What is in this article?:
Very few manufacturers are able to measure the profit per hour generated by their equipment. Most have never even tried. This is why “profit per hour,” or profit velocity, can be considered the “missing metric.”
The speed of money – how fast profits are generated by investments – is of prime importance to investors. Making money faster from the capital tied up in a business has always been the name of the game. When investing in complex, capital-intensive manufacturing businesses, this means finding new ways to generate profit as fast as possible from expensive production facilities despite the challenges that complexity breeds.
However, despite the desire of investors for faster returns, measuring and managing the speed of profit flowing from their assets is rarely done by manufacturers. Instead of return on assets, management teams pursue “margin,” or profit per product unit. All manufacturers can measure their product margins, but virtually none have the tools to precisely measure the speed of profit flowing from their equipment. Every CEO knows his margin level, but virtually none know their profit per machine hour.
Very few manufacturers are able to measure the profit per hour generated by their equipment. Most have never even tried. This is why we refer to “profit per hour,” or profit velocity, as the “missing metric.” Despite the speed of money-making being paramount to investors, manufacturers (with few exceptions) lack the tools to measure this metric and are, therefore, unable to proactively manage it.
With recent advances in information technology, this is beginning to change. It is now practical to measure and manage profit per asset hour regardless of the size and complexity of a manufacturing enterprise. In short, the “missing metric” of profit velocity is no longer missing.
The Manufacturing Challenge
Without ready access to precise and reliable profit per hour information, manufacturing executives and managers do the best they can by setting improvement priorities based upon the only detailed profit metric they have access to – the profit or margin per unit as reported by their accounting system.
But, unfortunately for their investors, when manufacturing management teams rely on standard profit per unit rankings to set policy on customer priority, product mix, market focus, pricing strategy, new capacity investments and the like, those policies are inherently biased in ways that actually slow down the enterprise’s overall flow rate of profit per hour. A lower average profit per hour leads to lower profits per quarter and per year, and lower returns to investors.
This problem is especially harmful to the thousands of manufacturers worldwide who produce extremely broad product lines with thousands of distinct part numbers from plants requiring significant capital investments. Their inability to measure and manage profit velocity leads to a pattern of decision-making that unintentionally drives investor returns down, well below the results those businesses can otherwise deliver.