Enterprise profit optimization solutions unearth the real cost of manufacturing

The results of a study conducted by enterprise profit optimization specialist Maxager Technology confirm that while many manufacturers believe it's important to measure the speed at which products are made, few actually have the tools to get it done.

The survey polled executives and managers at chemical, metal, electronics, and other complex manufacturing companies. Respondents had this to say:

• 92 percent believe the ability to analyze the speed with which the organization produces the most profitable products—or serves the most profitable customers and markets—is somewhat to very important.
• 71 percent do not have the systems in place to analyze combined margin and production run-rate data.
• Almost 6 percent use profit per minute calculated by combining production velocity with margin to measure profitability.

“The unavailability of a time-based operational metric that takes production run times into account forces companies to use different metrics in each department—none of which are directly linked to ROA [return-on-assets]. ROA is the profitability metric of most importance to shareholders,” says Michael Rothschild, founder and CEO of Maxager. “In our experience, lack of a common metric that will allow operating decisions to be based on a common goal results in lost profits worth 3 percent to 5 percent of revenue. It also results in heated debates about which products, customers, and markets are most profitable.”

According to Colin Masson, a director with Boston-based AMR Research, while numbers from AMR surveys differ from Maxager's, the bottom line is manufacturers haven't widely adopted a means to track profitability.

“Companies are doing a better job of knowing their end-to-end supply chain costs, but at the end of the day, it's still difficult to break out manufacturing costs by product, line, or site,” Masson says. “People still struggle to determine the actual cost of manufacturing.”

The importance of that capability grows as the nature of global manufacturing continues to evolve, Masson says. For instance, higher capacity utilization involving higher product mixes necessitates that a company be able to make tactical decisions on what is being produced to optimize profits and ROA.

“Manufacturers know they need to make the most out of their current assets in today's manufacturing environment,” says Masson. “That means using data to support decisions such as the day's optimal balance of product mix, whether or not another line should be added, and how much the company should rely on outsourced manufacturing. Use of profit velocity and analysis is critical to those types of decisions because they should all take into account not just standard costs, but also profit by hour—if not profit by the minute.”