In line with an analysis of plant profitability, a similar analysis of product profitability by production line may offer further possibilities for profit optimization. Certain products may run better, i.e., be produced at faster production speeds on one production line than on another. Knowing differences in profitability for a given product by production line allows the production team to consider potential causes and actions. One possibility might be to switch a product to another production line where it runs faster or with better yields and less downtime (Figure 3).
Figure 3. Comparing products and lines is crucial in maximizing plant and company profits.
Perhaps another product could run more efficiently on the production line in question. Routings of products to production lines where they generate the most cash-per-minute is a significant benefit from a profit-per-minute approach to profitability.
Producing chemicals in larger lot sizes would seem to be a logic means of increasing a product’s profitability by reducing set-up times. However, without knowing in detail the differences, if any, in profitability for a product by lot size, it is impossible to schedule product batches in way that will maximize profits. If there are not significant differences in profitability for different lot sizes, the production team might decide to schedule smaller lot sizes in order to meet demand for spot market products.
On the other hand, large differences in cash-per-minute with varying lot sizes might direct the production team to increase pricing for smaller lot sizes for certain products in order to increase their profitability. Again, without knowing product profitability at a granular profit-per-minute level, it is impossible to even know that one should be looking at these types of production decisions (Figure 4).
Figure 4. Efficiency of production is not always improved with bigger lots.
The ability to rank products on profitability by plant and production line opens up the possibility of quantifying downtime and losses in yield by product. If downtime or yield is worse than average for a given product, efforts can be made to investigate the causes. Does a product just not run well on a given production line? Is maintenance needed on that production line? Are capital improvements or replacements in equipment needed? Without knowing product profitability at this detailed level, the production team would not even know the need to ask these questions.
Once product profitability is known by plant, production line, lot size and non-production dimensions such as customer and geography, then decisions may be made to consider reducing the demand for certain products or even killing off others. The detailed view of profitability provided by the profit-per-minute approach may lead to major changes in product, customer and asset mix. As a result, capacity planning and loading of production facilities might be significantly impacted. For example, if a particular product is found to have very low profitability, sales and marketing, and production may jointly decide to stop making it and use the freed-up capacity to make more of a more profitable product.
If existing capacity among all plants is insufficient to produce more of a very profitable product, a decision might need to be made to add a new production line, or build or acquire a new plant. If a particular production line is old and in need of upgrades, a decision will need to made how to load other production lines while upgrade work is done on the poorly performing one.
If, as discussed earlier, changes in production lot size should be made to increase overall profitability, decisions can be made in the scheduling and loading of all company production facilities.
Effectively managing profit
As seen in the sidebar, product decisions can dramatically differ when based on profit per minute — the operational equivalent of ROA — rather than on margin alone. With this insight, we can readily see how the use of ROA at an operational level can have significant impact in deciding which products to make, where to make them and what to charge for them.
From a production perspective, an operational ROA view impacts decisions in areas such as productivity improvement initiatives, capital investment decisions and plant maintenance. Thus, using a profit-per-minute approach, makes it possible to base every day product-level operating decisions on ROA rather than on margin alone. The net result, as we have shown, is that production, sales, marketing and finance have a common platform that can be used to maximize overall company ROA.
Richard Batty is director of product marketing at Maxager Technology in San Rafael, Calif.; email him at email@example.com.