Saturday, August 28, 2010

Increase Profits by Reviewing Material Costs

vicinity software
How would you like to add 5% directly to your bottom line? Here is one way without much effort.
In changing economic conditions it is one thing to know your existing production costs it is another to anticipate changes before they happen. Far too few formula manufacturers have insight into upcoming production costs until it is too late. That is a bit like driving your car by looking in your rear view mirror.
Imagine the scenario where you could monitor your current production costs with an eye to changes coming in the future. What would you do with this information? Would you begin to look for alternative sources of materials? Would you work with R&D to identify replacement materials in your formulations? Would you brace your customers for a potential price increase? Any and all of these options are valid and each can add profits to your bottom line.
So how can you do it? The key is in knowing what material costs are changing in the future as well as what effect these changes have on the production cost of the finished goods.
The first part – knowing that material costs are changing – is the easier part of the challenge. If you can work with your vendors to get a better idea of when they anticipate price changes or if your material is traded on the commodities market you are most of the way there.
Spend some time looking at your most used materials in production. Specifically target those with relatively high costs per unit. Price changes in these products will have the greatest impact on your production cost. Then review the price fluctuations over the past couple years of this ingredient. Finally talk to some providers in the market. What are they seeing with this ingredient? Without much effort you can identify the key ingredients to monitor and gain some insight into the anticipated cost changes in the future.
  • Identify ingredients (high volume/high cost
  • Review price fluctuations over the past couple years (higher fluctuation is key)
  • Talk to suppliers in market about upcoming costs

Now that you have key items to monitor the next step is to calculate the affect these changes would have on your production costs.
Identify all formulas in which these ingredients appear. This should be a pretty basic where-used function in your manufacturing system. Once you know these formulas replace the existing cost with the proposed cost. The result is your new production cost for this formula. How does this compare with the existing formulation cost? It is enough for you to absorb or do you need to take corrective action?
Some formula manufacturing systems have functionality that will virtually automate the analysis step. The following screens are from Vicinity Manufacturing's Proposed Cost functionality
The user is able to select components (ingredients) and manually enter proposed costs or alter the costs by a % of current costs. With this table in place the Cost Rollup functionality is used to identify the formulas affected and calculate the new cost as seen below.

Whether you use an automated tool such as the one provided by Vicinity software or you do this manually with your existing system the results are the same. Find out what items impact the productoin costs, research and identify the proposed material cost and finally calculate the effect this change will have on your formulation costs.
This knowledge will go a long way to provide corrective action that will increase profits without making significant changes to your production process.
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