Sales increased but losses accumulated !!!

Monday, January 9th, 2012 at 11:54 am  
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When I started my career as a management consultant, I thought that the whole solution was sales. Increase the revenues would make problems disappear. Of course, my simplified view of business was quickly confronted with the reality of manufacturing.

So on my first business rightsizing in 1990, true to my beliefs, my primary mission was to increase sales to avoid my client bankruptcy. When making the diagnosis, and following a reorganization of the GL accounts on the income statement, I was amazed to see that the more product the company produced and sold, the more money they were losing. The factory making doorframes and jointed pine moldings had a higher cost of goods sold than the value of the sales, showing a negative gross margin.

The analysis of the job cost identified helped identified issues and correction. With annual sales of $1.5 million, the company should have had a maximum of 15 employees assigned to the production, but it had 27. The quality of the raw material used was inadequate. Pine boards of grade 4 and 5 were used instead of grade 2 or better. Consequently, sometimes managers preferred to burn the finished product instead of shipping it to customers. Wood and glue, believe me, makes for a great campfire!

The changes were positive. By reducing manufacturing costs, the new gross margin was now positive. This new situation helped to focus on developing sales, which increased by 100% annually, from $1,5 million to $3 million. In this case, the development of sales could not have been successful without a marked improvement in gross margin.

Gross profit shows the productivity of operations. The more efficient the company gets, the faster it can reach breakeven. To calculate the breakeven point, take the fixed costs of the company and divide it by the gross margin percentage.

For example, if your company has fixed costs of $1 million and gross margin is 25%, the breakeven point is $4 million.

 

Breakeven =    Fixed costs / Gross margin %   =    $1 million / 0,25  =  $4 million

This means that for sales of $4 million, gross margin will be $1 million, which amount must be subtracted from the $1 million of fixed cost, for net income of $0. This is the breakeven. So, for each dollar of sales exceeding $4 million, net income will be $0,25. Therefore, sales of $5 million will give a net profit of $250 000. (($5 million – $4 million) x $0,25)

 

What if the gross profit margin is less or greater than 25%? For the same example, with fixed costs of $1 million, if the gross margin is 10% this means that the breakeven point will be $10 million.

 

Breakeven =     Fixed costs / Gross margin %    =    $1 million  / 0,10  =  $10 million

 

So, before you start making a profit of $0,10 per dollar sold, the company will have to make minimum sales of $10 million.

The opposite, if the gross profit margin is 40%, the breakeven point will be reached much more rapidly with sales of $2,5 million ($1 million / 0,40), then providing a profit of $0,40 for each dollar sales exceed the breakeven point.

 

Breakeven =     Fixed costs / Gross margin %   =    $1 million / 0,40  =  $2,5 million

 

Healthy operations and production management is a guarantee of success for the manufacturing company. The number of variables and the speed at which the company must react requires integrated management system that captures information at the point of production. The component costs and the time value of labor must be entered immediately in order to check at the beginning of a trend, changes in the job cost.

Proper use of technology included in an Enterprise Resource Planning system (ERP) allows the identification and verification of the actual operating costs, which could then be compared to the expected results and highlight any differences.  The causes of theses differences might be: fluctuation in currency exchange rate that would have an impact on price of raw materials or the routing time allocated vs actuals time spent producing. The information collected should allow the manager to make the necessary adjustments as quickly as possible.

The ultimate goal is always to increase gross margin that in turn will allow the company to reach breakeven in a shorter amount of time and to generate maximum profits for every dollar sold.

 

 

Richard Landry, b.b.a., m.b.a.
www.visionmanagement.ca

When was the last time you calculate your job cost ?

Monday, January 9th, 2012 at 11:42 am  
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The job cost is a reliable indicator

The job cost is a powerful indicator of performance that can match each product manufactured to its proper costs. It allows the identification of the strengths and weaknesses of a manufacturing process. It helps to identify bottlenecks. It shows the required investments and help in the analysis of the return on investment (ROI) of past investments. The job cost can also help in setting the selling price. Any business and especially the manufacturer should know its job cost to the penny.

 

 

Recently, different types of solutions have been implemented to calculate the job cost. But how many companies use incorrect or partial data that provide only a portion of the information. Many management decisions made are based on incomplete data that threaten the survival of the company. The job cost should be calculated in real time to provide the manager with the information to make decisions to continually improve the profitability and productivity of the organization.

 

 

 

The job cost as a decision tool

The job cost includes the cost of raw materials, direct labor and overhead. This model can be calculated on a spreadsheet when the number of product is rather limited.  But this method holds a number of weaknesses including transcription errors, information that is hard to get and the time required to maintain the spreadsheet.

However, when the production includes several products, made from various raw materials with different routing time and processes, the task becomes increasingly complex. How to allocate the costs of raw materials? How to ensure that staff time is properly assigned to the right finished product? To get the correct job cost, which includes all data, a real time capture of raw materials and employee hours by product or project is essential.

 

The job cost is the main factor that affects profitability

Between 2001 and 2009 gross domestic product (GDP) of Canadian manufacturers decreased by $30,1 billion. The job cost is the main factor affecting the profitability of manufacturers. An integrated ERP that consolidates all data, transactions and updates will provide you the information required to support you in achieving your business goals.

 

 

Caroline Cholette, M.B.A
Director of Business Development
JBM Logic

 

References :

Michel Beaudry, Service d’intervention sur mesure (SIM) :
www.simexperts.com

JBM Logic, INTEGRA e-business :
http://www.jbmlogic.com/emanufacturing_fr.html

Is change a necessary evil ?

Monday, January 9th, 2012 at 10:58 am  
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There was a time when change was considered like instability and to be avoided at all cost, remember the old saying: “ If it ain’t broke don’t fix it ”. In the eighties, studies of Japanese manufacturers by Deming created a new trend. The concepts of lean manufacturing and continuous improvement showed us that change has become a necessary evil. Today, change is an opportunity to improve and use the logic of profitability, followed by any business.

 

A phase of imbalance towards to a better future

Any changes will automatically generate a phase of imbalance. This imbalance can lead to reluctance, especially when people are not consulted, informed and managed diligently. We must also take into consideration people’s habits and body memory, which is the most powerful.

 

Joannie Rochette

 

  
 
During a visit to a French Canadian TV show on November 13th 2011, Joannie Rochette relates her experience of the body’s memory that allowed her to make her performance at the Vancouver 2010 Winter Olympics Game. We all remember the tragic death of Joannie’s mother and her bronze medal just days after. Joannie does not remember skating that day, but her body did what it had to do. It remembered.

 

 

 

Consultation and clear objectives will rally the troops to go through any changes

Before you even think that a change would be beneficial, you must first clearly define the company objective. Once this step is done, then it is possible to identify opportunities to improve. A multidisciplinary team, without formal hierarchy, will allow your colleagues and staff to assist you in this quest. People who work on the floor are able to identify the loss of values and offer you solutions to solve them. Subsequently, the evaluation of these solutions and the ultimate choice should also be done as a team. Finally, planning, implementation, control and adjustments may be made by managers in collaboration with employees. The goal is to bring change while reducing the reluctance to make your company grow. Effective communication and mutual respect will help you to reach your goal.

 

 

Caroline Cholette, M.B.A
Director of Business Development
JBM Logic

 

References :

” La résistance au changement : synthèse et critique des écrits ”
Article produced by Céline BAREIL, Associate Professor, Department of Management, HEC Montreal.
Article # 04-10 – August 2004

Radio-Canada :
http://www.radio­canada.ca/emissions/tout_le_monde_en_parle/saison8/document.asp?idDoc=185062

Joannie Rochette :
http://joannierochette.ca/accueil/

Why a new Economic Blog?

Friday, April 25th, 2008 at 11:19 am  
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Welcome to Positive Twist on Economic news. Have enough of all the negativity in the traditional Media, me to, here are the good news. Read it, then start commenting!

Jean-François Brodeur
President of JBM Logic

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