The relationship between the two is rarely well understood and therefore the source of poor management decisions. Management controls only two variables – Price and Quantity. For example, it decides what quantity of labor to use (people hired) and what price to pay (wages or salaries). Conversely, it decides what products or services it offers to the market at what price and at in what quantities. The strategic configuration of these four variables determine sustainable corporate profitability. In traditional accounting, value is the product of quantity x price. Profitability is determined by maximizing the difference between the value received from the market and the value surrendered to the providers of input (materials, labor, etc.).
Value of Output = Ʃ Price of Output x Ʃ Quantity of Output
Total cost to the organization is minimizing the quantity of input consumed and minimizing the price paid for the input.
Value of Input = Ʃ Price of Input x Ʃ Quantity of Input
In traditional cost accounting, profit is maximized by maximizing the value of output and minimizing the value of input. This view obscures the true driver of long-term profitability: productivity x price recovery. The above equations can be restated as equally valid ratios:
The relationship of the three ratios explain bottom-line profit in terms of managerial effectiveness rather than accounting outcomes. Profits can be enhanced by increasing sales prices while decreasing the cost of input resources. Profits can also be enhanced by increasing the quantity of output while decreasing the quantity of input. The former option is unsustainable as it will attract competition very quickly or price your products out of the market.
The latter option is the only sustainable long-term strategy as gains in productivity enables reduction in price recovery. This increases market penetration and sustains competitive pricing. Every management team worthy of the title should be executing a productivity improvement strategy.
Our four decades of experience in defining, quantifying and developing comprehensive productivity improvement initiatives with top management have made us leaders in the field of productivity improvement. Are you cutting cost and raising selling prices as a means of shoring up profits or are you driving true competitiveness through productivity gains?
What You Will Gain
What Your Company Will Gain
New perspective and competence in developing and implementing inventory management systems.
Significant cash released from better inventory management.
Significant contribution to your organization's long-term success by optimizing inventory in the supply chain for maximum reliability.
Sustainable growth by optimizing inventory as a strategic advantage to increase market share.