Margin Optimization: The result of make versus buy decisions
Aim for the maximum contribution margin right at the supply planning phase
Within supply planning, there are considerable options with regard to the design of production plans with maximum profit margin. Possibilities to optimise margins result from:
Make versus buy decision
Exploiting market mechanisms such as volatile commodity prices and logistics costs as well as exchange rate fluctuations
Reducing production costs
Selection of the best production technology, avoidance of waste, scrap or idle time, energy efficiency, among others
Improving customers satisfaction
Switching to alternative supplies of a higher value product to avoid additional expensive setups, among others
The process of margin optimisation | Decisions based on controllable cost drivers
Enabled by the described degrees of freedom, costs are assigned that can still be influenced by planning and control measures. Costs which can be controlled are, among others:
- preparation and set-up costs of production facilities
- downtime costs of production plants
- inventory costs of raw materials, preliminary, intermediate and final products
- costs arising from non-compliance with lead times
- variable procurement costs such as quantity discounts
- variable costs of capacity and resource utilisation, e.g. overtimes
Make clever use of market mechanisms: Make-or-buy and/or hedge simulation with ORSOFT planning solutions
Time series simulations allow – in addition to common simulations for assessing the question of “make versus buy decisions” – to include currency or raw material hedging transactions to the optimisation processes. Whereas with “make versus buy” a preliminary decision is taken, hedging options enable to react more flexibly to later market changes, depending on one’s own production technology. An additional choice arises from letting a hedge option expire in the event of changing conditions.
Margin optimisation with ORSOFT Enterprise Workbench: You decide what measures to take!
Software-supported margin optimisation allows to integrate both, planning (order situation, available capacities, etc.) and commercial information (prices, exchange rates, transport costs) into the planning run. Different what-if scenarios can thus be calculated holistically and simultaneously and compared by using suitable key figures.
As a result of margin optimisation, there are several options to take
- alternative production, procurement, distribution processes and strategies,
- alternative production resources (or locations) and/or a
- strategic product/customer portfolio streamlining.
