MAY 4, 2020 | BLOG
Win ‘The Price Is Right’ Every Day in Manufacturing
The long-running TV gameshow ‘The Price Is Right’ gives contestants the chance to win cash and take home big prizes if they are good at naming the right price for various products. The manufacturing business works precisely the same way. The trouble is, most manufacturers are not equipped to win the game and fail to take home the cash and prizes.
Private equity investors care a great deal about the speed with which they can improve the financial performance of their investments. Unfortunately, the management teams operating their manufacturing businesses almost never pay attention to how fast their various product SKUs generate profits. And this is their downfall in ‘The Price Is Right’ game they must compete in every day.
Not knowing the profit speed of your various items makes it impossible to get your product mix or your customer mix right. It also makes it nearly impossible to get each product’s pricing right. This is a critical miss – especially in times like these where every chance to make a sale matters so much.
The reason most manufacturers overlook the profit each product yields per (machine) hour is that they’ve always been so focused on profit per unit. But profit speed beats margin spread, and it’s not even close. The few manufacturers who fully realize that the profit-per-unit (or margin-per-unit) measurement is woefully inadequate (compared to profit per production hour) are typically not equipped to do much about it. They simply have no way of tackling the complex challenge of measuring and then proactively managing how fast profits flow through their facilities.
Profit Velocity solves this age-old challenge with a breakthrough analytics platform that integrates data from disparate reporting systems to compute the precise speed of profit for every item a company makes. Having this perspective is extremely empowering for commercial and operational decision-makers who need to get their product mix and customer mix right. Amazingly, and almost invariably, they discover that just 4% of their customer/product combinations are responsible for about 64% of their profits. They are also shocked to learn that their fastest money-makers generate cash per machine hour 10 to 30 times faster than their slowest producers.
Our biggest challenge at Profit Velocity is helping new acquaintances appreciate the huge money-making power of leveraging the profit-per-hour metric in their mix management. But once management teams grasp this, they find two features of the Profit Velocity platform truly mind-blowing.
The first thing is that you’re able to visualize (in living color with our unique ‘Profit Maps’) how all of your products and customers are performing when it comes to profit generation. Profit Velocity reveals with perfect clarity a view into the speed of profit-making that was simply not possible before. This is extremely valuable when it comes to mix management.
Invariably, it becomes crystal clear that several products the Sales team was convinced were very profitable are, in fact, not at all rewarding due to their very slow production speeds. (We call these your ‘False Profits.’) On the other hand, you will find that products your Sales team previously overlooked as ‘low margin’ actually yield hefty profits because Operations can crank them out at an astonishing rate per machine hour. (We call these your ‘Hidden Winners.’)
One very important side note here is that being able to see profit per hour unifies Sales and Operations teams into cohesive market-leading organizations. It becomes their unifying metric – their single source of truth for determining the right price-volume mix.
The second astounding aspect of Profit Velocity is our ‘what if’ planning. Our tool lets you test ‘street level’ tactics for generating profit-gain opportunities. You can instantly see the net dollar impact made by small tweaks to productivity, prices, costs, yields, volume, utilization, etc. Real-time, high-precision ‘what if’ planning empowers managers to capture new value by visualizing and then acting on new market and production-floor tactics.
‘What if’ planning allows you to try out various scenarios for using price offensively. Pressure testing these scenarios before you ‘pull the trigger’ can help your Sales team confidently take share or capture price without triggering countermoves or price wars from competitors. This helps put your business in a position to maximize period-to-period profit gains through price leadership. When ‘price leaders’ consistently outmaneuver competition like this, they emerge as the most profitable player in their market space.
This approach to ‘high grading the mix’ eludes most market players because they do not have access to the analytical insights needed to map out targeted mix-optimization plays. This is why understanding profit speed is so critical to outmaneuvering the competition.
And when you can do that, well, you’ll be winning big every single day on ‘The Price Is Right.’