Increasing EBIT with Performance Improvement in Production
In the face of increasing global competition and economic pressures, optimizing production performance has become crucial for companies striving to enhance profitability. By strategically reassessing product portfolios & vertical integration, implementing impactful cost measures, and creating a culture that accepts that change is a must, businesses can navigate the challenges of today's market and secure a competitive advantage. Discover how to get profitability back on track with production optimization.
In today's business landscape, global competition has become significantly fiercer. According to a Horváth analysis of over 1,000 German medium-sized companies, the gross profit margin has decreased by an average of two percent since 2018 and after COVID. Actual punitive tariffs, wars and conflicts in different regions even enforce the downward trend: The pressure on EBIT targets is at an all-time high.
Consequently, cost transparency and control have emerged as the number one priority for Chief Executive Officers (CxO) as underlined by the latest Horváth CxO Priorities Study. This shift in market dynamics is not temporary – it represents a fundamental long-term change. Therefore, it is not a question of whether a reaction is required but rather how to adapt to maintain a competitive edge in this new market environment.
A high potential for improvement lies within the operations set-up. Up to 70 percent of costs are directly or indirectly linked to production. Improving even a few percentage points can have a substantial impact on the EBIT margin, making it crucial to leverage all potential opportunities.
Optimizing production performance is, however, a complex task. Embarking the following three core directives has therefore proven highly valuable in setting up targeted activities and creating short-term results.
1. Define the strategic core of future-proof production
The majority of production organizations footprints have a long history of growth. We frequently observe with our clients a missing regular, strategic assessment of which products are driving the company’s success in terms of EBIT and which production stages really add value.
Therefore, the scope of the product portfolio and production should be reconsidered based on current and projected contribution margins. This is a task that every manufacturing company should tackle in response to the new challenges.
Managing portfolio complexity is a large profitability-lever and additionally essential to standardize processes and minimize planning efforts. Therefore, products or variants with a low contribution to overall profit should be identified in order to eliminate them if necessary, thus streamlining operations and increasing profitability. This can also include shutting down entire production facilities with a product portfolio with negative or low profit margins. Limiting vertical integration for example can help to reduce process complexity and to increase flexibility.
2. Identify high-impact cost measures with a combined top-down and bottom-up approach
Top-down benchmarking and target definition is a common approach to improve overall targets for output, EBIT margin and productivity. However, alone it won’t do the job. A detailed bottom-up examination of each production facility's operations is key to identify the measures with the highest impact on operational efficiency.
For direct production costs, improving productivity involves optimizing workforce deployment and machine utilization. Streamlining processes by reducing complexity and implementing low-cost automation and digitalization can further enhance efficiency as well. Additionally, investing in employee training and development programs ensures that the workforce is skilled and flexible regarding the tasks they execute.
In terms of indirect production personnel costs, it is all about refocusing on value-adding activities. Focus on right-sizing the support functions with industry-benchmarks and elimination of role/function duplications across decentralized units have a direct cost impact. A standardization of production processes drives efficiency and eases maintenance.
And finally, it is recommended to streamline the material flow from end-to-end and adjust inventory levels.
3. Implement a mindset in the organization that change is eminent
Only one thing seems for sure in today’s volatile times: The market will not revert to the comfortable situation of a few years ago.
Creating a common understanding in the entire organization that conditions are different now and that change is imperative is key: From top floor to shopfloor – everyone needs to understand that they must contribute to keep the company competitive.
By fostering direct, open communication about the situation, companies can harness the collective intelligence and creativity of their workforce. Thereby, additional ideas can be generated together securing the buy-in from the organization, including employee representation.
Embrace the challenge – create a competitive advantage with the right partner
The journey towards performance improvement in production is multifaceted and requires a concerted effort from all stakeholders. By embracing the three discussed strategic directives, we are the right partner to navigate with you the challenges posed by the competitive landscape and emerge stronger and more resilient. The key lies in fostering a mindset focused on efficiency at every level of the organization. With the right strategies, companies can not only get profitability back on track but also set the stage for sustained growth and success in the future.
Dolling, A. / Nagler, D. / Linß, A. / Weigelt, Y. / Drüppel, M. / Lee, Y.
