Here are some things companies can do to immediately raise profits now:

I. Stop Taking the Lowest-Profit* Orders Now

• 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:

Develop low-cost new products: see article:

Reduce the cost and weight with Dr. Anderson’s cost-reduction workshop; see:

Minimize the cost of quality: see article: 

• Design new products around standard parts. see article:
Implement Build-to-Order to eliminate inventory costs and ship products on-demand: see article:

• Mass-customize products and options quickly and at low cost; see article:
Resupply parts and materials spontaneously to eliminate ordering and inventory carrying costs: see article:

• The ultimate way to increase profits would be to Design for Growth:
see article: 


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:

Contact Dr. David M. Anderson, P.E., CMC
fellow, American Society of Mechanical Engineers
phone: 1-805-924-0100
fax: 1-805-924-0200

copyright © 2016 by David M. Anderson

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