Vendors say profit-optimization solution proves time is money

Applications that force salespeople to stay within specific price ranges can be useful, but they don't always maximize profits, says Michael Rothschild, CEO of Maxager Technology.

Rothschild argues that ensuring the highest profit requires measuring the time involved in creating various products against the prices they yield, which is what he says Maxager's enterprise profit optimization (EPO) solution is designed to do.

Using proprietary optimization technology, the Maxager solution generates a profit-per-minute number—or what Rothschild calls the profit velocity—for each product. Logically, that should lead a company to prioritize the sale of products with the highest profit velocities over those that merely bring the highest price, or even yield the highest margins.

“Before you start doing tactical execution to get tighter control around products with 40-percent margin targets, you should understand the true economics,” says Rothschild. “What many companies don't realize is sometimes there are low-margin products that generate money at prodigious speed.”

Colin Masson, a director with Boston-based AMR Research, agrees that manufacturers typically don't have the tools needed to arrive at the problem Maxager addresses, which Masson calls profit-mix optimization. But there is growing interest in such solutions as more manufacturers adopt demand-driven business models that require generating broader mixes of products in smaller lots.

“You have to identify the most profitable products, and how to maximize the return from critical [production] assets,” says Masson. “This means understanding profit-per-hour for the portfolio of products you could make on those assets.”

To model profit velocity, Maxager pulls about a dozen core data elements—such as material cost, customer information, and product pricing parameters—from enterprise systems. The solution also considers run time by product, and ideally, detailed manufacturing execution data on machine times and yields, if available. “We bring those data streams data together [from ERP and production execution systems], grind them with our patented algorithms, present analytics, and allow for 'What-if?' planning,” says Rothschild.

The EPO solution allows making choices about which orders to accept and fulfill first, which products are the most profitable to make, and which lines or equipment to use to yield the highest profit levels.

Masson says a vendor called pVelocity also addresses profit-mix optimization, adding that large ERP vendors may expand into this area, since ERP has many of the core data elements. But to date, most manufacturers are building their own tools for addressing profit-mix optimization.

For some companies, it's important to analyze logistics data to fully assess the supply chain variables involved in the mix. Gunther Liemann, pricing manager at Perrysburg, Ohio-based Owens-Illinois, says Maxager has shown him that profit velocity is “equally if not more critical” to measure than margin.