The Role of Gross Margin in Continuous Process Improvement
While many indicators reflect a business’s profitability, such as operating margin and return on sales, gross margin often plays the most significant role in Continuous Process Improvement (CPI). This is because CPI is crucial for evaluating the effectiveness and efficiency of a business’s production and operational processes, where most of the headcount and resources are concentrated. Although there may be some quick wins in HR, that’s likely not where you want to focus your CPI initiatives.
Here are three CPI-focused initiatives that any business can implement to begin improving gross margins over time:
1️⃣ Performance Benchmarking: This can be approached from both internal and external perspectives by:
- Monitoring historical performance, setting annual improvement goals (e.g., X%), and determining how to achieve these goals through price increases and cost reductions.
- Comparing internal margins against industry margins and making a conscious decision to become best in class, then implementing changes to reach that goal.
2️⃣ Decision Making: Regularly monitoring gross margins relative to stated goals encourages critical thinking about pricing and costs. For example, run reports analyzing prices by product, region, and sales reps to identify inconsistencies that can be leveraged by the Sales team.
3️⃣ Feedback Mechanisms: These include systems and reporting tools that provide the necessary information to maintain an upward trend in gross margins, as well as employee incentive systems that reward achieving these goals.
While there are many other areas where you can focus your CPI efforts, including engaging manufacturing engineers and lean specialists, the above initiatives are a solid starting point that any business can deploy to start increasing cash flow.
Reach out with questions or if you need assistance building more robust planning tools.
