Managing margin pressure in manufacturing through pricing strategy and cost visibility

Manufacturers across many industries continue to struggle with margin pressure. Rising labor costs, supply chain disruptions, fluctuating material prices and increased competition make it difficult to develop pricing strategies that improve profitability. Sustainable margin improvement requires a deep understanding of what truly drives costs and profitability throughout the organization.

To protect margins, manufacturers should focus on accurate job costing, real-time operational visibility and data-driven pricing strategies. Continue reading for an in-depth exploration of common costing mistakes and strategies to bolster profits.

What factors are contributing most to margin pressure for manufacturers today?

Manufacturers face margin pressure from several directions. While some challenges are familiar, others have emerged as the business environment becomes increasingly complex. The organizations that manage margin most effectively understand not only external pressures, but also the internal drivers that impact profitability.

Supply chain issues

Manufacturers continue to face uncertainty from tariffs, geopolitical events, transportation costs and supplier instability. These factors can increase costs, extend lead times and create challenges for production planning and pricing decisions

Labor shortages and increasing workforce costs

Hiring and retaining skilled workers remain difficult. When there is a labor shortage, businesses must increase wages and often incur higher overtime costs. Training costs also increase when businesses struggle to keep employees.

When labor costs rise faster than productivity gains, margins can quickly erode.

Underutilized data

An often-overlooked challenge is the inability to translate data into actionable insights.

Manufacturers have access to more operational and financial data than ever before. That data can be used to speed up purchasing, optimize floor operations and more. However, that data is only valuable if you use it effectively.

Many organizations lack the systems, controls or reporting capabilities needed to act on insights that data provides. When leadership teams cannot access timely, accurate data, they may miss opportunities to optimize production, adjust pricing or respond quickly to changing market conditions.

Why is accurate job costing so important?

Accurate job costing helps manufacturers:

• Understand the true profitability of products and projects
• Develop more effective pricing strategies
• Identify opportunities to reduce waste and inefficiencies
• Improve forecasting and budgeting
• Make more informed operational decisions

Most manufacturers do not have a pricing problem. They have a visibility problem that leads to decision latency. When job costs are inaccurate, quoting errors, production inefficiencies and unprofitable work can go unnoticed until after a project is complete.

What expenses do manufacturers miss when calculating costs?

Many costing models were established years ago and continue to operate under assumptions about labor efficiency, machine utilization, scrap rates and overhead allocation that no longer reflect reality.

Direct materials and labor are a primary focus when calculating costs. But there are less-visible costs that can significantly impact margins that manufacturers need to account for.

Scrap, rework, and quality issues

Scrap can be excess material removed during production, discarded defective products or leftover raw materials with no use. Quality failures create an additional burden through the labor required to inspect, rework, repair or remake products. When scrap and rework rates are not accurately captured, production costs are often understated and profitability is overstated.

Operational complexity

Many manufacturers underestimate the costs created by complexity. Frequent production changeovers, expedited customer requests, engineering revisions, scheduling disruptions and custom product configurations consume time, labor and capacity that are rarely reflected in standard costing models. While each event may seem minor individually, collectively they can have a significant impact on margins and the true cost of serving customers.

How can manufacturers gain better visibility into cost drivers?

Improving cost visibility starts with collecting more accurate operational data and connecting it to financial outcomes. Manufacturers cannot improve what they do not measure, and many organizations struggle because operational performance and financial performance are tracked separately.

Monitor machine performance

Invest in technology that monitors:

• How often a machine is running
• How well it is running
• How much it is producing

Be sure you’re accounting for planned machine maintenance in your overall costing.

Detailed labor and machine hours tracking

Labor is one of the largest cost drivers for most manufacturers, yet many organizations rely on averages rather than actual performance data. Tracking labor and machine hours at the job, product or customer level provides a clearer understanding of resource consumption and profitability. More granular data helps identify which products, customers and processes generate the strongest returns and which create hidden costs.

To do this effectively, you may need to require staff to clock in and out by project, not just for the day.

Actual material costs

Material costs can fluctuate for a variety of reasons. Compare actual material costs with the originally quoted costs and analyze any variances. This visibility helps pricing teams make more informed decisions on future projects.

The role of technology and data in pricing decisions

Modern technology that is properly utilized enables leadership teams to make faster and more data-driven decisions about pricing. The greatest value comes from connecting operational data, financial information and customer insights to create a complete view of cost drivers and performance.

An optimized tech stack for a manufacturing business could include:

• Machine monitoring systems for equipment utilization and production insights.
• A timekeeping and labor management system for detailed workforce tracking.
• A cloud-based ERP system for financial management, job costing and reporting.
• A CRM platform for sales pipeline visibility, quote management and marketing capabilities.
• Operational dashboards and analytics tools that provide real-time performance insights.

What metrics best reveal profitability?

There is no single metric that reveals profitability. The strongest manufacturers connect financial metrics such as contribution margin, gross margin and EBITDA with operational metrics such as labor efficiency, machine utilization, throughput, scrap and rework. Together, these measures provide visibility into where margins are being created, where they are eroding and what actions leadership should take to improve performance.

How should manufacturers assess their costing models?

Many manufacturers assume their costing model is accurate because it has been in place for years. The better question is whether it still reflects how the business operates today. Reflect on your costing model. Do you know what your costing model is? Who owns and maintains it?

From there, you can start diving into more specifics, including:

• What pricing variables are being tracked?
• How does the model align with future priorities from margin, profitability, and operational perspectives?

Build specific cost models for each product and job to accurately account for variances in labor, materials, downtime, rework, scrap and other costs.

Significant operational changes, technology investments or process improvements should trigger a reassessment.

Why collaboration between sales, operations and finance matters

Job costing is the common language connecting sales, operations and finance. The most successful manufacturers create a continuous feedback loop that connects pricing assumptions, operational performance and financial results.

The communication cycle between departments looks like this:

• Sales set the margin: Every quote is built on assumptions about labor, materials, production efficiency and overhead. If those assumptions are wrong, margin is at risk before production even begins.
• Operations deliver the margin: Operations are responsible for executing the work as quoted. Production rates, labor efficiency, machine utilization, scrap and rework all directly impact whether projected margins become reality. Operations must continuously provide performance data back to sales and finance.
• Finance confirms the margin: Finance measures actual profitability and identifies where assumptions differ from results. By quickly communicating variances, finance helps sales improve future pricing decisions and operations focus on areas eroding profitability.

Steps manufacturers should take to improve pricing and cost visibility

Organizations looking to strengthen profitability should prioritize several near-term initiatives, including:

• Conduct a job costing study to identify missing cost drivers, outdated assumptions and opportunities to improve pricing accuracy.
• Evaluate costing model assumptions around labor, materials, machine utilization, scrap, rework and overhead allocation to help ensure they reflect current operating conditions.
• Model the impact of changing variables such as material costs, labor rates, tariffs or production capacity. Scenario planning allows manufacturers to understand how different conditions may affect margins before changes occur.
• Invest in systems and processes that improve machine monitoring, labor tracking and material cost reporting.
• Strengthen the connection between sales, operations and finance so pricing assumptions, operational performance and profitability results continuously inform one another.
• Assess whether current ERP, CRM and operational systems provide the visibility needed to support informed decision-making.
• Establish a regular review process for profitability at the product, customer and job level to identify margin erosion early and make proactive pricing and operational adjustments.

How Wipfli can help

Wipfli helps manufacturers improve profitability through job costing studies, cost-driver analysis and floor optimization initiatives. Our team can evaluate current pricing and quoting processes, identify opportunities for margin improvement and help align operational performance with financial goals. We can also help your business identify and implement technology solutions to improve production efficiency and enhance your data analytics capabilities. Start a conversation.

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