Which Product Variant Really Makes Money?
Key takeaways
- Whether to accept an order or continue a product follows the same method.
- Step 1: collect factors that influence contribution margin, such as inventory, production cost per product and sales, and focus on the most important 20%.
- Step 2: use a simple matrix to check which factors are related at all.
- Step 3: describe the relationships concretely, for example inventory as a mass balance of production and sales.
- Step by step, this builds a driver tree that shows which variants really make money.
In the second part on the question "What do I make money with?" we show how we find out which products and orders are really profitable. From the most important factors such as inventory, production costs, sales and seasonality, a driver tree is built step by step.
Accept the order or continue the product?
As promised, here is a second video on the question: what do I make money with, and what do I lose money with? For orders and for the product portfolio the approach is similar. You think about the product portfolio more in the medium and long term; no product enters the market or disappears overnight. With orders, on the other hand, you can counteract operationally every day.
The basic question is the same: what is my optimal state? Should I accept the order? Should I continue the product? Methodically, both have the same origin, namely how we break down the problem. In the last video we asked: what can we change and what not, what do we want to change and what should we change?
Collecting influencing factors: inventory, costs, sales
An example from a meeting in the last few days, slightly modified: a company produces for a market that is saturated in a certain way. The product will be continued; the real question is: when do I produce what, and when do I sell what?
For that we first look at inventory. If we produce far too much, the warehouse overflows at some point, it doesn't sell, and we have very long storage costs. Then the production cost per product, meaning when production happens and what it costs. And sales. That's simplified, but these are the points we can or can't change. From the list we take the ten most important points. The warehouse has a fill volume or a maximum capacity, whatever you want to call it.
Checking dependencies: crosses and zeros
Then we write the five to seven big drivers against each other again. Inventory obviously relates to itself: inventory in February is inventory in January plus what was newly produced minus what was sold. And the warehouse can't go below or above its minimum or maximum capacity. Empty is empty, full is full.
Then we ask further: are product costs related to sales? That's a case-by-case decision. And if product costs have nothing to do with inventory and sales volume, what do they relate to? For example the season: during summer holidays, temporary workers step in who are more or less expensive. So product costs don't depend on how full the warehouse is, but on which month we produce in.
The approach is clear: without overcomplicating things, we systematically collect a big list of what relates to the contribution margin or margin of the order or product and what we can change in reality. A product is a physical good; it has to be stored and transported, and it can't be made without material. We build up these obvious relationships. Then we put the list against itself and ask: what are the dependencies? Because to be able to describe the problem, we need to know what belongs to it at all. Storage space belongs to it, because you can't store more than the space allows.
Describing relationships concretely
So step one was: collect what belongs to the problem and focus on the most important 20%. Step two: understand how these influencing factors are related in reality. The simple method: are they related at all, yes or no? So first just distribute crosses and zeros.
Once we know what is related, in step three we go deeper into the crosses and get concrete. Inventory is obviously related to the volume produced and to sales. How do we express that? In this case with a simple mass balance: what goes in goes in, what goes out goes out. If more goes in than out, the volume rises, and vice versa.
This helps enormously, no matter how complex the problem is and no matter whether you are standing in front of it completely stuck: slice the problem, brainstorm first and then look more closely. Anyone who has worked in production for 20 years or runs their own family business knows very well where the shoe pinches. In the next step we then look at the bottlenecks. Because what matters are the dependencies where the bottleneck arises. If a machine is idle, we don't need to look at its capacity. If it needs a specialist to operate it, then it comes down exactly to that person's skill, deployed in the right sequence.