With inadequate costing information leading to a fuzzy vision of their profit margins, they lacked support for managerial decisions such as make vs. buy and product rationalizations. They were in need of a new costing approach, a pragmatic solution that was easy to use and understand, and one that could be implemented immediately.
Our team analyzed the supplier’s production and support processes to understand how work was performed and how resources were consumed. Our analysis gained visibility into the cost of each of those resources. This included understanding the material cost, outside process cost, production labor, production overhead, and other related overheads. The end result was a conceptual design that addressed the gap between where the client needed to be and where they currently were. We constructed a cost model to develop new production overhead rates that accounted for key issues and variables including:
- Excess capacity cost
- Nonproductive labor
- Recovery of capital investments
The cost and margin recommendations have resulted in several benefits for the medical device supplier, including:
- Accurate costing information for informed management decisions.
- A pragmatic approach to balance accuracy and complexity with simplicity and ease of use, providing the largest possible return on their investment.
- Additional projects, including a manufacturing footprint analysis.