Product Rationalization - Identifying Unprofitable Products
Few manufacturers would admit to manufacturing unprofitable products even if they knew it. However, if you are manufacturing a range of products chances are that one or more could be unprofitable, unless you can accurately quantify the on costs of making each product line.
Recently a manufacturer was able to determine the relative profitability of each of their range of products after implementing a PlantRun manufacturing information system.
All products used the same production process but the cost of each unit produced varied depending upon the raw materials used, production profile, breakdown and changeover times etc. Once these could be accurately measured and compared it became clear that one particular product was unprofitable at the established sale price.
After consultation with the Sales Department it was agreed that the market would not bear the price increase needed to make the product profitable. Therefore the decision was taken to delete the product from the company’s product range, which freed up production capacity to make more of the profitable products in the manufacturers range.
Ultimately if it is not possible to find a way of making a product profitably or increase the sales price are you not better off applying product rationalization and allowing your competitors supply it? They may or may not be able to make it profitably and probably won’t know either way.
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