When complexity rules

One of the most utilized values in manufacturing is the gross margin of the products produced, and costs are often allocated according to the products material value. For less complex industries, producing a small number of different products, a simple product calculation model that allocates manufacturing costs according to total material costs may be sufficient, and maybe even fair. However, as industries turn more complex, for example when the product line includes both cheaper, low volume products and costly bulk products, a simple model as the one mentioned above simply isn’t good enough.

For example, a simple cost allocation model makes it virtually impossible for a construction department to motivate a modular design. Since such a design is more complex, and thereby more expensive, the gross margin will per definition be lower than that of the non-modularised product. The simple costing model simply does not take into account that the use of a modular design, for example, reduces the number of unique parts. This makes the purchasing process easier, and thereby cheaper, which in its turn reduces the manufacturing cost of the modularised product.

In addition to providing accurate and transparent product cost information, profitability analysis gives extensive information on how different resources are consumed by the different products. This is often exactly the information needed by management when deciding on how to make a manufacturing process more efficient, and thus more profitable.

By expanding the scope of analysis to include development, sales, distribution, and even spare parts, you can also calculate and analyse a product’s profitability across an entire business. This makes it possible to, for example, identify products that – although they have great gross margin – consume large amounts of costs throughout the rest of the organisation.

By also including sales statistics in the analysis, the Astrada method makes it possible to analyse the results even by customer and sales channel.

If you want to know what reliable cost and profitability information can do for your company, please contact us. We will be more than happy to discuss your company’s specific issues.