Calculating your current production costs is a good first step to getting a grip on your profits. However, it’s not the last one. If you can’t anticipate future cost changes, you won’t be agile enough to adapt to the market as it evolves.
Have you tried driving your car by looking solely at the rearview mirror? It can be done, but limiting your view makes it much more likely that something will catch you by surprise and cause an accident.
Likewise, not being able to forecast your future production costs limits your view, leaving you unable to see the big picture and act accordingly.
Conversely, monitoring your material costs with an eye toward the future brings benefits, such as:
- You can search and compare alternative sources of materials
- You can work with your R&D team to choose possible replacement materials for your formulas
- You can advise your customers ahead of time that there will be a price increase
These and other benefits result in greater profitability and better customer relations. How do you accomplish it? The key is this: You must know which material costs will change in the future, as well as the effect they will have on the cost of your finished goods.
Steps to Gain Control of your Material Costs with Dynamics 365
Step #1: Identify High Volume / High Cost Ingredients. Knowing in advance about upcoming price changes is half the battle. Work with your vendors to get that advance notice. Or, if your material is traded on the commodities market, keep a sharp eye on trends, and you’ll have the information you need.
Analyze your output and identify the materials most used in production. Focus on those with the highest cost per unit, because these will have the most impact on your finished goods calculations. Next, analyze how the price fluctuated over the past 2 or 3 years to identify trends that will help you forecast. Finally, talk to providers in the market. Find out what trends they see. This data will give you insight into anticipated price changes.
Step #2: Run the numbers. First, find all the formulas that use the key ingredients you identified in Step 1. Your manufacturing system likely has a “where used” function to quickly pull that together for you. Next, enter in the proposed material costs and recalculate the total production cost.
Compare the before and after. Is the difference negligible? Can you absorb it? Or do you need to take corrective action?
Dynamics 365 + Vicinity provides all the Benefits of a Formula Manufacturing System
Some formula manufacturing systems, such as Vicinity Software for chemical manufacturers, food & beverage producers or breweries, take most of the legwork out of the process. One can easily enter a proposed price for formula components or alter costs by a percentage of the current values. The Cost Rollup functionality is then used to identify the formulas affected and calculate the new cost.
What is more, Vicinity can allocate labor and other additional costs to each production run, and even associate non-inventory stocking items, such as water, with a formula. Taking all these factors into account provides you with truly accurate production costs.
Whether you have a specialized software solution, or you calculate pricing with a manual system, the important thing is that you identify the components that have the greatest impact on production costs, find out what price changes are coming your way, and run the numbers so you can adjust course and increase your profits. To learn more about how Vicinity can
By Vicinity Software |