A manufacturer and distributor of products was struggling as its top line revenue was growing. The company had added personnel and increased other expenses such as marketing to support this growth. Despite gaining wider distribution and traction with larger customers, profit margins were declining and management was overtaxed.
Through a detailed review of the current inventory management system, it was determined visibility into product cost was poor. Additionally, there was no allocation of labor made in the product costing, and certain products required as much as 25% more labor to produce, creating a misleading desired product mix. A new inventory management system was implemented and a revised and more accurate bill of materials was created for all products.
Discounting, promotional expenses and account management personnel, previously treated as costs of doing business, were combined with COGS in calculating a contribution margin from products sold. Through this process, it was determined that the company was actually losing money selling its products to multiple customers. Analysis of shipping costs indicated that the company was undercharging its customers on most orders shipped by as much as 20%.
The senior management team had the ability to analyze comprehensive product costs to make decisions on marketing programs and customer contract negotiations. Multiple customer relationships were terminated, and the disproportionate amount of internal resources required were eliminated and/or assigned to other customer accounts. The company’s breakeven declined by over 30% and management was positioned to grow with confidence when new opportunities arose. Additionally, about 15% of the company’s SKUs were jettisoned, allowing it to focus on its most profitable items.GROW BOLDLY fintrepidsolutions.com
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