights
on hidden costs. Then the company should take immediate action eliminate
them from the portfolio, stop offering them, and stop accepting those
orders.
These actions will raise profits now and save money now,
provided personal interests do not interfere.
Sales assignments may have to be rearranged so that no individual salesperson
will not be penalized.
Ultimately, sales incentives should be shifted from units or revenue to
profitability.
Until then, decisions on what to sell and what customize must be made on total
cost thinking.
2. Profits vs Revenue
If done across the product line, dropping the worst 80%
products
could triple profits while only dropping revenue by 20%
The following scenario shows the power of this methodology using
a simple example. If a company kept the 20% of the product line that was making
80% of the profits (the usual Pareto’s law ratio), and dropped the other 80% of
the product line, it would result in only a 20% drop in revenue.
However, dropping 80% of the worst products would eliminate 80% or more of
overhead and distribution costs because those products are built infrequently
with less common parts on older equipment using sketchy documentation by a
workforce with little experience on those products. Further, those products may
be less well designed for manufacturability and have much higher quality costs.
If overhead and distribution costs are half of total cost (as is quite common),
then eliminating 80% of those costs will cut total costs in half. If profits
were originally 10%, dropping revenue by 20% and cutting costs in half would
result in over three times the profit!
3. How to Improve the Remaining High-Profit Products
Sales of the remaining high-profit products can be improved by taking the
resources that were wasted on low-profit products and shift them to raise sales,
improve functionality, and lower costs in the remaining products as shown in the
next figure.
In fact, one of Dr. Anderson’s clients, regained lost sales in one division in
just two months!
4. How to Lower Costs (to raise sales or profits) Now on Your Best
Products
One near-term benefit is that eliminating money-losing, fire-drill products will
eliminate the overhead costs to pay for their losses. Since overhead costs are
paid for by the profitable products, reducing these overhead costs will
eliminate the “lower tax” on the best products, which will then immediately
raise their profits or improve sales or both!
This technique also provides a way to reduce cost on existing cash-cow products
without expending any engineering effort or writing any change orders.
5. How to Raise Sales (or profits) Further
The following strategies can be implemented with the help of Dr. Anderson to
raise sales or profits or both:
• Design products for manufacturability: see article:
http://www.design4manufacturability.com/DFM_article.htm
• Develop low-cost new products: see article:
http://www.design4manufacturability.com/designing_low_cost_products.htm
• Reduce the cost and weight with Dr. Anderson’s cost-reduction workshop;
see:
http://www.design4manufacturability.com/steel-reduction-workshop.htm
• Minimize the cost of quality: see article:
http://www.halfcostproducts.com/cost_of_quality.htm
• Design new products around standard parts. see article:
http://www.design4manufacturability.com/standardization.htm
• Implement Build-to-Order to eliminate inventory costs and ship products
on-demand: see article:
http://www.build-to-order-consulting.com/sbto.htm
• Mass-customize products and options quickly and at low cost; see
article:
http://www.build-to-order-consulting.com/mc.htm
• Resupply parts and materials spontaneously to eliminate ordering and
inventory carrying costs: see article:
http://www.build-to-order-consulting.com/supply_chain.htm
• The ultimate way to increase profits would be to Design for Growth:
see article:
http://www.halfcostproducts.com/cost_of_quality.htm
These are the general principles. Pass
around this article or URL to educate and stimulate interest
In customized seminars and
webinars, these principles are presented in the context of your
company amongst designers implementers, and managers, who can all discuss
feasibility and, at least, explore possible implementation steps
In customized workshops, brainstorming sessions
apply these methodologies to your most relevant products, operations, and supply
chains.
Call or email
about how these principles can apply to your company:
copyright © 2016 by
David M. Anderson
Book-length web-site on Half Cost Products:
www.HalfCostProducts.com
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