Fast Nickels vs. Slow Dimes
According to Profit Velocity, the root cause of conflicting metrics and disappointing return on sales (ROS) is an unappreciated, but profound, flaw in traditional cost accounting. Simple example: A metal fabricator makes two products, “Nickels” and “Dimes.” It’s obvious that a Dime has twice the margin per unit of a Nickel, and to the extent allowed by the market, management will push sales to sell more Dimes, even if it means losing share of Nickels.
But what if Nickels flow through the crucial, expensive metal forming machine faster than twice the speed of Dimes? In that case, low unit margin Nickels yield more total cash profit per hour (day/week/month) of machine time than high unit margin Dimes. Getting the product mix of Nickels and Dimes right is essential to optimal profitability. Since most industrial manufacturers make hundreds or thousands of product varieties (SKUs), the product mix problem is unsolvable and profits suffer.
"Data gathered from Profit Velocity’s 30 most recent customers reveals massive untapped profits ‘hidden in the mix"
“Simply put, the unit margin metric, the basic building block of all costing methods, provides just half the information management needs,” says Rothschild. “Unless margin per unit is factored by units per hour to compute what we call Profit Velocity, or profit per hour, sales, production, and finance can never agree on the day-to-day choices that could maximize total profit, EBITDA, and ROS. The underlying cause of the anemic shareholder returns of many manufacturers runs much deeper than the lack of good enterprise systems. To solve the fundamental problem, we had to begin by rethinking product costing, and then designed a state-of-the-art enterprise performance management (EPM) solution around the metric of profit per asset hour.”
“Senior executives often candidly admit to me they don’t know the true profitability of their products or customers. They don’t trust their standard unit costs and margins. But they want to know the truth,” Rothschild claims.
A Genuine Paradigm Shift in Enterprise Performance Management
“In our early years,” Rothschild recalls, “whenever I pitched ‘profit per hour,’” as the crucial ‘missing metric,’ many executives looked at me strangely. But now that we’ve built a track record of enabling manufacturers achieve stunning profit gains, we see an eagerness to try our time-based approach to see whether they too can achieve a new level of profitability.”
Data gathered from Profit Velocity’s 30 most recent customers reveals massive untapped profits “hidden in the mix.” In diverse industries such as metals, chemicals, plastics, semiconductors, food processing, building products, auto parts, and pharmaceuticals---wherever a broad portfolio of SKUs are made for multiple customers---the data inevitably show the same thing---industrial manufacturers fail to capture 3 percent to 5 percent of their top line revenues as bottom line profit.
Keep it Simple, Deliver First Results Fast
Velo enables cross-functional teams to gain alignment on their negotiation strategy before opening the dialog with a critical customer
Given the power of its analytics, the PV platform is surprisingly quick to set up and requires just a few data elements from other systems. “Through experience we learned two lessons. First, few manufacturers are confident of their data reliability. Second, before agreeing to a pilot, they want to know they can “ring the register” within a quarter, not a year or years,” says Rothschild.
To meet the first challenge, Profit Velocity figured out how to strip down to just eight data elements the inputs needed to fire up a PV platform. Six of those are pulled from the invoice file. For each transaction, PV needs the invoice ID, shipment date, customer name, product name, units quantity, and revenue. The seventh is the material cost of each product. The eighth is the rate of productivity---the units per hour as a product flows through a single critical process step. Most manufacturers want to include more data elements than the essential eight and supplement customer name with details like market segment, location, sales rep, etc. along with data on product characteristics: type, color, size, etc. These optional data elements allow the PV platform to reveal subtle profit differences caused by these attributes.
Years ago, Profit Velocity’s greatest challenge was that few customers had decent data on production speeds. But with all the investments made since then in shop floor systems, manufacturing execution systems (MES), production scheduling tools, and the drive toward Industry 4.0, most firms nowadays have reasonable production speed data.
“The second major challenge we faced was delivering a useful PV system in just weeks, so that new customers could achieve their first gains within a quarter,” Rothschild reports. “To solve this, our software engineers developed a ‘Lego-like’ cloud solution that’s easy to configure to the customer’s precise needs. Regardless of a customer’s industry, terminology, processes, locations, data definitions, or language, we ‘adjust the settings’ to launch PV in under a month.”
Profit Map: Visualization is Key to Gaining Rapid Consensus
Profit Velocity believes that graphics are essential to gaining a quick consensus among decision-makers on the shortest path to better profits. Consequently, the company has invested tremendous effort into refining its unique “Profit Map.” The Profit Map weaves together in a single vivid graphic the relationships between margin per unit, units per hour, and profit per hour for any set of products, customers, or facilities. Pouring over tables of numbers to deduce their meaning isn’t easy. So, the Profit Map turns raw data into actionable insights by reducing a blizzard of numbers into impactful visualizations. Customers claim that PV’s Profit Map, and especially its real-time updating to show the impact of what-if scenarios, makes it a game-changing tool.
Velo: Enabling Genuine Organization Change
A light data load, quick set up, and the Profit Map opened doors to many new customers. But the company learned that those features were still not quite enough to assure that customers would achieve tangible gains. The core problem: the people working inside each manufacturer had spent years, often decades, basing their decisions on margin per unit rankings. Just because senior management grasped that profit per hour is a superior profit metric does not mean that the people who do the work day-to-day could easily shift their mindset to take advantage of PV’s insights.
To solve this “last mile” challenge, Profit Velocity has added a suite of professional services to help organizations make the changes needed to realize the upside the PV software quantifies. Called “Velo,” short for Velocity, these advisory services address a range of issues that organizations face when trying to institute sustainable improvement.
Velo usually begins with “Rapid Results” workshops for a customer’s cross-functional teams soon after the PV system is set up. During these workshops, the Velo team guides the customer teams on journeys that explore practical what-if scenarios. Participants from sales, finance, production, quality, etc. see their business from the new angle of profit per time and come up with practical ideas for adjusting processes, prices, customer priorities, etc. to generate meaningful gains.
"Given the power of its analytics, the PV platform is surprisingly quick to set up and requires just a few data elements from other systems"
Velo: Prepare to Negotiate Your Largest Deals
Everyone knows the Pareto Principle, or the 80/20 rule: 80 percent of your revenue comes from 20 percent of your customers. The same concept applies to products. Profit Velocity’s data analyses from hundreds of industrial manufacturers revealed that there’s always an “80/20 inside the 80/20.” In short, when you crosslink customer and product data, you find that 64 percent (80 percent x 80 percent) of all revenue and profit come from just 4 percent (20 percent x 20 percent) of customer/product combinations.
To leverage this startling reality, the Velo team developed a rigorous methodology to help manufacturers prepare for negotiations with their largest accounts. Breakthroughs in enterprise profitability are impossible without an understanding of both PV’s profit analytics and the contextual information surrounding these hugely important customer relationships. Weaving together all these factors, Velo enables cross-functional teams to gain alignment on their negotiation strategy before opening the dialog with a critical customer.
“Too many of our customers were getting hammered down on price by the sourcing teams of their largest customers. They had no effective way to prepare a viable counter,” remarks Rothschild. “Velo helps our customers defend themselves from sourcing predation while meeting the vital needs of their largest customers.”
By providing decision-makers with new visibility into their business, Profit Velocity is carving out a niche for itself as the next generation in enterprise performance management. A diverse array of large, industrial manufacturers, now depend on Profit Velocity’s analytics and Velo’s methodology to gain control over their futures. Rothschild concludes, “By completely rethinking and then fixing the flaws of traditional profit analytics, we enable complex enterprises to see far more clearly what they can and must change to dramatically improve their financial results. That is our calling.”