Improving profitability and margins in manufacturing

Manufacturers are getting squeezed from multiple angles right now. Input costs are on the rise, supply chains are unpredictable and labor keeps getting more expensive. But in this environment, margin and profit improvements are achievable. They require discipline, an honest assessment of your operations and a willingness to act on what your data is telling you.

Keep reading for strategies to improve your business’s profitability.

What’s squeezing manufacturer margins right now?

It’s no secret that margins are currently tight in manufacturing. The top two causes of that are supply chain challenges and rising labor costs.

Supply chain instability

Supply chain disruptions drive up costs and make planning more challenging. Manufacturers are dealing with significant supply chain volatility right now, due to the following factors:

• Tariffs continue to be unpredictable. The Canadian tariffs are the latest example.
• Resin availability is unpredictable and prices are going up.
• Steel and aluminum availability and pricing continue to be a challenge.
• Geopolitical uncertainty in places like the Middle East, Russia, China and Taiwan continues to create trade relationships volatility, making it nearly impossible for manufacturers to lock in stable demand and supply plans.

Labor costs

Starting wages in manufacturing have climbed to $17-$20 per hour in many markets. That’s compressing margins across the board. Even high-performing manufacturers are seeing margin compression right now as labor, benefits, utilities, supplies and indirect costs all trend upward simultaneously.

The challenge isn’t just cost. It’s that many organizations haven’t raised prices fast enough to keep up. At Wipfli, we’re seeing a significant number of manufacturers’ balance sheets showing signs of financial distress, including covenant violations, forbearance situations or unsustainable debt-to-earnings ratios. If you don’t have a strong balance sheet when things get hard, survival becomes less likely.

How to improve manufacturing profitability

Consistently turning a profit is tough for manufacturers in today’s landscape. Here are some items to focus on that could improve overall profitability:

Rethink your pricing strategy

Most manufacturers do a reasonable job of incorporating the costs of raw materials into their pricing. Where they fall short is in recouping all the other inflationary costs, including direct labor, indirect labor, benefits, utilities and supplies. These line items are all going up, and the value-added portion of a manufacturer’s cost structure is taking the most compression.

You must separate the raw material price conversation from the broader inflationary cost increase conversation. And it’s a conversation you must have with customers, even if it means breaking a contract or pushing back on a “no.”

Pricing strategy also means evaluating your existing capacity. If you have open press time or machine availability, you can price more aggressively to fill that capacity and cover overhead. If you don’t have capacity and would need capital investment to take on new work, that changes the math entirely. Pricing a project that requires a large investment, the same as one that uses equipment you already have, can create real cash flow challenges.

Maximize your technology ROI

Automation investments are spendy. Manufacturers with tight balance sheets can’t afford to spend millions automating medium- or low-volume parts just because the technology exists.

The right question isn’t “should we automate?” It’s “what level of automation do we actually need to run this profitably?”

That spectrum runs from solid process flow and hand automation on the low end to fully autonomous cells on the high end. And many organizations that think they’ve fully automated are still putting an operator at the end of the line waiting for parts. That’s not automation. It’s a gap in execution.

When evaluating a capital investment in automation, consider:

• Value-add vs. volume: Higher-volume parts justify more automation. Low-value-add parts may actually need automation most, because the economics don’t justify manual labor.
• Flexibility: Can this asset be redeployed if the project doesn’t meet volume expectations? Prioritize equipment that can be used across multiple projects over single-purpose pieces of equipment.
• Phased approach: Start with entry-level automation that has a lower payback threshold. Evolve the automation plan as volumes increase and the product matures.

Think of capital investment like a ladder; you don’t have to start at the top rung. A phased approach that builds in flexibility de-risks the investment and keeps you from overextending on a project that hasn’t proven its value.

Manage labor more efficiently

As wages rise, it becomes more important to maximize throughput and value added per hour of labor.

Here are a couple of practical strategies:

• Reduce reliance on temporary labor. Temp markups can run as high as 60-65%, while the cost of hiring someone full-time with benefits is closer to 20-30%. In this labor market, you’re not saving money on temps anymore. You’re paying a premium for flexibility you may not need. Temporary workers have their place, but should not be viewed as the easy button.
• Eliminate low-value work. Manufacturers frequently throw labor at small problems because they don’t want to spend the time or money to solve the root cause. This practice compounds labor challenges. You end up with a disproportionate number of people doing inspections, moving product unnecessarily or absorbing transactional waste that proper process design would eliminate.

Control material costs

Buying on contract or locking in a price through futures markets is a good option when available, but most manufacturers can’t rely on it. Distributors pass through market pricing, and a six-month PO doesn’t guarantee a six-month price.

So the strategy shifts to speed and transparency. Identify when prices change quickly and be ready to pass those costs on. To show your customers you’re operating in good faith, pass along price drops the same as you do for increases. For manufacturers, those hard pricing conversations get easier when you have built trust with customers.

Two other tactics that matter:

• Multiple suppliers and approved materials: If you’re single-sourced on a critical material, your leverage disappears. Qualifying a second vendor or second approved material takes upfront work but offers supply continuity and potential leg up in price negotiations. Lessons from COVID still aren’t being applied consistently. Don’t wait for the next disruption to learn this again.
• Pay suppliers on time (or early): Manufacturers with stretched balance sheets stretch their suppliers. That’s one of the fastest ways to lose material availability. Organizations that pay on time, or even early, for potential discounts, can expect more consistent supply and maybe preferential terms/price.

Know your market

Cost-plus pricing is a starting point, not a strategy. The best manufacturers actively build market intelligence into how they quote and how they assess their business.

Track your own hit rates. Review your margin reports by customer and market. When you miss a quote, do some digging to understand where your pricing was off and whether it was material, labor or both. That feedback shapes how you quote the next job and how you structure your business to be more competitive overall.

Build real cost visibility

Cost visibility plays a key role in margin improvement. But many manufacturers struggle to understand all the costs that need to be factored into pricing.

• Start with your bill of materials: Audit your highest-volume and lowest-margin parts regularly. Are you running them the way you said you would when you priced them? If your actual cost differs from the standard cost by more than 5%, you need to understand exactly what’s driving the gap. It’s often a performance erosion problem, not a pricing problem, that is entirely within your control to fix.
• Price by part, not by blended rate: When it’s time to pass on a price increase, don’t tell a customer you’re raising everything by a certain percentage. Show them by part where costs are increasing and where they’re coming down. Not every part carries the same labor or material cost. The manufacturers who can walk into that conversation with part-level data look sophisticated. The ones who can’t look like they’re guessing.
• Be honest about your low-volume, high-mix parts: They can look like big profit drivers on paper. In reality, they create supply chain complexity, scheduling headaches and labor inefficiency. Do a tail analysis on your lowest-volume parts and customers. For the ones that don’t make sense, either reprice them, restructure how you run them or have a direct conversation with the customer about the arrangement.

Know your money makers

Finally, be honest with yourself about where you’re actually making money. If someone asks you what your 10 most profitable parts are, you should be able to answer without hesitation. Find ways to produce as many of those products as possible.

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