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Year-end Surprises: Daily Inventory & Margin Control

Written by CyFrame

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Year-end Surprises

Are you feeling positive or anxious about the anticipated profitability projections?

Is your business forced to carry additional raw material or finished products to compensate for surprises and accuracy problems?

Can you easily manage results and quantify if you attained a positive daily contribution?

If not, you are not alone:

Most of us just went through or are still closing our fiscal years. Some of the compiled data made assumptions and we are likely in for some hard realizations. Some of these assumptions may result in the following scenarios:

 

  • A painful, time-consuming year-end process
  • The profit margins results are again less than expected
  • Hidden products resulted in negative contributions
  • Profitable finished goods may be overpriced and not competitive
  • Inaccurate costing estimates correlate to poorly published price lists
  • You may be forced to carry additional stock / raw material
  • Some products may show negative quantities

As we fight our way through the annual closing procedures many owners of plastics processing companies, facing similar recurring problems, ask: Why are the results not what we expected? Could we not have foreseen this sooner? What contributed to the erosion of our margins? Were we in control of inventory levels and did lack of reliable MRP data result in excessive raw material or finished product inventory?

Don’t accept the status quo; adopt simplified methods by implementing corrective actions to improve daily controls that will ensure you have the ability to react much faster to guarantee better result next year.

Proactively evaluating the overall process as COGS that supports the business growth and operational performance, is the first step in taking strategic actions to gain control over margins improve performance.

THE POINTS OF FAILURE

In the plastics molding and extrusions industries, most companies have built upon many manual paper-driven and side systems to handle order entry, purchasing, scheduling, production, quality control, distribution, inventory and invoicing. With so many systems it’s hard to nail down root causes when the financials indicate a problem.

But if you dig deep, you might be able to determine some products were sold at a net-loss. Then ask yourself: if you had real-time data for these underperforming products, could you have fixed production and material issues up front and avoided a negative impact? Could you have met profit margin target to increment profits if you had a constant flow of accurate data to better plan production runs? Would you be able to reach daily margin objectives with real-time tracking so that every product makes a positive contribution to the bottom line and if there were underperformers, why?

Companies may be forced to perform multiple physical inventory counts of raw material only to uncover surprises such as bloated or missing inventory levels, prolonged downtime, missed delivery dates and consequently, an erosion of profits.

Managers know that there are errors and duplication within the data and recognize that capturing information manually or in isolated systems along with the delay between production and reporting plays a big role in the loss and creation of inaccurate information, so all they can do is take decisions based on estimations and experience, hoping their thinking was adequate.

Accounting personnel has to collect the information from many departments and compile it by comparison between departmental reports. Chances are they will find contradictory data and they will be forced to choose one based on experience and feeling, but never 100% sure it was the right value.

Most crucial are the Job Costs for Margin Controls. A concept that many companies fail to handle, due to the complexities of today’s manufacturing processes and the reporting tools used, like spreadsheets, and then integrating them into financial statements.

When this process is not mechanized in a system or handled properly with the right information and with the right procedure in place, major financial surprises will arise when a physical inventory count is taken and report unexplained profit margin variances.

For example, if you estimate a product can be produced for $100 at standard cost but the actual cost is $120, you are transferring $100 to your finished goods inventory while you are actually writing off $20 for each one you produce. For simplification purposes, if that is the only product you make, you will have incurred a 20% negative variance in your profit margin when all the direct labor and raw material numbers are validated for your financial statements.

All these factors contribute to delayed poor working actual costs data with no clear actions to make corrective actions and do not support the organization as a whole to take strategic decisions for sustainable growth.

REGAINING CONTROL

To regain control of the margins, the company needs to gain visibility in every part of the process. So, a good place to start is evaluating and questioning the communication exchange and information flow between these intersecting areas: financing and accounting, sales and distribution, inventory control, and manufacturing and planning.

The objective is to set in place a repeatable structure, ensuring information is shared and moves easily along the process; where each person in the chain gets the right information in the moment that is needed. Where Administration, Operations and Production, Warehouse, Purchasing and Shipping can capture and feed the system instantly, so all the information that is shared across the business is the same, is unique, is reliable, is accurate and up-to-date in real-time and support the initiative to reduce raw material consumption, waste and associated downtime.

Establishing a solid process where everyone has the right tools to execute the job and contribute to the quality of the data, allowing the business to adjust quickly to variants on costs. The point is to be able to take quick informed decisions with confidence, based on readily available accurate reporting and reliable information to accurately forecast the quantities of raw material and finished goods, control price lists and set proper selling margins, always.

With timely and accurate data production managers, planners and purchasers will transition from fire-fighting to making strategic company contributions. It will empower finance and company leaders to confidently improve the budgeting of time machine, material, and other resource allocation and improve their ability to accurately forecast results.

The net result is a solid foundation for continuously meeting or exceeding profit margins and service objectives while supporting the month and year-end closing process to minimize stress and complexity from end to end supported by accurate live departmental data.