Profitability under pressure
Maintaining profitability under pressure, starts with understanding your costs, says Brian Gold, managing director of Jotika Software.
With uncertainty in the economy, some parts of the glass industry are experiencing a dip in demand. As your competitors respond by cutting prices, there is more pressure to reduce your prices and deepen discounts.
But the big problem with price discounting is that you can quickly slip into loss-making. So, as we all experience more price competition, it is essential that you understand your costs properly.
It’s one thing knowing that costs are increasing, but you get into a whole different game when you can pinpoint exactly what, where and for whom those costs are arising.
Think differently about your biggest costs
For most glass businesses the greatest outlay is for raw materials and energy. As these prices continue to rise you need to make sure you allocate costs properly so that you can understand the margins on different product lines, and price them appropriately.
Forward-thinking managers don’t just accept overheads as the ‘price of doing business’ and spread them equally across their price list. They look at how different products take up more or less resources, from large pieces of glass that hog the entire furnace, to complex pieces that take more labour and require specific machines.
Get on top of waste
Waste from cutting and occasional breakages are unavoidable, but you can still reduce their impact on your profitability. This could be by improving waste at cutting or by analysing internal breakages more precisely to determine a resolution.
Similarly, some products carry a greater risk of damage, perhaps due to their size or extra handling. Provided you are recording breakages and internal rejects properly, you can review which products are more likely to require rework and so build that into your costings.
Manage rejects and returns
When items are rejected by a customer, whether that is due to damage or failing to meet the specification, the cost of rework can put a serious dent in your margins. It is really important that you analyse where these costs are occurring, so you can see which products and processes are most prone to problems, so need management attention and/or price adjustments.
Equally, this kind of analysis sometimes reveals a small number of customers who are a lot more likely to complain of damaged products. Whatever their reasons, you may need tighter quality control or less generous discounts for these particular customers.
Go beyond generic reporting
Within the glass industry there are huge differences in the kinds of contracts and products that each business makes, as well as the specific equipment and the working culture within each company. This means that cost analysis needs to be specific to you; generic reports are unlikely to add much value.
It is important that you find analysis and reporting tools that let you slice and dice your data so you can get investigate issues properly. It is essential that they allow you to group costs into categories such as material (including waste), direct labour, direct energy cost, breakage cost, customer remake cost, transport cost and so on.
In this way you can focus in on where your intuition leads you and then ask more specific questions of the data as you expose your blind spots, uncover patterns and identify potential problems.
Adjust prices and improve outcomes
There are two key ways in which glass companies are benefiting from the kind of detailed cost analysis that we have been describing:
- By understanding the true costs for each product, they are setting individual prices that they know are fair and are offering customer discounts that reward profitable, partnerships, not high volumes at unsustainable margins.
- They are identifying key areas of cost reduction where they need to focus attention and resources, such as furnace optimisation, quality control or barcode tracking through production and dispatch.
Through these combined approaches, the owners of glass businesses are making the most of challenging market conditions and coming out the other side a great deal stronger and more profitable.