More often than not, manufacturing companies experience sales and production teams that are at odds with each other. Conflict between those who make products and those who sell them often simmer to a boil, weakening the organization and eating into the bottom line. However, there is a better path to aligning sales and production, strengthening the enterprise, and growing revenue and profit. The solution to solving this issue may lie in the profit-per-time metric.
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.
Opposite economic goals of raising revenue while lowering cost would appear to drive perpetual conflict between sales and production. 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 valuable time and resources negotiating temporary fixes to appease sales or production.
Time Can Bring Resolution
There is a better way. 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 agree on 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 a far lower 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 care about most: Return on Assets (ROA), namely, how much profit, or return, flows through the equipment, or asset, 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 continuous conflict between growing revenue and cutting costs, sales and production may never be perfectly harmonized. 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, both groups can work in tandem to make smarter choices that deliver faster growth and higher returns to investors.
