Company Overview
A small precision-manufacturing company generates $20,000,000 in annual revenue with a balanced customer mix:
- 50% Commercial Contracts
- 50% Government Contracts
Despite steady sales volume, the company experienced declining margins due to rising labor and material costs, inconsistent cost controls, and pricing pressures in both segments.
Current Cost Structure
| Category | % of Revenue | Dollar Amount |
|---|---|---|
| Labor Costs | 50% | $10,000,000 |
| Material Costs | 35% | $7,000,000 |
| Other Operating Costs | 10% | $2,000,000 |
| Total Costs | 95% | $19,000,000 |
| Pre-Tax Profit | 5% | $1,000,000 |
Company Overview
With a 5% margin, the leadership team set a target to double profitability within 12-18 months.
Key Challenges Identified
1. Labor Inefficiency (Primary Cost Driver)
- High overtime usage across production teams
- Lack of standardized work procedures
- Inconsistent productivity across shifts
- Skills mismatch and training gaps
2. Material Cost Volatility
- Limited supplier competition for specialty inputs
- Long lead times driving excess buffer inventory.
- No formal cost-reduction or value-engineering program
3. Contract Pricing Constraints
- Government contracts locked into fixed pricing structures
- Commercial pricing not updated to reflect actual cost increases.
- Margin variability of 12-18% across product lines due to inconsistent quoting
4. Overhead and Other Costs Growing Quietly
- Redundant software tools and subscriptions
- Indirect labor roles expanded without ROI validation.
- Lack of real-time visibility in job costing
Profit Improvement Plan
1. Labor Optimization Initiatives
Objective: Reduce labor costs by 5-8% without reducing headcount.
Key Actions:
- Introduced lean manufacturing principles: 5S, standardized work, take-time planning.
- Implemented daily production huddles and KPI boards.
- Identified bottlenecks and rebalanced workloads across shifts.
- Rolled out cross-training to reduce overtime dependence.
Financial Impact:
Estimated annual improvement: $600,000-$800,000.
2. Material Cost Reductions
Objective: Lower material cost by 3-5%.
Key Actions:
- Consolidated suppliers and negotiated volume pricing.
- Introduced a dual-sourcing strategy for high-volume items.
- Implemented a value-engineering process with engineering and supply chain chains.
- Reduced inventory buffers by improving forecasting and scheduling.
Financial Impact:
Estimated annual improvement: $300,000-$500,000.
3. Pricing and Contract Management
Objective: Capture an additional 2% margin on both commercial and government
segments.
Key Actions:
- Updated commercial price lists based on true cost-to-serve.
- Submitted cost adjustment proposals for eligible government contracts.
- Applied a standardized quoting tool using real-time labor/material rates.
- Conducted customer-level profitability analysis to identify low-margin contracts.
Financial Impact:
Estimated annual improvement: $400,000-$600,000.
4. Overhead & Indirect Cost Controls
Objective: Reduce other costs by 1-2% of revenue.
Key Actions:
- Eliminated redundant software and vendor services.
- Reorganized indirect staff roles for clearer accountability.
- Implemented monthly job-cost reviews with operations and finance.
- Introduced automated AP/AR workflows to reduce administrative workload.
Financial Impact:
Estimated annual improvement: $150,000-$250,000.
Total Projected Profit Improvement
Across all initiatives, the company is positioned to increase profits from $1,000,000 (5%)
$2,400,000-$2,700,000 (12-13.5%) within 12-18 months.
Summary of Financial Impact
| Improvement Area | Estimated Impact |
|---|---|
| Labor Optimization | $600k–$800k |
| Material Cost Reduction | $300k–$500k |
| Pricing Improvements | $400k–$600k |
| Overhead Reductions | $150k–$250k |
| Total Range | $1.45M–$2.15M |
Outcome
By focusing on operational efficiency, disciplined cost management, and improved pricing discipline, the company nearly doubled its profitability without requiring significant capital
investment or increasing headcount. Leadership now conducts quarterly cost reviews and real-time job costing, creating a sustainable margin improvement culture.
