Paint Manufacturers Can Increase Profits Today
July 1, 2009
One of the most overlooked sources of profit in a paint manufacturing organization is in the existing business processes. Much attention is spent on gaining new sales or adding new products and little energy is focused on existing business. While adding new sales is an important element to the life and success of any company, immediate profits can be found in your existing product mix and with your existing customers.
We will explore three things you can do today to ensure your organization is getting the most out of the operations of the existing business without changing much of what you are doing. We will focus on the following areas of your business: reduce inventory shrinkage, reduce formula loss and follow up on sample opportunities.
Reduce Inventory Shrinkage
Reduce Formula LossIs This an Issue?
Most formula manufacturing companies create formulas in R&D and then work with production to scale the formula to production volumes. Once the formula has been run in production for a few months a theoretical production yield is established. After that time little attention is placed on the actual yield of the formula.
What processes do you have in place to review actual formula yield? Do you look at the formulas with the highest or lowest yields? Do you compare the actual yields vs. theoretical yields? If you calculate production yield at the end of a month and do not look at yields by formula you have a problem.
Why Should I Care?
Formula manufacturers live and die by yields. If the yields vary significantly from standard there are a number of areas affected. If a formula requires more material than expected to get the same finished goods you may experience raw material shortages, delayed shipments of finished goods, increase in expedited orders through production or increases in QC additions to bring a product within specification. Each of these effects erodes profits.
Additionally if the actual formula yield is not in line with theoretical yields then it is probable that you are not experiencing the margins you were expecting. If you experience higher than average losses for a formula you are losing the opportunity of added profits.
How to Fix this Problem
- Identify loss by formula for the prior three months. Measure yield by comparing input vs. total output (including finished goods and intermediates) for the previous three months. Make sure to only include batches that are closed and no future production is expected.
- Target items that have highest loss. List formulas in order of highest loss value (loss % x avg selling price or cost x production volume). These items will yield the greatest results of change. Focusing on items with a low loss, low cost or low volume will not yield results as high as items with high loss, high cost and high volume.
- Identify causes of loss. Most unexpected loss occurs in a change in raw material specifications, change in operator procedures or change in equipment performance. Depending on the facility the human element is the one that has the highest degree of error – focus on what the material handler has to do when making this formula. Inquire if procedures have been changed or if any of the material packaging or handling instructions has changed. Involve the R&D lab to calculate theoretical yields based on currently available raw materials.
- Implement policies to track these formulas and note exceptions. Mark the formula in such a way that for three months you can review the loss for each batch. Make this a part of the final QC/packaging process. Isolate any batches that have high losses and investigate the causes immediately.
Follow up on Sample OpportunitiesIs This an Issue?
Most formula manufacturers provide samples to new or existing customers. Very few actually have a mechanism to track these samples and follow up on the results. Does your organization ship samples? What is the process to ensure the samples are actually driving sales? If you are not able to quote your sample/sales ratio you have a problem.
Why Should I Care?
While samples may seem to be a minor issue in your organization take a minute to track the steps involved in sending a sample. You will find that the process from taking the sample request to fulfilling the order is much more complicated than just filling a typical order. Why? Because all your systems are built around shipping an order size – not a sample size. Samples are seen as a bi-product of your normal process. Therefore systems are not in place to address the small quantities and unique handling requirements for that sample.
Take an hour and follow a sample through the process in your company. See what manual steps your employees are taking to address this sample request. Now multiply that by the number of samples you process in a year. This is a significant issue for any company that sends samples.
Now to add insult to injury – you will find that most companies will send a sample but very few actually follow up on the results of the sample. Crazy as it may sound, very few companies record samples shipped in a system that sales people can track and that management can audit. To prove that to yourself, randomly pick five samples shipped three months ago. Then track if those samples lead to sales. Did we follow up on those samples? If they did not turn into sales – why didn’t they?
The issue here is not in sample cost, but rather the incremental labor cost to fulfill the sample without proper follow through. Each sample shipped is a potential sale – not just for this month but for years to come.
How to Fix this Problem
- Identify closure rate of samples. Review three months of samples sent six months ago. How many have actually resulted in sales? Can you really tell?
- Target formula/product types that have resulted in higher closure rates. Identify what makes these different than other products – type customer, salesperson, nature of product.
- Work with Sales and R&D. Develop a plan to track and follow up on samples sent to new or existing customers.
- Implement CRM (Customer Resource Management) If a CRM system is not in place to track samples then you should consider it. The addition of one significant customer could pay for the entire effort.
For more information contact Randy Smith at email@example.com or visit the website at http://formulamanufacturing.blogspot.com/.
Also, visit www.vicinitymanufacturing.com.<