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The Tale of Four Manufacturing Companies by Richard Artes

by admin on Tuesday, August 05, 2014 10:14 AM

This article is short story about four manufacturing companies named Company A, Company B, Company C and Company D. Each of these companies makes products with the same name and characteristics. 

These products have the same description, function, performance, features, quality and capabilities. There are, however, difference in company operations and management. Which company would you choose to work for or invest in? This story provides some information so you can make the best choice. As in real life, some information we use to make decision may be incomplete, outdated or inaccurate. This data is accurate.

Company A sells its product for $7.40. Annual sale volume is 5,000 units. Unit production cost is $3.85. Annual infrastructure (SG&A) cost is 31% of annual revenues.

Company B sells its product for $6.50. Annual sale volume is 7,500 units. Unit production cost is $5.10. Annual infrastructure (SG&A) cost is 19% of annual revenue.

Company C sells its product for $5.00. Annual sale volume is 15,400 units. Unit production cost is $4.40. Annual infrastructure SG&A) cost is 28% of annual revenue.

Company D sells its product for $10.40. Annual sale volume is 950 units. Unit production cost is $8.85. Annual infrastructure (SG&A) costs is 21% of annual revenue.

What information and knowledge can you gather and analyze to make the best decision? While you may want more information, it is just not available.

The purpose of this story is to illustrate the valve and purpose of a balanced evaluation of customer value, market leverage, product pricing (market & message), operational productivity and infrastructure efficiency.

Given this information, the best strategy may be to calculate gross and net profit margins. Competitive and successful manufacturing companies balance supply and demand forces to achieve and sustain target gross margins greater than 50% and net margins (EBIT) greater than 20%. The best choice may not be the lowest product cost or the highest sale volume or the smallest % of infrastructure resources. Employees who can evaluate the business environment, value' enterprise productivity and structure opportunities like this example illustrates can implement new methods, ideas and strategies necessary to achieve competitive productivity. This capability is part of "The Competitive Growth" Process. 

What is the best answer? Figure it out!

Richard Artes is an education developer and productivity consultant serving the manufacturing industry. He is a graduate of the University of Minnesota. He is long time member and participant of AME and APICS. Mr. Artes strives to encourage and stretch the boundaries of manufacturing management to include competitive productivity, economic growth and profits through a process called "The Competitive Growth Process".


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