Solving the Hate-Hate Relationship of Sales and Production
At far too many of the manufacturing companies we’ve encountered, Sales and Production are at odds, if not at each other’s throats. Blame and resentment between those who make products and those who sell them is often at a slow boil, weakening the organization and eating into the bottom line. However, the solution may lie in the profit per time metric.
Is conflict between Sales and Production inevitable? Or is there a path to peace that can align Sales and Production, strengthen the enterprise, and grow revenue and profit?
For obvious reasons, every Sales team is primarily charged with maximizing revenue. Quotas and incentives drive them to get more revenue while maintaining price and margin levels.
By contrast, along with managing its manufacturing KPIs, Production must lower total manufacturing costs, especially manufacturing cost per unit, so that adequate margins are generated while also delivering customer satisfaction through product quality, on-time delivery and service.
Polar opposite economic goals of raising revenue while lowering cost would appear to condemn Sales and Production to perpetual ‘scorpions in a bottle’ warfare. On one side, Sales keeps pushing Production to expedite certain customer orders and add (higher priced/higher margin) specialty items to the product line (aka SKU proliferation). They do this to please customers and build the order book – demands that can create havoc and raise the costs of Production. On the other side, Production keeps lobbying leadership for more reasonable lead times and SKU rationalization to help meet cost and productivity goals that, if implemented, could reduce revenue. Caught in the middle, senior executives often spend time negotiating temporary ‘cease fires’ between the feuding teams.
Time Can Bring the Love
There ought to be a better way, and now fortunately there is. But to get there, the Finance team has to provide Sales and Production with an innovative time-based profit metric – one that computes the exact profit impact of each trade-off Sales and Production must face – before they hammer out a shared decision.
Unfortunately, given the limitations of traditional profit margin analysis, the most detailed manufacturing profit analysis available to date has been ‘manufacturing cost per unit’ and ‘profit per unit.’ Consequently, that high-priced specialty item – the one that Sales has been pushing for – will carry a higher unit margin than a standard, high volume product. But if the special item’s unit margin is recalculated to account for the extra production time needed to make each unit – to calculate a profit per time metric of ‘margin per production hour’ – a much different profitability picture may emerge. That specialty item will often yield far less margin per production hour than the standard product that, despite its low unit margin, generates a healthy profit per machine hour. By flying through the equipment so fast, the standard item more than makes up for its low unit margin.
Margin per machine hour, when automatically computed at an order-by-order, product-by-product level, reveals the most granular detail possible of the one profitability metric manufacturing investors actually care about: Return on Assets, namely, how much profit (return) flows through the equipment (assets) in a given period of time.
Investors reward management teams that maximize ROA, so senior leadership should provide Sales and Production teams with time-based profit analytics that would foster better collaboration. Incentives for both Sales and Production focused on driving more profit per time can strengthen alignment and overall performance gains.
The objective of every manufacturing enterprise – maximizing investor returns by maximizing ROA – can only be realized if both Sales and Production trust their company’s profit analytics and agree on the precise profit impact of each choice they make before they choose a common course of action.
Given the inescapable conflict between growing revenue and cutting costs, Sales and Production may never sing in perfect harmony. But wasteful wrangling between two sides of the same manufacturing firm can become a thing of the past. Once Finance starts providing Sales and Production with profit-per-time analytics, the warring factions can bury the hatchet and make smarter choices that deliver faster growth and higher returns to investors.
Connect with Profit Velocity to discover the answers your company data wants to reveal.