Not all companies have the capacity or interest to go big with a major acquisition or product line. Sometimes, it’s enough to focus on incremental improvements to existing capabilities or the addition of new ones. Improving your margins can provide the fuel to get you there by adding to your top line (sales) or curbing your bottom line (expenses). The cash you free up can then be reinvested in capabilities that enable growth.
Recognizing that you can get more out of your manufacturing operations is easy. Determining how is more complicated. Before you retool your sales processes to drive up revenue or scale back on fixed expenses to cut costs, you need to first understand where your best opportunities lie. Here are five areas of opportunity that we most commonly see on the shop floor for how to increase profit margins:
1. Sharpen your product costing expertise
Many manufacturers struggle to quantify the cost of manufacturing, engineering and delivering products to their customers. Material, payroll and fixed overhead costs are relatively straightforward. Technology has also made it possible to track direct labor on a job.
However, there are other costs that are harder to gauge, such as unplanned downtime and variable overhead. In addition, higher material costs and extraneous surcharges that arose during the pandemic have not necessarily factored into production costs.
Getting a better handle on true costs will enable you to pinpoint opportunities to increase prices or reduce expenses. From there, you can begin to explore other areas for margin growth, such as inventory control and purchasing patterns.
2. Invest in automation
Automation can improve your top line by enabling you to do more without necessarily expanding your payroll. In this tight labor market, few manufacturers are looking to eliminate staff. But by automating dangerous, repetitive or difficult-to-fill positions, you can extend your existing workforce, produce more parts at a faster rate and thereby increase your profitability.
The key is to strategically invest in automation as a means to remove effort, improve accuracy and reduce risk.
3. Deploy industrial internet of things (IIoT) capabilities
Sensors and other IIoT technologies provide extremely valuable insights into operational performance, such as equipment status, job progression and per-piece run rates. All of this data can be used for historical comparison across machines, parts, shifts and employees to identify areas for margin management. From there, you can start to anticipate and eliminate equipment failure, downtime and other sources of waste. The productivity time you reclaim can be converted into more capacity.
The best part? You don’t need to invest in a full-scale overhaul of your equipment to take advantage of IIoT technologies. There are still benefits to be gained, even with limited resources.
4. Optimize your workflows
Waste can creep into processes in unexpected ways. People and material bottlenecks, inefficient changeovers, cumbersome setups and other hurdles to productivity can drive up expenses and erode margins.
Taking an end-to-end view of the entire value stream can yield substantial opportunities for margin improvement. This requires a deep dive into every process that supports your operations. How is demand triggered? How effectively do orders proceed through each step? Can you reduce the time for changeovers or machine cleaning? Are you getting tripped up by inventory availability? Any means to reduce the difference between tact time and lead time will free up more time to add value to your business.
5. Automate information flow
Data is a tremendous — but often overlooked — asset to manufacturers. In combination with IIoT technologies, it can be vital to identifying processes or operations that need to be shored up and to help you prioritize your strategies for doing so. When you have access to data that is timely, actionable and relevant, you have the means to make more informed and strategic decisions about where to adjust your operations to improve margins. Think of it as a means to objectively assess operational and financial performance.
Bringing it all together
Taking a strategic approach to margin improvement is foundational to a successful effort. What are you good at that you can build on? Where do you need to shore up operations to better manage expenses? Answering these questions requires a clear and unbiased understanding of your operations from multiple angles, including operations, finance and IT.
Reviewing the entire value stream from beginning to end will likely reveal many hidden opportunities to eliminate waste or free up capacity. Strategies for margin improvement tend to be closely intertwined, which is why a holistic view of the entire ecosystem is so crucial to success. Moreover, sustained margin growth can’t be achieved with a one-and-done exercise. Building an annual review around your operations will go far in keeping your margins healthy and your shop floor running smoothly.
Wipfli can help you improve margins
That’s a lot to take on, but you don’t need to do it on your own. At Wipfli, our manufacturing and technology specialists understand the many factors that drive margin performance. From classic process improvement methodology to Industry 4.0 technology, we have the full suite of capabilities to help you assess, understand and prioritize opportunities to increase your margins. Learn how you can gain more from your operations to innovate, automate and grow.
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