We are very possibly entering a time period that there are going to be dual pressures on profitability. First of all almost all companies are going to feel the impact of growing inflation due to the general strength of the economy, both from a labor perspective and the increase in material input cost due to demand. Second of all the possible impact of retaliatory tariffs on either finished products or materials sourced from other countries will affect manufacturers and distributors.
The question becomes what is the best course of action to “Protect Profitability”. The easy solution is to increase the selling prices of your products which your competitors will do also. This approach will only keep your organization on even footing with your competition. I would take the stance of developing a long-term competition advantage through a disciplined product cost take out (PCTO’s) process. This combined with some level of selling price increase will give you a leg up on the competition. This PCTO process should be driven by leadership from each of your individual product managers by setting goals for how much cost can be taken out of the product and holding them accountable for meeting those goals. Ultimately that manager has ownership of that product. This continuing process becomes annual not just a stop gap measure in times of the current cost pressure.
The starting point is for the product line manager and the executive team as a whole to understand the key performance indicators (KPI’s) driving the product cost – both general economic KPI’s and internal KPI’s. The external KPI’s are those that both your organization and your competition face (see the graphics below).
How you gain your competitive advantage is through driving improvement in your internal KPI’s. I will give multiple examples below:
From a Labor Perspective
- Labor productivity improvements
- Reduce labor content through automation
- Can we use sub-assemblies from our supplies thus pushing back some of the work to the supply chain
From a Material Perspective
- Can we get better yield from the material we are processing
- Can we find ways to reduce scrap
- Alternate material and alternate vendors – by being blindly loyal to your current vendors, you could be missing an opportunity
All of these are examples of internal metrics that need to be monitored and managed for the products that you are producing. To take this a step further set goals for continuous improvement in these metrics. When you meet the goal – reset the goal for further improvement. This will establish a culture of continuous improvement in your organization – keep in mind “if your organization is not continually improving, you are losing ground to your competition”. My last suggestion is that you listen with a keen ear to the employees closest to the product – those on the floor producing it. They are your best source of product and process improvement ideas.
At CDH our Executive Focus service offering is all about making your individual internal metrics come alive. For over 40 years we have been helping companies monitor and manage their KPI’s in a unique format to drive continuous improvement. If you would like to learn more about our Executive Focus process, please contact Dennis Pierce, Director of Management Consulting at [email protected] or 262.784.4040.