Increasing Cash & Profit
By
Product Mix Analyses.

The interplay of prices and volumes largely determine the cash flow, profit, and return on assets of any business. Product mix plays an even more important, though largely misunderstood, role in generating bottom line results in almost every manufacturing industry, commercial printing included,.

Experienced executives intuitively know that subtle shifts in their product mix can dramatically alter profit results in any given financial period. They understand this even though product prices, costs, and total unit output remain virtually unchanged from a prior period. Companies have even been known to blame bad quarters on the unexpected shift in the product mix that ate up planned profits.

Given the financial impact product mix shifts can make it is disconcerting that many companies cannot precisely measure the profit swings that changes in their product mix causes. Why? Because traditional measurement approaches that arise from accounting systems are typically not capable of rigorously isolating and quantifying the cash and profit impact of mix variances. This problem is magnified in the printing industry as many company executives do not recognize that they do indeed have a product mix.

Consequently, very few companies have a disciplined method of proactively managing their product portfolios to maximize cash, profit, and return on assets. Management teams shocked by an attack of the ‘mix monster’ shouldn’t be. After all, as the business adage goes, “You can’t manage what you can’t measure.”

Innovative procedures that allow management to precisely measure and manage product mix profitability are possible. The bottom line benefits of these efforts vary by company and industry segment but printing companies can increase incremental cash revenue by 3% to 5% of a sales dollar.

It may be counterintuitive, but increasing cash and profit by managing mix is not simply a matter of selling more of the higher margin products. Margin per unit (folders, books, packages, lbs of paper, etc.) is necessary but in itself is insufficient information when attempting to maximize the profitability of a product mix. Optimizing the mix also requires full transparency in the cash contribution per production minute generated by each product.

By itself, margin only information sends confusing and conflicting signals to a company’s sales, marketing, finance, and operations teams. To solve the puzzle of optimizing product mix profitability both margin per unit and the speed that those margins are flowing through the asset base must be taken into account. Armed with a perspective that takes both margin and production speed into account, a company can pursue product mix strategies that truly maximize cash, profits, and Return On Assets (ROA).

To improve mix, a company must first be able to define, isolate and measure the amount of cash and profit change generated as a result of a mix shift. Next, the management team must employ a system and process for improving mix by focusing the organization on the products that generate the highest return for shareholders.