Article – 23. Mar 2021
TIP OF THE ICEBERG
What lies beneath your cost data?
Implementing operational efficiencies may not lead to the incremental profit expected if you don't have a firm understanding of your costs.

You know the saying if you “assume” you will make an ASS out of YOU & ME. But sometimes I think it is Human nature to assume. You take things at face value and trust that what lies beneath is correct and accurate, what else could it be?

It is only on reflection, that I tell myself again and again, that I am making the same mistake! Don’t assume anything! Review the data. Always base your views on fact. Otherwise what you might uncover is just the tip of the iceberg. Knowing what lies beneath your cost data can make the difference between incremental sales (which is normally the main driver) or incremental profit and I know which I’d prefer and this is what we can help you with.

We were recently engaged with a client to help them improve their manufacturing capability. It was a rapid improvement project to quickly identify and implement better ways of working. It was all about volume. They had a massive sales opportunity in front of them, where they could sell everything that they could produce over various product ranges. A dream position for any business.

We acted fast. We quickly analysed production capability to establish current performance and understand what MUDA’s (key wastes) could be eliminated without impacting on production volume and implemented a range of measures that increased output by over 40%. Happy clients. Project over, right?

UNCAPTURED COSTS AT EVERY TURN

There is a constant mis-conception of once you have started to produce a greater volume and doing it more efficiently, you will make more money, but this can be short-sighted thinking.

Having lifted the lid on production efficiency, we wanted to see the engine running and invited the finance manager to provide the data for the senior stakeholder review.

She acknowledged the additional volume produced and incremental sales, but could not understand why they were not witnessing the buttom-line numbers coming through. We asked to examine their cost model. Which everyone suddenly realised didn’t exist.

In simple terms a cost model, continually captures raw material costs, conversion costs (across all processes), overheads and logistics costs. It’s a basic equation of: Raw material costs + conversion costs + overhead recoveries + logistics + margin = selling price.

Many companies have impressive ERP systems to control this but not all. And without a systemic control in place, it was easy for our client to assume (and there is that word again ASSUME!) that they knew their best sellers but it became apparent very early on, that one of their highest volume products were in fact losing them money!

 

  1. Some raw material costs had changed and not been apdated
  2. Agency labour, shift premiums and additional costs were not captured
  3. Throughput was being calculated based upon theoretical and not on actual volumes
  4. Logistics costs were based upon full loads and not by pallet or part load etc.
  5. Various forms of price reductions being given to “KEY” customers based upon volume
  6. Free delivery offering based upon total spend irrelevant of location of margin of product

Below the surface we uncovered uncaptured costs at every turn.

DO YOU KNOW WHAT'S BELOW THE SURFACE IN YOUR BUSINESS?

If you don’t, we can help you to build a systemic approach to monitoring your costs and improving your buttom-line numbers. If this sounds of interest, please get in touch with Jeff Taher:

Jeff Taher, jeff.taher@syn-group.com

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