iSixSigma

Price Recovery

Definition of Price Recovery:

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Heads up! Having too many variations in valuation and costs can throw a monkey wrench in one’s understanding of what is happening in shifts in productivity. Don’t let it happen to you and your business.

What is price recovery?

Price recovery is defined as the variation in valuation and costs associated with Work in Process (WIP).

3 Drawbacks of price recovery

There are some major key drawbacks to having too much recovery in price to consider. Here are some clear examples.

1. Too much differentiation

Many say that variety is the spice of life, but that isn’t always true when it comes to you and your business. Having too many variables can create confusion and lead to more Work in Process (WIP), when the goal is to minimize or even eliminate WIP.

2. Too many unnecessary costs

You are having to figure in the beginning work-in-process costs, the price of labor, the raw materials, and the total costs. All of these combined can quickly get out of hand and significantly increase WIP. Being able to trim as much of these as possible is of paramount importance to the long-term success of a business.

3. Too much confusion

Having to put too much emphasis on varying valuation and costs creates less throughput when being able to streamline is a better approach to your business.

Why is price recovery important to understand?

Being able to minimize it is important to cut back on WIP in order to maximize the potential of your business.

1. You can’t really know how your business is doing.

If you do not have a clear understanding of the variances in valuation and cost associated with your Work in Process, it is impossible to know where changes can be made in your processes in order to do what is best for your business model. Knowing where cutbacks can be made and the order of things can be made more efficient is an integral part of the health of your organization.

2. Happier employees

When the fat is cut, employees can have a clearer understanding of their work duties and goals. This leads to a happier and less stressful work environment.

3. More satisfied customers

Getting ahold of the reins on your processes helps cut down on WIP. This gets your products into your hands quicker and helps ensure your clients get a better, more consistent product.

An industry example of price recovery

A manufacturer might decide to create a line of toys. They come up with dolls, trucks, games, and more. The only problem is that all of these items have drastically different associated costs and processes to create them. The cost gets out of control leading to a staggering amount of WIP. The better option is to focus on a few key items with similar processes involved in their development in order to minimize costs and maximize workflow.

3 Best Practices When Thinking About Price Recovery

1. Keep it consistent

Make processes as simple and repeatable as possible in order to minimize the downtime that increases labor costs as well as a lack of consistency unit to unit.

2. Eliminate too many variables

Keeping moving parts as minimal as possible makes it much easier to track where changes need to be made to maximize throughput and profitability.

3. Keep employees and customers happy

Being able to minimize recovery makes for a better work environment as well as provides a more reliable product for your customers.

Frequently Asked Questions (FAQ) about price recovery

1. Is cost recovery the same thing?

While this term concerns the variation in valuation and costs associated with WIP, cost recovery is an accounting method that focuses on a business not recognizing income from a transaction until the cost has been covered by the customer.

2. Can minimizing this really help my business?

Yes! Just one example is this case study where a mining operation was able to cut its operational and maintenance costs by 92.7 percent.

3. This is a component of Work In Process. Why is having WIP not good for business?

As long as you have works that are in process, it is hard to make money from them as they are not completed.

Getting Your Price Recovery Under Control

An understanding of this concept is an absolute must when it comes to making your business thrive. Not knowing where to make adjustments in order to streamline your company’s processes and minimize the variables in order to control costs makes for an amount of WIP that drastically affects the health of your organization. For happy employees and customers, tighten up your ship.

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