By Rick Batty
Business Intelligence (BI) software has brought a powerful ability to use data that companies have captured to make informed business decisions. The ability to look at masses of different types of data allows companies to look at many dimensions of the business in a variety of ways. However, bringing different sources of data together is not a simple task and it requires specialized applications that go beyond the focus of BI tools’ horizontal focus.
A good example of this is the bringing together of margin and production data. Companies have long managed profitability by looking at margins by product or customer. However, attempts to maximize margins do not maximize profits. Why? Using a margin-only approach fails to take into account the speed, or velocity, at which products are made. A lower-margin product may generate far more cash than a higher-margin one if it can be made much more quickly.
Many companies have long realized the importance of production velocity for profitability but they had no means to incorporate it with margin. So they settled for margin as the best available proxy. But in doing so, they leave money on the table, often 3-5% worth of revenue. For a company with $1 billion in sales, this amounts to $500,000 to $1 million per week. The challenge of combining margin and production velocity data would not be difficult if a company produced only a few products. But for manufacturers that make hundreds of thousands of SKUs, the problem becomes insurmountable.
A BI tool can look at either margin or production velocity data in detail and from many viewpoints but it does not inherently map the production data to the margin information and have a built-in ability to analyze the combination of the two. This requires a specialized application with built-in algorithms to calculate true profitability as a function of both margin and production data. This combination is profit velocity, which represents how much cash is being generated per minute by a specific product, customer, sales region, market or production facility. The ability to calculate profit velocity in detail, as profit per minute, quickly and easily for a company making hundreds or thousands of products in multiple plants and selling them to numerous customers requires a specialized application that goes beyond the basic capabilities of BI tools. Furthermore, if forward-looking modeling to look at changes which might increase profits and company return on assets (ROA) is required, a specialized application is highly recommended. This new breed of applications which is now emerging will sit on the BI and ERP technology stack and further increase companies’ ability to use their data for improved corporate performance.