As commodity prices increase, suppliers come knocking, pushing through commensurate increases. But what happens when those same commodity prices fall? Too often, purchasers fail to get a break. Consider the situation of an aerospace and defense supplier. As key metal prices rose, the company grudgingly accepted its suppliers’ price increases for machined parts. Trouble is, the company lacked good tracking data on commodity indexes. So … [ Read more ]
A profit map, the core analytical tool of profitability management, displays the profitability and cost structure of every product in every customer in the company. Profit maps show exactly where profit is flowing and where it is lost.
A profit map is not especially difficult to develop, but it is completely different from the information developed for financial reporting. Many finance managers make the … [ Read more ]
When faced with the need to expand manufacturing capacity and the inherent investment required, first perform a thorough profitability analysis (a profit map) of each product produced from the capacity-constrained factories (this includes profitable products being sold unprofitably to selected customers). Since many companies have a significant amount of unprofitable business, it is quite possible that stopping the unprofitable sales can free up enough capacity … [ Read more ]