Last week, the Wall Street Journal published an article on October 13 titled “GM to Open Stamping Plant in Texas.” The byline is “Large Cost Savings Expected as It Cuts Down on Transporting Parts.” The article discusses GM’s cutting of its logistics costs through co-locating its parts-making and assembly plants.
The new plant, is part of a broader rethinking of logistics by GM Chief Executive Dan Akerson, who is anxious to close the company’s profit margin gap with rival Ford Motor Co.
His aim is to lift GM’s North American margins to 10% from about 8% now, a feat that would generate hundreds of million of dollars in new profit.
“We spend billions a year on logistics,” Mr. Akerson said. “Think about that, billions. Any savings I can get by cutting my logistics bill goes right to my bottom line and makes us more competitive. I’ve told our teams that we need to make this a priority to look across the organization and take the steps to cut the costs.”
The article also cites GM’s and Ford’s profit per vehicle, operating margins and operating profits.
In any business there are potential opportunities for profitability improvement. The GM example cited above is one way to increase operating profits via cost reduction.
As stated in the “Profitability Improvement” page,
There are many ways to improve profitability, ranging from those relatively straightforward to complex. This topic is especially critical now, for a variety of reasons, including overall low economic growth and substantial ongoing economic uncertainty.
While “cost-cutting” (i.e. expense reduction) has been commonplace for years, and often is relatively straightforward, there are often overlooked opportunities that are significantly more impactful. These other revenue and profitability improvements can be found in a variety of areas, including improvements in strategy, (new) products, operations, leadership, revenue management and pricing. In many cases, improvements in profitability derived through these other areas are not only larger than those derived via “cost-cutting,” but they often have other added benefits, such as strengthening of the competitive position.
Changes in pricing and pricing strategy, while it can be complex, is often a potent “lever” for revenue and profitability improvement. Deloitte has compiled, based upon the average Fortune 1000 company, pricing’s impact on profitability vs. that of other improvements, as seen in the chart on that page.
Of course, the potential “leverage” of pricing depends upon many factors and varies among firms. Estimates can, and should, be calculated on a firm-specific basis. As well, being a potent “lever” can also mean that poor pricing decisions also have the potential to be (very) detrimental.
StratX, LLC (stratxllc.com) is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.