Optimizing Gross Margin: Key Strategies for Manufacturers

Gross margin and gross profit are essential metrics for any business, especially manufacturers. These figures represent the difference between revenue and the cost of goods sold (COGS), and they ultimately determine how profitable your business is. But understanding and improving gross margin can be a bit tricky, particularly in a manufacturing environment where the calculation of COGS might not always be clear.

In this article, we break down the fundamentals of gross margin, explore why it’s important, and discuss how you can use modern tools like Power BI and Fathom to analyze and optimize your gross margin. By the end, you’ll have actionable strategies to enhance profitability.

What Is Gross Margin, and Why Is It Important?

Gross margin is the bread and butter of how businesses make money. For manufacturers, it’s crucial to clearly define and accurately calculate gross margin because it directly impacts the company’s bottom line. However, many manufacturers struggle with one key question: What exactly goes into cost of goods sold?

At its core, gross margin is the difference between your revenue and your cost of goods sold. However, in manufacturing, understanding what to include in COGS is essential. Labor costs, applied overhead, and materials should be accounted for, but it’s important to avoid “kitchen sink” accounting, where too many expenses are inaccurately thrown into the COGS bucket.

If you don’t get your gross margin calculations right, you risk making poor strategic decisions based on inaccurate data. This can hurt profitability and put your business at a competitive disadvantage.

Setting and Sharing Gross Margin Targets

One of the simplest yet most effective ways to optimize gross margin is to set clear targets. These targets should be shared across your organization—especially with your quoting and estimating teams. It’s vital that everyone, from top management to sales personnel, understands what the business needs to achieve in terms of gross margin.

Set targets by customer segment or product type and break them down into manageable, realistic goals by month or quarter. With well-defined targets, your team will know exactly where the company stands and how to drive better results.

Analyzing Gross Margin Using Power BI

The next step in improving gross margin is analysis. Using tools like Power BI, manufacturers can break down the data into manageable pieces, allowing them to focus on areas where the most significant impact can be made.

For example, Power BI allows you to drill down into details like job profitability by part or customer segment. You can identify patterns, trends, and exceptions by analyzing historical data. For instance, you might find that certain parts or customers are more profitable due to differences in gross margin percentages.

With tools like Power BI, you’re not just looking at one big number—you’re able to slice and dice the data to uncover actionable insights. This helps you make informed decisions about pricing, production, and even sales strategy.

Making Improvements with Fathom

Once you’ve analyzed your data, the next step is making improvements. Tools like Fathom enable you to model various scenarios and simulate the impact of changes on your gross margin.

For instance, you can experiment with price increases, cost reductions, or volume changes and see how they affect your overall profitability. This methodical approach to testing different strategies helps you determine the best ways to improve your gross margin over time.

At a high level, these tools help you move the needle in key areas, allowing your team to focus on what matters most: improving profitability.

Bringing It All Together

Optimizing gross margin is an ongoing process, but with the right strategies and tools, you can make significant improvements that drive profitability. Start by understanding the fundamentals of gross margin, set clear targets, and leverage powerful analytics tools like Power BI and Fathom to track your progress and make data-driven decisions.

If you’d like to learn more about how we help manufacturers optimize their gross margins, feel free to reach out to us at Chortek. If you found this article helpful, please share it with others who may benefit from it. Thanks for reading!