By Rick Batty
A frequent question posed by manufacturers concerns whether a profit-per-minute approach is still useful when production is not at capacity. If production is indeed running at 100% capacity, manufacturers readily realize the value of using a profit-per-minute approach to increase profits by making some products rather than others, by taking orders from certain customers rather than from less profitable ones or by selling into only the most profitable markets.
However, when plants and production lines are not fully utilized, companies may feel that there is no real need to apply a profit-per-minute perspective to make decisions regarding which products to make and to whom they should be sold. They believe that when production is not at capacity, it is necessary to take in any business that can generate a profit, no matter how low that profit might be. So in their minds, there are no profitability trade-offs to be made.
This viewpoint fails to consider certain fundamental benefits of using a profit-per-minute approach. Without using profit-per-minute, companies will still be generating sub-optimal profits even when capacity is not constrained. If profits are down because production is not fully utilized, it is more important than ever to look at other ways to increase profits and corporate ROA. A profit-per-minute approach can be even more valuable in this scenario. Profit-per-minute can help in (1) the search for new business to fill production and (2) optimizing existing business.
Determine Which New Business to Pursue
While it may make sense to accept any new profitable business to utilize production capacity, salespersons must still seek out this business. It does not magically appear for the company. A profit-per-minute approach’s profit-per-minute metric enables Sales to determine which products and customers merit the most effort for securing new business.
Evaluate Existing Business
When profits are down because of idle capacity, it is more important than ever to look at ways to increase the profitability of existing business. Various areas can benefit greatly from the use of a profit-per-minute approach.
- Uncover previously hidden lower-margin, high profit-per-minute products that could sustain a price decrease which would increase demand and thereby increase production.
- Determine which products or customers are possibilities for price increases.
- Decide which products or customers are the most profitable and redirect sales and marketing programs towards them. Current programs are probably concentrated on the highest margin products, which may or may not be the most profitable ones for the company.
- Focus attention on the most profitable customers from a profit-per-minute basis rather than a margin-only one. Redirecting this focus may take the form of greater contact from Sales, better payment terms, prioritized production runs etc. Such increased focus may increase demand from the most profitable customers and thus generate more production volume.
- Consider switching products to production lines where they can be made more profitably. This is an option that is very attractive and which may not be available when production is running at 100%. A profit-per-minute approach allows manufacturers to see how profitable products are when made on different production lines.
- Better prioritize which products or production facilities to target for productivity improvement initiatives. When production is not at capacity, it is the perfect timing for carrying out these initiatives. Downtime will not take away from production time, which would result in lost revenue and possibly unhappy customers. Productivity improvements can target products that will have the most immediate and significant profit improvements.
In summary, it is readily apparent that profit-per-minute provides significant value even if production is below capacity. A profit-per-minute approach enables (1) targeting new business that will not only help fill production volume but will also generate as much profit as possible under the circumstances and (2) optimizing existing business to maximize corporate profitability and Return on Assets.