The size of the cost price directly affects the size of the sales margin and the possible volume of sales. In market conditions, a company cannot form its products’ selling price by adding the marketing margin it needs to the production cost but is forced to limit the marginal selling price to the average market price level.
How to reduce the cost? Competitive advantage will always be with those manufacturers whose production cost is lower than that of competitors. Conversely, companies with the highest production costs will always struggle with marketing and financial stability because their small sales margins will not allow them to generate income sufficient to cover all costs and make a profit. But there is an excellent way to reduce the company’s dependence on the sales department – to reduce the cost. It depends on the production technology, the cost of raw materials and energy carriers, and the wage fund. The owners and management of the company have more opportunities to influence these factors than the plans of network retailers or the weather.
- Analyze and improve technology. Technologists and engineers graduated from universities decades ago, and most did not develop afterward. And over the years, technology has come a long way. It will be best and most interesting for top managers to visit similar production sites in other cities and countries. You can learn from experience and optimize your production.
Modernization is very painful for technologists, engineers, veterinarians, and agronomists – they must re-learn new technologies, and some of the employees must be reduced or replaced. But it gives an impressive effect. You can link the motivation system to cost reduction and pay bonuses – then the staff will benefit from optimization.
Experiment, use different equipment settings and different raw materials, and attract external consultants and your innovators. All this together will provide an opportunity to increase the return on each production line.
- Involve staff in the improvement process. People in production always have a lot of simple ideas and suggestions for improving production and making it more convenient for themselves and the owners. The main obstacle to staff participation is the fear of contact with management, responsibility, and punishment if something does not work out. Remove unnecessary hierarchy levels between managers and production staff, which only hinder communication and inflate costs. For example, there were groups of mechanics, engineers, and specialists on a large poultry farm at each service. For instance, if there was an engineering service at the poultry farm, there was an additional department of the chief mechanic. The chief power engineer had a whole staff of highly paid deputies. At another poultry farm, the chief engineer, retired colonel of the Engineering Troops, organized his service on the principle of autonomy in case of war. Each section had a separate person in charge of pressing the button. It all ended because the staff was cut three times, and the chief engineer had to part ways.
- Use hidden reserves. Often, production waste is disposed of, and disposal costs money. But what for you is a waste of the primary production. For others, it may turn out to be a raw material. You need to find a buyer – and instead of disposal costs, there will be income from selling a new product. For example, food production waste is pet food, biomaterial for vaccines, feed additives for livestock, fertilizers, etc.
- Make purchasing more flexible. Due to the risk of abuse, the procurement process is highly bureaucratic: tenders, many price negotiations, strict budgets, and supplier due diligence. While the buyers will prepare and agree on all the documents, prices may change, and you must start again. In the food industry, unexpected demand often arises (for example, from a large retailer) – and the manufacturer needs to purchase raw materials urgently. While your procurement tender is going on, another supplier manages to satisfy this demand.
The tender committee often rejects the application of a good supplier who works only on a partial prepayment basis. Profit suffers; it happens entirely imperceptibly. It is often possible to influence delivery times by advancing suppliers. It increases the need for working capital, and there are also risks of a return due to inadequate quality. Still, discounts and reduced delivery times compensate for these costs, and inventory turnover increases.
Tenders are not as good protection against abuse as is commonly believed. They give results only at the initial stage when the company establishes procurement processes and interacts with critical suppliers. After that, all parties to the process are already well acquainted and often agree among themselves before the start of the tender. A well-thought-out personnel motivation system and direct contacts between shareholders and key suppliers help control purchases. Buyers will be afraid that the shareholder will call the seller directly and ask for a price.
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