Lean manufacturing and the expected efficiency to be gleaned is a great thing; however, does this alone guarantee the profit we deserve? Well, I suppose it depends. In particular it depends on the right volume of sales generated by the shop to appropriately cover the burden (overhead) and expected profit. This is also called the contribution margin.
Depending on whom you talk to, burden, overhead or fixed costs are determined in many ways. In manufacturing, the position of shop supervisor is normally classified as a fixed cost. What happens if the job requires the supervisor to operate a machine? Are the costs now to be defined as variable? As variable costs are those that change with volume, such as materials for instance, does it now follow, if things slow down we eliminate the position? Probably not, because the business cannot operate without the position if things turn for the better again.
While costs such as rent, utilities, maintenance and transportation, even if some of them vary from month to month, can readily be set and accounted for, the costs of staffing is a little more complicated with respect to how those costs are defined in your accounts package.
Get in control
The reason as to why this topic is of great importance in these times -- and probably always -- is that as sales go up and down, so do profits. OK, this is no great revelation we all know this! However, I see in my travels that because it is not monitored, nothing is done about it. If seen at the end of the month, quarter, or even worse at the end of the year, that the burden rose from 20 percent to 30 percent of revenues, it is too late.
Imagine you had a simple way of knowing how things stood at all times. How much better could you manage your business and make day-to-day decisions with a tool providing this information? A tool and set of numbers clearly indicating things are moving along smoothly.
Today, the dashboard is that tool. Just as in your car, the gauges show that all is well. In this same way we must we present data for the behavior of the business, monitoring key factors constantly. In the interest of not creating unnecessary administrative work, the accounts package should readily present the data. If such figures are not relevant enough in as a short time period like a week for instance, estimates for work in progress must be added to sales invoiced.
Manage what you measure
Most shops have a good idea for cost of goods sold and therefore the material costs for typical jobs. Thus, your dashboard does not need to reflect purchases inventories but must clearly show output and sales for a given period. If weekly sales invoiced and work in progress shows the correct relationship to the expected overhead for that period, everything is tikitiboo [everything’s OK].
Here is the cherry on top: manage what you measure. On the other hand, said more, strongly we can only manage what is measured.
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