Project Experience

Manufacturing…Understanding a Competitor's Costs Can Help Your Company Structure Its Business to Compete

Client Situation
Conducting a manufacturing cost study of a competitor's operations can reveal relative strengths and weaknesses in your competitors own operations as well as your own. By improving the productivity of these areas, you can bring your cost structure in line with your pricing so that you can deliver the greatest value to the customer at the greatest profit margin. A major producer of a specific type of equipment wanted to understand a competitor's operations and strategies. This competitor continually sold the same products for far less than our client could, and our client needed to understand this competitor's product cost structure and how it related to their pricing.

Fuld Approach
Understanding the process by which the product was manufactured was only the beginning. We developed a competitive side-by side P & L that mapped the competitor's operating costs against our client's. We combined data from 10-K reports with information obtained during interviews with internal sources to benchmark the competitor's processes, headcount, best practices and accounting methods on a regional and "by factory" basis. When we researched processes, we did not limit our focus to manufacturing processes. This is a common mistake when companies want to know why a competitor is more efficient. We review all business operations processes from finance to IT systems to manufacturing work cell setups and wage rates to marketing and sales and other below the line costs. Fuld & Company is well versed in building cost models that offer scenario planning. In this particular case, a model was built that allowed the customer to change raw materials costs, wages rates, headcounts and other parameters to look at various business environmental scenarios. The side-by-side P&L statement was then built from this data.

Benefits and Implications
In the end, we discovered that all processes were nearly identical with the exception of the method for allocating overhead. The competitor used activity-based costing methods. As a result, the overhead cost allocated to the product was less than our client's. This finding was a revelation for our client, and they were able to incorporate this into an investigation of their own efficiencies and overhead allocation methodology. For more information on comprehensive cost and benchmarking studies and cost modeling in the manufacturing industry, contactnbulger@fuld.com.