The Habit of OutPerformance - Optimizing Profit in Manufacturing

Maxager and “Lean” Manufacturing

By Rick Batty

“Lean” manufacturing gained prominence with the revolutionizing methods advanced by Japanese manufacturers. Approaches such as “kanban / just-in-time” and kaizen dramatically changed manufacturing practices and brought about much greater efficiencies. A major focus and benefit of these approaches is the reduction of work-in-process inventories. This inventory reduction often exposes problems in the manufacturing process which can then be addressed. The common analogy is that of draining the water so that the rocks which were previously below the surface are now apparent. The rocks represent problems or inefficiencies in the manufacturing process. Once they become apparent, these inefficiencies can be addressed, thereby making the manufacturing operation more efficient and more profitable.

A profit-per-minute approach to profitability is actually an application of “lean manufacturing” principles to the financial operation of a manufacturing business. Rather than looking only at the numbers of units flowing through the manufacturing process and the time spent for different products in the process, profit-per-minute looks at the cash value of products or customers as they flow through the process. By combining margin per unit information with production velocity, a manufacturer can look at how fast or slow cash and profit flows through manufacturing at the key production steps. Profit-per-minute analysis at the product or customer level can be used to identify the “rocks” which are low-profitability products or customers decreasing the efficiency and profitability of manufacturing.

A profit-per-minute approach makes it possible to measure Return on Assets (ROA) at the operational or transactional level. Being able to view true profitability by product, customer, plant, production line, market or sales region at a granular level enables operational decision making which will increase “leanness” and maximize overall corporate profitability and ROA.

Dangers of the Status Quo

By Jason Stewart

Marketer extraordinaire Seth Godin had a great post on his blog late last year called “Top Ways to Defend the Status Quo” with the caveat that “All quotes actually overheard, or read on blogs /comments about actual good ideas.” Check it out here, but a few highlights include gems like "we'll let someone else prove it works... it won't take long to catch up” as well as "it's fantastic, but the salesforce won't like it."

It got me to thinking about some of the things we have heard from prominent manufacturers that might make the list.

Are your existing systems really “good enough”?
You have, undoubtedly, invested a fair amount of money in things like ERP, CRM, SFA, BI and more. These are incredibly valuable systems for a manufacturer, but how is strategic analysis information delivered to your team? Let me guess…could it be via spreadsheet? Another question…how many engineers did it take to create that report for you? One last question…is it in some form that your team can use it day-to-day while they actually do their jobs? Does that sound “good enough” to you?

Should data quality concerns stop you in your tracks?
You don’t want to make the perfect the enemy of the good. Data can be improved incrementally, but in the meantime you should keep in mind that the data you are pulling out of your existing systems is what you are basing your decisions on now, and it should continue to be used throughout the improvement process. In our experience, data is never perfect, and probably never will be. The quest for “perfection” is a fruitless one, though, and could make you a prisoner of the status quo.

Is I.T. really too busy for any new projects?
With more and more software and services moving to a SaaS model (Software as a Service), software initiatives cost less, are faster to implement, and have quicker return on investment. IT organizations are still busy, and need to carefully prioritize any new projects – but SaaS is designed to take some of the weight off of the shoulders of IT and generally has a much faster rate of return on investment than more traditional projects. Time and personnel commitments of SaaS projects need to be evaluated differently than those other projects, and the business needs that are addressed need to be the driving force behind whether a project gets the green light.

On the flip side, many mature IT organizations are required to try and build a solution “in-house.” But how long will it take them to do it? And how much time and money might you lose while you are waiting for a product that may be “customized” for your individual needs but is also ultimately handicapped by usability and performance issues?

Status quo is a dangerous thing, and is often the biggest competitor to any new initiative.