Value adding ratio

Have you ever calculated yours?

It is a pretty simple performance measure that carries a lot of weight, and contains the seeds of success, and destruction. In addition, if you know your industry well, it is pretty easily calculated for competitors, so acts as a useful competitive benchmark.

Break your P&L up into a few categories:


Direct labour

Administrative Overheads,

Divide the results by sales, and you have the value adding ratio. Just ask your customers what parts of your cost base they are happy to pay for to get the product they buy, unlikely many will answer with a positive to the fancy headquarters building, the boss’s new car, or the off-site strategy meeting at the Casino in Hobart.

To be fair, there are many costs that are necessary, but do not necessarily add the value that consumers are happy to pay for at the supermarket. Things like R&D spending, market research, IT expenditure, freight costs, and many others fall into these categories, but a debate about how they can be reduced,  and how the productivity of the expenditure can be  increased, is extremely valuable to have.

Pretty basic management stuff, but so easy to ignore. It is also very easy to produce an infographic that everyone can buy into, by simply breaking up a picture of the end product into its percentage categories. This has an enormous  visual engagement value for anyone embarking on a Lean initiative.



About strategyaudit

StrategyAudit is a boutique strategy and marketing consultancy concentrating on the challenges of the medium sized manufacturing businesses that make up the backbone of our economy. The particular focus is on their strategic and marketing development. as well as the business and operational efficiency improvements necessary for day to day commercial survival. We not only give advice, we go down "into the weeds" to ensure and enable implementation.
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