Profitability: The One Metric That Matters
In a recent blog post, I referred to LNS Research’s “28 Manufacturing Metrics That Actually Matter.” I love metrics because they create a measuring stick of how we are doing against our goals. However, the one most important metric that all other metrics drive to is profit.
Profit is what influences the stock price, and it’s the metric that all other metrics must support. At its core, profit is sales minus expenses so each metric must help us determine how we can increase sales and/or decrease expenses, thus increasing profit and shareholder value.
Let’s take Overall Equipment Effectiveness (OEE), which is one of the “28 manufacturing metrics that actually matter.” It’s made up of the following components:
1) Availability, which represents the percentage of scheduled time that the operation is available to operate
2) Performance, which represents the speed at which the unit runs as a percentage of its designed speed
3) Quality, which represents the good units produced as a percentage of the total units started
Recently, for one of our customers, we set up a system to monitor the OEE on one of their filler units. We found that its OEE value was 65%, with the components: Availability = 87%, Performance = 92%, Quality = 82%.
Focusing on Quality, we determined that by reducing the speed of the filler, it could potentially reduce spillage, and thus waste. So we reduced the total number of products filled, but increased the total amount of good product. This decreased waste, which reduced expenses. In effect, we lowered our Performance to 90% but raised Quality to 91%. As a result, this boosted the customer’s OEE to 71% - a 6% increase from the original state.
The customer reduced its waste from 1200 units to 486 units. If the cost per product produced is $0.50 that translates to savings of $357 per shift per machine. For a facility that has over 50 filler machines running three shifts a days, that translates into over $50,000 in savings per day. That’s over $15MM in savings per year. At a multimillion dollar company, that’s a significant savings!
For companies large and small, cost savings go directly to the bottom line. So while metrics are good to drive behavior, they are all in place to improve the one all important metric of profit.
It sounds so simple and intuitive that everyone should be doing it, but the truth is many manufacturers have OEE values that are around 60% while world-class manufacturers have OEE values of 85%. This represents a large opportunity for improvement and greater profitability. Some may not even realize the potential profitability being lost either because they do not measure OEE or they don’t have programs in place to improve OEE.
If manufacturers saw OEE from the perspective of how it ties back to profitability, I’m pretty sure we’d see more with an OEE near 85% or higher. The same could be said for each of the 28 metrics that matter.
Are you maximizing your profitability?