The problem.. the company used a conventional standard costing system to determine how profitable products and customers are. However as a result of the method used to allocate costs and overheads, management were convinced that printed products were much less profitable than plain products. For example a plain product had 8% net margin, whereas the same product printed had 5% net margin

This difference is due to printed products being allocated more overheads than plain products.

The project MBA examined the profitability of all products and customers. We created a model of the business by combining all the products, customers, routes, capacities and costs into one database. This was analysed using BMAP-OPT and the most profitable course of action was identified within days. New simple systems were introduced to provide constant information on the true profitability.

The solution. In order to maximise total profitability the company needed to maximise total added value in any period of time. Because overheads and fixed costs do not change as the mix of work changes, they are not included in product profitability. The bottleneck in the company is not printing, but is the moulding of the product. To maximise added value, the company now maximises the throughput of added value through moulding. The throughput of printing does not matter because it is not a bottleneck. Also moulding plant is much more expensive than printing plant.

The results showed that printed products are twice as profitable as plain products and the company is enjoying dramatic profit growth.

The company is a 22 million manufacturer of plastic food containers in the UK. The manufacturing process includes extrusion, moulding and printing. The company is profitable, but needed to increase profits considerably in order to replace ageing plant. There is a considerable choice of machines in each of the manufacturing departments. The company sells over 200 products to 80 main customers. Products are sold as either plain or printed.