I was talking to one of my clients last week trying to help them identify and plug a margin leak. These leaks occur when the net and/or gross margins do not not add up to what is expected. There are basically two types; pricing or efficiency leakage.
Pricing leakage happens when the pricing is put together.
Efficiency leakage happens when it costs more to deliver the product or service to the customer than was priced for.
The key point that came from our discussion was that you have to measure both individually to really understand where the leaks are coming from.
Below I share a list of potential leakage points, all of which I have experienced at various points in my own career. Go through the list and consider where your profit might be flooding away.
Discounting and pricing errors – Discretionary, unplanned price reductions and pricing errors
Errors and rework – Time and materials to correct faulty products, or sending the wrong product to the customer
Waste materials – Raw materials wasted in production
Billing errors – Failing to bill a customer for all of the products they have received
Theft/Fraud – Fraud by employees and customers will occur when the right checks and balances are not in place
Damages and write-offs – Damage to stored products and the write-off of ‘out of date’ or obsolete stock
Returns – Failing to account for products and materials returned from customer, and to suppliers
Collection of discounts – Failing to collect discounts due from suppliers
Quotation and pricing errors – Getting the price or estimates in proposals wrong
Over servicing – Giving the customer more than they paid for
‘Bling’ costs – Gold plated staplers are not necessary in most businesses
Industry processes – If a company operates in a regulated industry, or has shared industry processes, margin can be impacted by rules and processing errors outside of the company’s control
Currency fluctuations – When billing and/or payment for materials is in a different currency, exchange rate movements can either enhance or erode margin