Any organization or firm operates with the goal of creating a profit in short or long term. The same is the case with manufacturing firms.
A manufacturing firm is a business where an organization uses most of its resources to create or develop a product and supply it in the market or to a seller who markets it. Profitability of manufacturing firms depend on a number of factors. We’ll take a detailed look at those factors in this blog.
1. Number of Manufacturing Units
The number of manufacturing units represents the most fundamental variable that affects earnings in every enterprise, including manufacturing firms. For example, for farmers, this may mean acres, for ranchers, cows, or factories when it comes to manufacturing firms. No matter what industry you are in, the number of manufacturing units you have directly affects your ability to make a profit as well as loss. If you were to double the amount of factories in your business that is producing $50 in profit per factory, your profit would increase by twofold. Unfortunately, losses are cumulative; if you’re in loss over a single manufacturing unit, unless you change things, doubling a unit will result in losses as well.
2. Production Per Unit
Production per unit is also an important factor when it comes to assessing profitability of a firm. If a firm has a number of factories, but the factories don’t produce or work on optimum levels of efficiency and potential, it might result in loss of profit. In order to maximize profits, make sure your factories and manufacturing units are running at full capacity and efficiency. In case the production or demand levels are low, shut down a production unit instead of running multiple production units at less capacity.
3. Demand for the Product
The demand for the product you manufacture will also play a huge role in the profitability of your business. For example, if you’re a manufacturer of electronic goods like mobile phone, your product is in demand, which is why it could lead to more orders, subsequently allowing your manufacturing units to work at maximum potential and generating desired profits.
Similarly, if you’re manufacturing out of demand products, the profitability of your company will still be affected but in a negative way. An example of this could be the tinned food industry. Factories making tins for food packaging have seen a fall in demand due to people moving away from tinned and packaged foods. This will impact your factories since the demand for the product has fallen, something which isn’t in your control.
4. Degree of Competition
The degree of competition your manufacturing firm faces will affect it’s profitability as well. If your manufacturing firm is making products that no other firm does, at least in your local region, then it faces minimal competition and can maximize profits easily. If there is strict competition among the firms and a number of firms manufacture similar products, then you must be very careful and precise in order to maintain quality, timely delivery, precision, and many other things. All of this still isn’t a guarantee that you can make your desired or calculated profits.
When a market is competitive, the profit is generally lower, except in few exceptions where large firms create a monopoly. This is because consumers and customers generally are more inclined to move towards firms that offers the lowest rates.
5. State of the Economy
The state of the economy your manufacturing firm operates in will also play a huge role in its profitability. If the product you manufacture is a luxury item, for example high end cars, expensive smartphones, etc, and the economy of the local region where you operate is healthy and stable, it’s only natural that your profitability will have a positive impact since the demand for luxury items will go up. Similarly, if the economy is unstable and inflation is on the rise, not only the demand for luxury products will go down, the product manufacturing and factory running costs will also go up due to shortage and availability of raw materials competitive rates.
6. Economies of Scale
Economies of scale is the cost advantage that businesses enjoy as a result of production efficiency. In order to attain economies of scale, businesses must increase production while reducing expenses. Costs are distributed among a greater variety of commodities, which is why this occurs. Both variable and fixed costs are possible.
If your manufacturing firm has high fixed costs, you can counter it by increasing the production and the number of units produced to achieve the economies of scale which will positively impact your profitability.
7. Exchange Rate
If your manufacturing firm is reliant on raw material that isn’t locally available and has to be imported, the exchange rate of your country will heavily impact your profitability since depreciation will increase production costs. If the currency of the country you operate in is stable, it will positively affect your profitability, Similarly, if your manufacturing firm is reliant of exporting manufactured products, a fall is exchange rate will positively impact the profitability of your firm since you can export bigger quantities now and opt to have better profit margins as the fall in exchange rate makes exporting products cheaper in comparison to the foreign client or customer.
If you run a manufacturing firm, you need to be aware of these factors to know how you can maximize efficiency and increase profits. Sometimes, manufacturing products in-house isn’t ideal and outsourcing it is the best possible solution. In this case, Connekt, LLC is your best option. Based in the Bay Area, CA, we are an engineering firm and provide outsourcing solutions for your business. Our services include finite element analysis,rapid prototyping,3D printing, injection molding, and more. Contact us now for further details, information and assistance.