What is an 18% Sales Increase Worth?

How Much Will You Pay to Get Such an Increase?

·????? It depends on the size of your company. The impact on your bottom line in relative terms may be about the same no matter how big your business.

·????? In absolute terms the impact is much larger for bigger businesses. The question should be understood as what % of the bottom-line benefit are you willing to pay for such an increase?

·????? The impact also depends on your cost structure. What % of sales is your variable cost (materials and energy make up most of this)? What are your fixed costs (your operating expenses? Since these costs are ‘fixed’ they do not change over a considerable range of sales and sales volumes. If we increase sales volumes by 16% will fixed costs increase? By how much? Why?

·????? The impact of a 16% sales increase (on the bottom line) will depend on your current profit margin.

·????? You can increase sales by increasing your product’s price. If you have a lot of competitors price increases may not be a good option. If you have a monopoly increasing price is much easier.

Propositions:

A.??? Many businesses can increase sales and production volumes by 18% (and more) without the need for additional resources (people and equipment).

B.??? Many businesses can cut lead time by 50% and achieve nearly 100% reliability (nearly 100% of orders are delivered on time and in full).

C.???? Many businesses can cut inventory levels by 40% and more.

D.??? Many businesses can achieve A, B, and C.

Below are my assumptions of a typical cost structure.

·????? A typical Return on Sales is between 5 and 10%[1]. For my article, I use 8%.

·????? A typical materials and components cost percentage for manufacturing companies often falls within the range of 40% to 70% of total costs. I use 55%.

·????? Based on the above operating expenses must be 37% (8%+37%+55%=100%)

What is the impact of 18% more sales while holding operating expenses constant:

The 18% increase in sales doubles profit, IF you can ‘convince’ the market to buy 18% more AND you can produce 18% more without adding to operating expenses (and investment). That is a 100% increase in profit! Confirm it for yourself.

Return on sales is not ROI. My investment assumptions are:

A.??? Working Capital:

a.???? Receivables and Payables will vary as sales volume changes.

b.???? Raw material inventories will vary with sales volumes.

c.???? Semi-finished and finished product stock can be cut similarly to the 50% lead time cut. (With a 50% lead time cut these stocks can buffer for the shorter time between production runs.)

B.??? Fixed Assets: For an 18% increase in volume, we expect no change to fixed assets.

Double profit & ROI with 18% sales growth and NO increase in operating expense and fixed assets. Inventory declines 40%

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If you can add 18% sales (and production) profit doubles. If you can increase the price (and not lose sales your profit more than triples. Depending on the benefits’ the impact on profit can be higher than just doubling.

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What will make the market buy 18% more from you (or pay 18% more)?

·????? Will your markets buy 18% more if lead time is cut in half?

Most companies have an item lead time that is 90% sitting in queues and only 10% (or less) time being transformed. Check your situation!). Cutting lead time by 50% lowers the time an item spends in queues to 80% (of lead time).

·????? Will you sell 18% more if you deliver ~100% reliably on time on your promised date?

If the first point is true (Most companies have an item lead time that is 90% sitting in queues and only 10% (or less) time being transformed), then much of the semi-finished production is not needed yet.

Replace what is not needed yet, with what is needed now.

What blocks many companies is the policy to batch orders. Larger batches consume less time for changeovers. This means less capacity loss and lower cost per item. But you create lots of inventory, the time between changeovers increases, product availability suffers, and you can lose customers. Is this pain worth the gain?

• Many factories should be able to develop much shorter changeover times.
• Will you sell 18% more if you introduce new and/or improved products more frequently than your competition? If the new and improved products are truly new and improved, then you are likely to sell more.
• To develop a product is a project. For many companies, projects take longer than desired or promised. Often enough the promised improvements are not delivered.
• My claim is there is plenty of potential to increase sales by 18%. But can your factory and product development produce 18% more?
• We know that many factories seek efficiency everywhere when what they should do is seek great effectiveness at the constraint resource. The Theory of Constraints has shown many times that a factory seemingly at capacity can produce more than 18% more.
• We know projects are given plenty of time and much of this time is wasted. Stop wasting project time. Think about multitasking, task switching, student syndrome Parkinson's law and other damaging behaviours.
• Many factories have shown the capability to increase production by much more than 18%. Companies have also shown that much shorter lead times, greater product availability and ‘perfect’ reliability often do result in increased sales.
• How much your sales increase depends on your performance before the improvements and the changes you implement.

If someone helps you increase business volume by a number such as 18% how much of the improvement can he charge your company? What % of the improvement are you ready to pay an expert?

Why would you want to pay anyone? After all, a big part of the solution direction can be found in this article.

The benefit of an expert is speed. He is likely to help you realise profit and ROI benefits sooner.

On the other hand, doing it on your own is a great learning experience.

To whet your appetite, I helped several companies to about 30% more. Example: I spent a day driving to their location, 2 hours with their engineers and the rest of the day driving home. I worked with the engineers to devise the changes and the direction they should take. It took the company two weeks to make the necessary changes and to produce and sell 30% more. What did they (and others) do? For that, you can talk to me.

[1] The return on sales (ROS), also known as net profit margin, can vary widely among manufacturing companies depending on various factors such as industry, size, efficiency, and market conditions (CHAT GPT).

However, a typical range for ROS in the manufacturing sector is often between 5% to 10%. Some highly efficient and profitable manufacturing companies may achieve ROS above 10%, while others, especially those operating in highly competitive or low-margin industries, might have ROS below 5%.

It's important to note that ROS can fluctuate due to changes in factors like raw material costs, labour costs, energy prices, and economic conditions. Additionally, companies within the manufacturing sector may have different business models, cost structures, and strategies that can influence their ROS.

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