MCPD: Sales Decrease Scenario

 22/02/2019
By Dr. Alin Posteucă
Sales Decrease Scenario: Internal Target Profit by Minimizing Inputs

Over the life of each company, shorter or longer periods of decline in sales may occur. The causes of these decreases may be diverse from internal causes of the company (lower quality level, increased cost level, slowing innovation, unsynchronized processes to market requirements, poor leadership, poor performance of supply chain supply, etc.) to external causes of the company (sudden and unexpected movements of competitors and/or suppliers, the decline of the industry in which the company operates or worse, the materialization of a financial or economic crisis). However, regardless of the increase or decrease in sales level, companies must achieve an acceptable level of profit.

Current Conditions and Challenge

In this context of a sales decrease scenario, there are some questions, such as:

  • how should all the company’s resources be directed to ensure profitable business continuity and company development in line with its competitiveness vision?

  • is the exclusive focus of profit making on sales enough (external profit)?

  • how can annual and multiannual target profit be sustained, both on the external profit (from sales) and especially on the internal profit (from cost improvement with a consistent productivity growth plan)?

  • how to optimize both the structure and the methods of production to ensure competitive products?

Spending a lot of time in companies from different industries, there is a sharp increase in concern for cutting costs steeply and achieving Return on Investment (ROI) targets. The company stories before joining the MCPD system, companies with long experience in systematic and systemic improvements are generally the following:

  • real story no. 1: We have to cut unit costs by 6.5% this year. So, we look forward to suggestions from each department… but our current management system is no longer helping us.

  • real story no. 2: We have to cut fixed costs by 8.5% this year. So, we look forward to suggestions from managers… ideas are delayed and / or the required results are not achieved.

  • real story no. 3: We have to cut costs by € 4.5 million this year… but this is impossible… we have almost no consistent suggestion. In the past years we have applied everything we could… in two months we have a group audit on this issue and we do not know what to do.

  • real story no. 4: The structure of our cost is high compared to that of other competing companies and we do not know now which is the best way to improve it… we lose orders and our sales decrease continuously because we have an average unit price higher by 5.5% comparing to our competitors with similar products… the tendency is to suddenly increase the discrepancy between our price and theirs.

  • real story no. 5: 4 months ago the representative of our main customer came and said the time has come to share our profit with them… they want a 6% reduction in our costs for the next 12 months and await a consistent productivity plan for us for years to come… otherwise they will cancel the contract.

In this context, using the MCPD system, establishing Cost Improvement targets and targeting all systematic (kaizen) and systemic (kaikaku) improvements by coordinating them according to the need to meet Cost Improvement targets require establishing the framework within which the manufacturing companies will operate and the continuous improvement of costs of losses and waste (CLW), the basic concept of MCPD system, must be addressed according to sales scenarios:

  • sales increasing: focusing especially on maximizing outputs (or in particular on minimizing the costs of losses);

  • sales decreasing: focusing especially on minimizing inputs (or in particular on minimizing the costs of waste).

In this episode, I will present the role of the MCPD system in the sales decrease scenario.

Our Approach

So, from the perspective of MCPD a cost improvement scientific approach is needed to continuously support the target profit regardless of the sales trend, especially in the scenario of declining sales. For example: if the annual target profit is 10 million €/$/£/¥ and the external profit level (from sales) covers only 7 million €/$/£/¥, then an internal profit (from cost improvement, with the help of productivity gains) of 3 million €/$/£/¥ is needed. The KAIZEN and KAIKAKU projects for cost improvement now have a very clear goal: meeting the € 3 million €/$/£/¥.

Concentration of productivity improvement in minimizing inputs is focused on losses or not effectively used input for human work, material and energy and waste or reducing/eliminating the excess amount of input. Focusing on minimizing inputs does not exclude paying attention to obtaining external profit by maximizing outputs or effectiveness improvement. Furthermore, there may be different needs for increasing outputs or reducing inputs.

From the perspective of the annual minimizing inputs, Cost Improvement change drivers aim to maximize efficiency, especially through:

  1. maximizing variable cost efficiency;

  2. maximizing fixed cost efficiency;

  3. continuously improving of the total lead time;

  4. continually improving inventory levels: raw materials, components, consumables, and finished products.

The CLW associated to minimizing inputs that can be saved have a direct impact on the annual profit and loss account and are taken into account for example: improving material and utility costs, improving labour costs/ working hours, improving maintenance costs, improving non-quality costs, improving the inventory of raw materials and finished goods, etc.).

Expected impact

We remind you that, typically, CLW accounts for 30-40% (sometimes even around 50%) of the total cost of a manufacturing company and we seek to target productivity improvements as close to the ideal cost or zero cost of losses and waste (CLW) as possible for each Product Family Cost (PFC) and for all company.

Therefore, from the perspective of the MCPD system, the sales decrease scenario to ensure internal target profit by minimizing inputs addresses:

A. Minimize Inputs by Maximizing Variable Cost Efficiency

Real examples of cost reduction by using the MCPD methodology are presented in the book Manufacturing Cost Policy Deployment (MCPD) Profitability Scenarios: Systematic and Systemic Improvement of Manufacturing Costs:

  • KAIKAKU for cost improvement of 122,580$ by Reducing a Raw Material, Utility and Labour Costs for an existing product;

  • KAIKAKU for cost improvement of 34,500$ by Labour Cost Reduction.

B. Minimize Inputs by Maximizing Fixed Cost Efficiency

Real example of cost reduction by using the MCPD methodology are presented in the book Manufacturing Cost Policy Deployment (MCPD) Profitability Scenarios: Systematic and Systemic Improvement of Manufacturing Costs: Kaikaku for cost reduction of 756,000$ by Reducing Environment Costs.

C. Minimize Inputs by Continuously Improving Manufacturing Lead Time and Continuously Aligning Manufacturing Processes to Market Needs

Real examples of cost reduction by using the MCPD methodology are presented in the book Manufacturing Cost Policy Deployment (MCPD) Profitability Scenarios: Systematic and Systemic Improvement of Manufacturing Costs:

  • KAIZEN for cost improvement of 875,000$ by Reducing the Lead Time of an Assembly Line;

  • KAIZEN for cost improvement of 275,000$ by Synchronizing the Lead Time of the Equipment with the Assembly Line Takt time.

D. Minimize Inputs by Continually Improving Inventory Levels: Raw Materials, Components, Consumables, and Finished Products

Real examples of cost reduction by using the MCPD methodology are presented in the book Manufacturing Cost Policy Deployment (MCPD) Profitability Scenarios: Systematic and Systemic Improvement of Manufacturing Costs:

  • KAIZEN for cost improvement of 65,000$ by Reduction of WIP Storage Space;

  • KAIZEN for cost improvement of 175,000$ by Reducing Unplanned Packaging Consumption to Improve Supplier Lead Time.

Remember, the MCPD system warranty is to reduce annual manufacturing costs by minimum 6% for 5 consecutive years.

What Do You Think?

What elements are needed for business leaders to have a great MCPD System to support the Sales Decrease Scenario (Achieving Internal Target Profit through Minimizing Inputs)?

Dr. Alin Posteucă is the founder and CEO of Exegens®, a global consulting firm specialized in cost competitiveness improvement and operational excellence. It helps customers create and implement profitable strategies and cost improvement programs that ensure a unit cost improvement of at least 6% per year for each of the next 5 years by maximizing the efficiency and effectiveness of operations.

He is the author of Manufacturing Cost Policy Deployment (MCPD) concept, published in three books at Productivity Press – Routledge/ CRC, New York (USA). The latest, ”Manufacturing Cost Policy Deployment (MCPD) Profitability Scenarios: Systematic and Systemic Improvement of Manufacturing Costs” (October 2018) is based on its main belief that the annual and multiannual target profit can be achieved irrespective of the sales volumes, increasing or decreasing. He is also the co-author of the book ”Manufacturing Cost Policy Deployment (MCPD) and Methods Design Concept (MDC): The Path to Competitiveness”, published at Productivity Press New York (USA), 2017, as well as the author of the book ”Manufacturing Cost Policy Deployment (MCPD) Transformation: Uncovering Hidden Reserves of Profitability”, published at Productivity Press din New York (USA), February 2018.

Alin Posteucă has more than 20 years of experience in Cost Improvement consulting and training. He has a PhD degree in Industrial Engineering and a PhD degree in Economics.