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Manufacturing companies continue to look for ways to achieve greater business success. Whether the measure is growth, profit, return on investment, market share, or another similar metric, manufacturers are constantly looking for opportunities to improve their business performance—and this means increasing shareholder value.
With the concept of the value delivery process solidly in mind, let's look at how manufacturers can increase shareholder value.
There are four fundamental ways to generate greater shareholder value:
Increasing the price of your product, assuming that you continue to sell the same amount, or more, will generate more profit and wealth. Of course, there are many obstacles in the way of increasing the price of your product, such as the price charged by competitors, the perceived value received by your customers, and so on. But what if you could increase prices, even by just a few percentage points? What impact would this have on your company? Particularly in a low-margin business, even a modest increase in price might have a significant impact.
Assuming that you are able to keep fixed costs constant, or at least increase fixed costs at a rate that is less than sales growth, this will effectively reduce per-unit cost and, as a result, contribute to shareholder value creation.
So how to sell more product? One thought is to reduce the price. Of course, this directly conflicts with our first shareholder value creation idea, discussed above. But if a five percent% reduction in price drives a 10 percent increase in sales, perhaps the overall numbers make sense.
What else can be done to capture greater market share? Add features and functionality that exceeds the competition? Provide fast delivery? Offer value-added services such as vendor-managed inventory? Perhaps increase production capacity so that you have more product available to satisfy market demand? There are many strategies and tactics to pursue sales growth, and these need to be measured carefully against their ability to not only increase sales, but to do so in a way that increases shareholder value.
Increasing fixed cost utilization is a close cousin to selling more product, with the common theme of decreasing fixed cost per unit. In addition to selling more product with the same fixed costs, manufacturers can also focus on consolidating and rationalizing their fixed costs. Perhaps production activity can be consolidated over fewer pieces of capital equipment? Maybe multiple manufacturing facilities can share production planning and procurement resources? Regardless of the action taken, manufacturers need to be certain that the ultimate goal of increased shareholder value is not lost.
Reducing unit is probably the most common shareholder value creation method cost. It's hard to argue with the benefit of, say, reducing the cost of purchased materials by five percent%, or of reducing inventory investment by 10 percent. These are typically worthwhile objectives and have been the focus of much of our improvement efforts. The list is long of improvement methodologies and tools that, in theory, lead to reductions in cost.
A key requirement for selecting the right improvement action and generating greater shareholder value is a solid understanding of cost across the total value delivery process. As your product is transformed from the most basic of raw materials through to a finished product in the hands of the end-user, do you have a complete and accurate picture of all the sources of cost? Again, while a significant portion of total cost may be supply chain costs, there are likely costs attached to marketing, engineering, and other similar activities that live within the broader value delivery process.
The challenge is to identify the leverage points within your value delivery process. Supported by a solid understanding of cost and a deep understanding of what the customer values, coupled with a good dose of business acumen and intuition, manufacturers can identify the areas within their value delivery process where improvement most matters.
The answer may be that a focus on input cost reduction is the leverage point that will generate the most impact on shareholder value. But it could also be that enhancing product quality and functionality and, as a result, gaining a premium position in the marketplace, is the leverage point that will generate the most impact on shareholder value. These are two quite different improvement strategies, and focusing on the right one may be the difference between the success and failure of your business.
Indeed, to be eligible to launch a business improvement project, manufacturers need to first be able to clearly articulate the shareholder value impact of their chosen improvement project, and to demonstrate that the selected business improvement imitative is the very best use of limited resources and investment.
Learn more about how manufacturers can better focus their improvement efforts.
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