How Manufacturers Can Find and Fix Profit Leaks

You’re growing. Revenue is up. But somehow, profits aren’t keeping pace. If that sounds familiar, you’re not alone. Many manufacturers experience margin erosion without realizing it until the gap between expected and actual profitability becomes impossible to ignore. The culprit? Profit leaks in manufacturing that quietly drain your bottom line while everything on the surface looks fine.

During a recent Moore on Manufacturing episode, Mike Sibley and Kevin Golden, both partners on the James Moore manufacturing team, broke down how these hidden cost problems develop and what manufacturers can do to find and fix them. The discussion highlighted the importance of cost visibility, accurate job costing and understanding where your margins really stand.

When Margins Don’t Match the Financial Statements

One of the most common warning signs is a disconnect between what you think your margins are and what your financials actually show. As Mike Sibley put it, “I’ve got my margin by product, and I think I’m X percent. And then I go to their financial statements and their financials show substantially lower margins, and that tells me you don’t know what your margins are because there’s costs out there somewhere that you’re not identifying and capturing.”

That gap often comes down to overhead and labor costs that aren’t being properly allocated, material costs that have crept up without anyone tracking the change or pricing that hasn’t been updated to reflect rising expenses.

The High-Volume Trap

Mike shared a client example that illustrates this perfectly. The company had two product lines: one high volume and one low volume. The business was always breaking even, and no one could figure out why. When Mike dug into the numbers, the high-volume line was actually losing money. The low-volume line was profitable enough to offset those losses by just enough to keep the company at break even. Without product-level margin visibility, the company had no idea one line was subsidizing the other.

It’s Not Always a Pricing Problem

When margins start slipping, the knee-jerk reaction is often to raise prices. Kevin Golden pushed back on that assumption during the episode: “The knee-jerk reaction is if you’re not making enough, just increase your pricing. Well, maybe that’s part of the solution, but that’s not always the solution. We’d all be out of jobs if all we did was cover up all our inefficiency and mistakes with price increases.”

Price increases may be part of the answer, but without understanding what’s actually driving costs up, you risk masking the real problem. Better cost visibility allows you to have informed conversations with vendors and customers, back up price adjustments with real data and identify whether the issue is pricing, process or both.

Find the Hidden Cost Drivers

Sometimes the profit leak is hiding in the last place you’d look. Mike shared a story about a client experiencing gradual margin deterioration. As he dug into the numbers, he noticed the company’s trash bill was climbing. The trash hauler charged by weight, so Mike pulled the invoices and trended the weight over 12 months. He found a sharp increase over a two-month period.

When the CEO went to the production floor, they discovered a training issue had led to defective product being scrapped at a much higher rate, with no mechanism in place to flag it. Once the problem was identified and fixed through a continuous improvement initiative, material costs came back down.

Another client believed their margins were in the 54 to 55% range. In reality, they were in the mid-30s. The root cause? Direct labor and indirect labor were commingled in the financial statements, and employees weren’t logging their time to work orders properly. Once the team separated those costs, built discipline around time tracking and started allocating overhead correctly, the company gained the clarity it needed to actually manage margins and capacity.

Contribution Margin vs. Gross Margin

Mike also stressed the importance of understanding the difference between contribution margin and gross margin. “If the contribution margin’s really, really low, then you got no chance once you add overhead into that,” he explained. Contribution margin, which accounts for labor and materials, gives you a clearer picture of whether a product line can carry its weight before overhead even enters the equation. If that number is already thin, no amount of overhead adjustment will save it.

Protect Your Margins with Better Visibility

The common thread across every example in this episode is visibility. Manufacturers who know their true costs at the product level, who track changes in labor and materials over time, and who review variances regularly are the ones who catch profit leaks before they become serious problems. Kevin summed it up well: “Wherever you’re at today, take it that next step further to have a little bit more clarity. That’ll start leading to questions. And as you can’t answer those, you’ll start digging a little bit more, and next thing you know, here’s a problem. Now how do I fix it?”

If your margins don’t look the way you expect, the answer isn’t always a price increase. Sometimes it starts with asking better questions and building the cost visibility to answer them.

Watch the full episode for more on job costing, hiring structure and protecting margins during growth. Watch now on YouTube.

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