The Most Important Manufacturing KPI of All
Many organizations are unaware of a manufacturing key performance indicator (KPI) that revolutionizes the way they’re able to look at profitability – ‘profit per hour.’ Investors care about how fast an enterprise is able to make money. The ‘profit per unit’ analysis most manufacturers focus on does not address the speed of profits whatsoever. This is why having a profitability analysis that uses time-based analytics gets manufacturers and investors on the same page.
In manufacturing, it’s as if Sales, Production and Finance all speak different languages because all three look at different manufacturing KPIs to measure their success.
- Sales talks about revenue per customer, price, profit margin, customer satisfaction, etc.
- Production talks about material and labor costs, speed, productivity, cycle time, etc.
- Finance talks about return on assets (ROA), revenue, earnings per share, profit per quarter, etc.
Profit Velocity has developed a single manufacturing KPI that addresses all three viewpoints, giving Sales, Production and Finance a common focus. In fact, each group benefits from being able to reach a consensus on the right profitability analysis for determining which SKUs and customers to focus on.
Profit Velocity uses eight key data points to generate reporting on the speed of profitability of a manufacturer’s SKUs, clients, plants, assembly lines and more. This reporting can be configured in multiple ways to forecast how changes in a manufacturer’s focus or pricing can affect profits.
Let’s say SKU 1 was pushed by Sales because it appeared to have a high-profit margin. Production knew SKU 1 was not the most efficient use of resources and other SKUs could be produced much faster for lower costs. Because Profit Velocity brings all of the data into one system, the actual profit per time for SKU 1 was found to be much lower than originally thought, while other SKUs were found to have much higher profit per time. This tells the company that Sales should not be pushing SKU 1 as it did previously.
Using profit per hour gives manufacturers greater control over strategic revenue growth decisions. Thanks to Profit Velocity’s built-in ‘what if’ planning capabilities, you can manipulate data points such as product costing or throughput speed and instantly review how these changes would impact bottom-line results.
Let’s say Sales has a customer asking for a discount on a large order to meet a competitor’s price. You can plug in different price points into the Profit Velocity reporting tool to find break-even points. Similarly, Production can test out different material costs and other variables to manage margins.
Having a single manufacturing KPI that ensures Sales, Production and Finance are speaking a common language helps manufacturers improve internal decision-making and make operational improvements more easily. The instant projections generated by ‘what if’ scenario planning takes the guesswork out of what used to be highly complex, controversial decisions.