Does Your Company Have a Margin Improvement Program?

Prime Advantage, a Chicago-based buying consortium for mid-sized industrial manufacturers, recently announced the findings of its fifth Prime Advantage Group Outlook (GO) Survey, and reviewed the top economic concerns of midsized industrial manufacturers for 2010.  According to the survey, “The top three external concerns facing small and mid-sized manufacturers include customer demand at 38 percent (and up from 24 percent in the last GO Survey), price pressure (32 percent) and inflation (16 percent).”  I was interested to see that sourcing concerns were highly rated and that these issues were mentioned:

 

• The ability to generate cost savings
• Managing the cost of raw materials and components

Since the fourth quarter of 2009, most of the work that I have done with clients has been focused in those two areas.  I believe that the mid-sized manufacturers who survived the recession are determined to improve margins so that they are better positioned during the economic recovery and for the next recession, whenever it occurs. What does margin improvement entail?  There are two basic options – raise prices or reduce costs.  Raising prices has never been easy, with global competition in most markets, it can be a risky approach.  Reducing total cost which includes manufacturing, purchased materials, and transportation has several benefits.  Done correctly, you take cost out of your system permanently by developing collaborative programs with both suppliers and customers.

 

Here are some suggested actions that I learned while managing Purchasing and sourcing during my corporate career:

 

• Create “costed” bills-of-material for each of the SKU’s.  A costed bill is easy to create, have your finance people look up the purchased costs for each item on the bill as well as the labor cost associated with the product.
• Identify the highest cost purchased items for each product.
• Develop the cost history for the last 3 years.  If you do not have the data, ask your suppliers to furnish it.
• Compare that history to market information by using Bureau of Labor Statistics price indices or published commodity information
• Get actual product samples of each high cost component.  Many times seeing the differences for the same type of item used in one end product versus another can be quite revealing.

 

In large companies, Purchasing will do this as part of their regular activity.  In smaller organizations, once you have completed the information gathering, decide which suppliers and/or items to tackle first.  Start with commodities that you think have good savings potential. Schedule meetings with those suppliers and plan to introduce your 2010 margin improvement program. 

 

Your plan for each meeting will be different based on the commodity, the number of suppliers that you use for a given item or commodity, and how much competition exists in the marketplace. The discussion should focus on what can be done to take cost out of the item(s) in question.  In most cases, this is the start of a process, so record the expected actions, responsible individuals, dates, etc. If you identify purchased commodities or items that have not been market tested for a year or longer, then doing an RFP and validating your current pricing is a good first step before you engage your current supplier in the effort.

 

 

Suppliers will try and respond positively when the customer – you – takes a collaborative approach.  In fact, many suppliers are taking the lead in working with their customers to take cost out of the process.  The large marketers, manufacturers, and suppliers in the consumer products industry have been working together for years.  Mid-sized companies need to adopt these practices to improve their margins and prosper in the years ahead.