profitability graph

Profitability solution

Healthy product margins are essential for a business to succeed. Good access to reliable and accurate product costs are essential for managing profitability. Without accurate and timely information it is impossible to make adjustments to correct poor profitability. Margin erosion can occur for numerous reasons including errors, failures, poor estimation and many more. The management of product margins depends upon good control of costs and pricing strategies.

Problems:

There is numerous product costing systems in use, some useful others not. Costing systems based upon estimation require skill and accept a degree of inaccuracy, these are not recommended. Cost estimation systems are costly to maintain and add delays to sales processes. Costing based on prior experience is not uncommon, these systems can also be inaccurate, and errors passed from one project to the next. Some companies compound errors by applying incremental increases to product costs year on year. Incremental increases are quick to apply but lead to high levels of inaccuracy.

Solution:

Product margins will be achieved if sales costs are accurately calculated and additional costs are not added by downstream processes. Product standardisation can ensure that the information used by sales is accurate. Furthermore, product standardisation will eliminate unnecessary processes between sales and production. Thereby, reducing unnecessary design time, information transfer and opportunities for error.

Develop a standard product reference library with integrated cost database. The product standards must be complete, accurate and contain the data required by stakeholders. Preferably, use standard costs rather than actual costs. Actual costs are volatile and are affected by quantity, availability and supplier choice. Associate standard costs to each of the standard components. A regular adjustment is made following the comparison of standard and actual costs using a variance report.  Once costs have been allocated to each component, the total cost can be easily calculated as the product is configured. It will now be straightforward to calculate and maintain product profitability.

 

Advantages from different perspectives

  • Faster receipt of sales quotations
  • Opportunity for more competitive prices
  • Accurate product costs
  • No estimating uncertainties
  • Reduction of skills required
  • Reduced sales support time and cost
  • Fewer bottlenecks requiring management attention
  • Increased profitability with the reduction of cost and risk, while improving  productivity
  • Accurate product costs
  • No estimating uncertainties
  • Reduced sales support time and cost
  • Fewer bottlenecks requiring management attention
  • Increased profitability with the reduction of cost and risk, while improving  productivity
  • Accurate product costs
  • No estimating uncertainties
  • Reduced time to issue customer proposals
  • Reduced sales support to define technical details and costs
  • Fewer bottlenecks requiring management attention
  • Accurate product costs
  • No estimating uncertainties

 

Further help and assistance

Gatehouse Design are specialists in product standardisation, product configuration and design automation. We can help companies develop highly effective product strategies, maximising profitability, productivity and customer satisfaction. We can help you improve profitability and improve the efficiency of your business. Please contact us to discuss any product design related issues that you may have.

There is an offer a free product audit to help identify opportunities for product standardisation, product configuration and design automation. Additionally, Gatehouse Design has published many helpful white papers and articles which are available on this website.

 

The author

Written by Peter Slee-Smith 14/05/2018.

Peter Slee-Smith founded Gatehouse Design in 2012, a Chartered Mechanical Engineer with more than 30 years experience in industrial design. Peter qualified with a Masters Degree and has held senior positions in many leading engineering and product manufacturing companies. He is passionate about product design efficiency and has written many articles on the subject. Based in Littleport just outside Ely in Cambridgeshire, Gatehouse Design specialises in product standardisation, configuration and design automation.

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