Budget Manufacturing Successes Supply Chain

High-tech manufacturer improves budget

This large listed Manufacturing business produced their high-end product range of measurement equipment in a single factory, with an integrated management team covering Manufacturing, Purchasing, Logistics, Engineering. The production process was extremely complicated and the products took between 4-16 weeks to assemble, with many orders for the most expensive machines involving serious customisation.

Because production lead times were so long the customer order pipeline was know well in advance, meaning revenue forecasts were reasonably reliable. The product costs were only budgeted using standard product costs, which meant they missed additional customisation costs and were not accurate for variances in purchasing (price and quantity), logistics handling/storage, and freight costs. Monthly discussions of financial performance typically glossed over these (sometimes quite high) variances because we can’t control them so it doesn’t matter.

We built a new Budget model which rolled up the missing cost assumptions into the Cost of Sales, based on a combination of historical variances as well as what could be estimated based on the forward order book.

Result: The new budget model generated more meaningful discussion of variances which allowed the management team to target areas for improvement.

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