Evaluate the profit potential of flooring companies and jump out of cost accounting systems

In the current market downturn, floor companies need to be able to survive and develop. To reduce costs and increase profit margins are the two most concerns for flooring companies. Reducing costs means adjusting the industrial structure, integrating existing resources, and maximizing the use of resources; increasing profits means rationalizing the product structure, starting from the perspective of long-term profit, and starting from the source.

Assessing corporate profit potential

The management of an enterprise should not only assess actual expenditures based on the budget, but should compare the profits that the company may obtain when it fully realizes its full potential against the actual profits. It is necessary to carry out a major study on the "profit margin", that is, actual profit loss, and re-analyze all key operational steps. Then list the causes of the profit gap, sort them according to economic value, and finally solve them in turn.

Using this approach, the company must first be broken down into separate operational processes such as order registration or cargo transportation, as well as individual production lines. It should start with the key processes that are most closely related to the company's income or expenditure.

The next step is to identify the links that affect or limit corporate performance. As long as the "bottleneck" links affecting the production schedule are clearly defined.

The output or workload that a company can achieve at full speed is its true potential. In production, the so-called maximum potential refers to the fact that there are no shutdowns, underemployment, or overstaffing in the production process; all products are qualified, and the rate of defectives, waste, or rework rate is zero; and the raw material consumption rate of each product reaches The minimum amount required.

After you and your team have discovered the key links that lead to the loss of profits, the key is to determine the amount of lost profits. In other words, what is the difference between the existing profit and the profit that should have been obtained? This kind of operational data is what management personnel really need. Explaining this evaluation process in detail is rather complicated and subject to patent restrictions. However, you can organize a small and refined team to conduct independent assessments in your own way.

You can inspect the largest production process in the company's largest factory. Identify the product types that the process mainly produces, and find out the fastest speed to actually produce this product, the so-called “bottleneck speed”. Then, determine the number of products produced by this production process last year, that is, your actual production. So your optimal production process time (OPH) is: OPH = actual production volume / maximum bottleneck speed.

The president of a company that provides flight diets for a major Australian airline admits that the initial assessment showed that his business operations were even less than 50% of his maximum potential, and he also sniffed the results. Business performance is better than budget, and the cost per guest is lower than other companies. However, after a new competitor emerged, the price for each guest meal was reduced by as much as 35%. At this time, the catering contractor realized that to survive, it was necessary to reduce costs on a large scale. Assessed according to the above method, the Qantas airline operates only 40% of its maximum potential.

Calculate corporate profit loss

Once you have discovered the huge potential of the company, the key issue is to estimate the actual economic value of this potential. To do this, it must be clear whether the various products you produce are constrained by sales factors or by production factors.

Companies that are constrained by production factors are those that can produce as many products as they can produce. Companies that are constrained by sales factors must produce according to the needs of existing customers. What these companies need are more or better customers.

In the past two years, the Chinese flooring market has suffered from sluggish performance due to multiple influences. In order to survive in this rapidly changing operating environment, flooring companies must do their best to reduce expenditures and increase profits. However, if you want to succeed in the future, you must not only focus on the ultimate profit, but should start from the source.

Jump out of cost accounting system

In order to increase income and increase profits, we must first make full preparations and question some basic operating methods in business operations. The first is the cost accounting system. No matter what system you use, or simply present the documents in the shoebox, the costing systems of all companies are similar. They compare the actual income and expenditure with the budget, and then draw the difference between the two and expect to find out. Improvement opportunities.

In fact, as long as you move your head a little, it is not difficult to see that this kind of data is useless. For example, you find that companies have overspend on the labor force, and there are budgets for raw materials. What is the use of such information for you? It can be said that there is almost no meaning, because they are only a record of historical performance. The difference you pound each month actually masks millions of dollars in unnecessary and untapped earnings each year. As long as your management can notice, this money is almost at your fingertips.

For example, a manager of an international food processing company broke through conventional thinking in terms of increasing productivity. He is clear that the market environment is extremely harsh, there is a serious excess of production capacity, and the price pressure is extremely high. In this case, only by minimizing the cost can we be competitive. But when you look at the workshop, you will find that the area under the can filling machine is full of leaking soup, and that one person is responsible for the removal of the soup every day. However, when talking about this loss with management personnel, he said: "Loss? There is no loss problem here. Everything is in the budget."

The canning machine of the seventh production line has been working for 30 years. During this period, the customer’s preferences have changed a lot. The diced meat and vegetable diced food in the soup are larger than before. Therefore, sometimes it is not coordinated with the feeding port of the machine, causing spillage of the soup. How much economic loss will this bring to the company? Managers are unaware and indifferent. Nothing exceeded the budget anyway.

A productivity team used a stopwatch, a barrel, and some cost data to calculate the cost of leaks: $750,000 a year. In the past six years, the seventh production line has squandered more than four million US dollars worth of soup.

The ending of the story is very satisfactory. The company spent 50,000 U.S. dollars installing a larger new flow valve for canning machines, which completely solved the problem of leakage of soup.

The key to this story is that it is absolutely impossible to use the company's cost accounting system for improved management. Balanced scorecards and benchmark statistics are equally powerless. These methods can only explain the past and present conditions, but they cannot reflect the best results that could have been achieved.