Are you a CFO in manufacturing grappling with the relentless challenge of margin erosion? You’re not alone.  

Margin erosion isn’t mythical, it’s a real and pressing issue that can silently bring even the strongest manufacturing operations to a grinding halt.  

Margin erosion is the gradual decline in gross margin that can slowly undermine your company’s financial stability if left unchecked. 

In today’s fast-moving business environment, where everything from supply chain complexity to market volatility is constantly shifting, understanding and addressing margin erosion is crucial.  

It’s not merely a financial metric but a reflection of how well your business can adapt to changing conditions and maintain profitability. 

Why does Margin Erosion happen? 

To effectively combat margin erosion, we need to understand what it is and what causes it.  

When the difference between sales and the cost of goods sold (COGS) gets smaller over time, it is called margin erosion. But why does it happen? 

• Pricing Pressure: When competitors aggressively cut prices, it can force your hand to lower prices as well, leading to reduced margins. It’s a constant battle to balance competitive pricing with profitability. Intense competition can lead to pricing wars, reducing your gross margins. 

• Cost Increases: Rising costs for raw materials, labor, and other inputs directly impact margins. Inflation and increased operational expenses mean that every dollar spent reduces the margin between costs and revenue. 

• Inefficient Operations: When inventory isn’t managed well and resources are wasted, operational costs can skyrocket. Often, these inefficiencies go unnoticed until they become a huge financial burden.  

A study from McKinsey found that companies using digital tools can boost production by 10% to 30%. 

• Changing Customer Preferences: The market’s preferences can shift quickly. If your product lineup doesn’t adapt to these changes, you risk becoming irrelevant, which affects your ability to maintain healthy margins.  

As consumer demands shift, manufacturers must adapt. An Accenture research reveals that 64% of consumers wish companies would respond faster to meet their changing needs. 

Add economic downturns, fluctuating currency rates, and evolving state of regulations to the above challenges and you are in the midst of a perfect storm. You are often introduced to unforeseen costs and operational challenges, squeezing margins further. 

How can CFOs combat Margin Erosion? 

To tackle margin erosion effectively, CFOs in manufacturing should focus on these strategies: 

• Gross Margins & Sales Rewards: Let’s start by making gross margins the heart of your sales rewards program. They should be the first thing you see on sales reports and the guiding star for compensation plans.  

When margins take center stage, your team knows what truly drives success. Burying them at the bottom is a missed opportunity. Tie commissions and bonuses directly to margin goals, as this keeps profitability not just a priority but the priority. 

• Cost Optimization and Efficiency: This strategy is not new but is unmissable. Reducing operational costs is crucial.  

For instance Nucor, a leading steel producer has implemented a highly efficient mini-mill production process to keep things efficient by using electric arc furnaces to melt scrap steel, which is a lot cheaper than traditional blast furnaces.  

This smart move, along with just-in-time inventory management, helps Nucor stay profitable. 

• Take control of Inventory: Inventory management is crucial for your company’s financial health. Holding too much inventory can tie up cash, leading to liquidity issues and eating into your profits.  

An “Open to Buy” program is a great tool for this. It helps you manage your spending, ensuring you clear out old stock before adding new items. This keeps you from buying too much and keeps your cash flow on track. 

• Indirect spends directly impact Margins: Take a close look at every line in your general ledger; knowing exactly where your money goes, whether it’s for consultants, marketing, shipping, or maintenance fees is crucial.  

Forming a committee to review these expenses quarterly can help keep everything in check. You can also partner with E2E supply chain automation & procurement automation solution providers like Moglix.  

Moglix through its award-winning cloud SaaS platform and catalog-based buying model can give you better visibility into indirect spending and speed up your digital transformation journey at a rapid yet sustainable pace. 

• Artificial Intelligence will drive efficiency: According to a survey published on Forbes.com, nearly two-thirds of CFOs (65%) are integrating AI into their long-term strategies, yet many are still figuring out how to use it effectively.  

For CFOs, AI can be a game-changer in safeguarding gross margin. Using predictive analytics lets you foresee market changes, so you can tweak your pricing or inventory as needed.  

Interestingly, though these tools offer great benefits, only 49% of CFOs feel “very knowledgeable” about generative AI as per the above-mentioned survey. 

So, we’ve covered some key strategies to fight margin erosion. But let’s be honest—CFOs in manufacturing are already familiar with some other common tactics.  

We’re not going over the basics like product mix optimization, value-based pricing, risk management strategies, supplier relationships, or dynamic pricing.  

You’re already familiar with those. These are solid strategies you likely use already. 

Staying Ahead in the Margin Game 

As we move forward, CFOs in manufacturing must embrace a proactive approach to combat margin erosion. This means staying flexible, using new technology, and adjusting to market changes.  

By encouraging a culture of innovation and teamwork, CFOs can protect their margins and turn challenges into growth opportunities. The future is for those who can foresee changes and adapt quickly. 

Moglix’s integrated procurement saas solution, automated workflows, and catalog-based buying solutions, combined with its state-of-the-art physical warehouse network could be a “one ring to rule them all” partner for CFOs in manufacturing.  

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