The Results Are In
Yes was the typical response to our recent informal survey of companies dealing with compressed marketplace opportunities. While the open ended survey questions were designed to create dialog, business leaders where very specific on their comments about the relentless pressure to lower prices.
A highlight of some of the comments received to the question, have your margins been shrinking over time, included:
“We have run out of ways to lower costs, so now we are eating into working capital to cover our daily short fall.”
“Our business had been forced into a lot of short running jobs with a lot more change overs. Long runs are a thing of the past. Unfortunately we can’t recover the added cost because the pricing is still at the larger volume discount level.”
“You won’t believe how frustrating it is to lose something over a nickel. It’s almost as if nothing else matters except the numbers on the page.”
These are just a few of the comments that are representative of a general theme, most businesses are now being forced to learn survival skills in a minimal margin market place. While margin compression is not a new issue and certainly does not come with any easy answers, there are few options to explore that may provide relief. They do require some level of higher risk and embracing a changing environment. The first one is redefining your business definition of “burden rate” and the second is developing a new market position for your business. For today’s purposes, let’s focus on burden rates.
Costs for any business have three basic classifications:
- Raw material cost is “any cost associated with bringing material in the front door”
- Labor is “any person or thing changing the appearance of the material and making it become a product that your customer pays for.”
- Your “burden cost is everything else.”
This may seem like a simplistic approach to a complex pricing structure, however, an objective outsider can use it to provide some significant opportunities to achieve cost reduction opportunities for almost every business. Unless you use a published pricing policy, every business has built in “wiggle room” in its quoting process. This wiggle is compensating for an excessive burden rate. Changing the final price, whether published or not, is a symptom of cost misunderstanding.
SEWN is a free service to manufacturing business owners struggling with these cost cutting burdens.
We are proud partners with the Bucks County Economic Development Corporation and would be happy to work with you (and BCEDC) to help save and create jobs in our own backyard.
To learn more about what SEWN can do for you go to www.steelvalley.org/saving-jobs/sewn or contact Greg Olsen, sewnse@steelvalley.org or (215) 458-7580.