On Finance

Dec. 21, 2004
Breaking the manufacturing sound barrier.

About a year ago, Bernie Asher ordered a new car. Because he wanted bucket front seats rather than a bench -- a supposedly standard option -- delivery stretched out to eight weeks. Asher, president and CEO of Real World Technology, Mount Prospect, Ill., figures the delay was about the same as it would have been 20 years ago. In other words, despite two decades of technological progress and productivity increases, the company making his car was unable to break what Asher dubs the "manufacturing sound barrier." Just what is the manufacturing sound barrier? According to Asher, it is all those annoying occurrences that keep a company from meeting its customers' demands, while also achieving the highest profits possible. Many of these problems are self-generated, says Asher. For example, he points to the tendency of many manufacturers to include buffer periods into their production schedules, essentially factoring in delays. Asher, however, is now on a mission to help manufacturers crash through the sound barrier. He has come up with something called the Manufacturing Profitability Index, or MPI, to aid his efforts. In the quantitative shorthand of performance measurements, MPI = throughput efficiency x gross margin x revenue. In practice, it takes into account the manufacturing efficiency, profitability, and income generated by a production process or a production line. (In the spirit of full disclosure, developing MPI wasn't an entirely selfless exercise for Asher. The manufacturing scheduling software his company produces can improve index-measured performance.) The calculation appears almost too simple to be of any significant use. But MPI gets at the issues that make a difference. "It measures both manufacturing efficiency and what's happening in the market," says Bill Swanton, vice president of manufacturing strategies at AMR Research Inc., Boston. Throughput efficiency, a complex-sounding term, is simply the ratio of units actually produced during a specific time period to the number that theoretically could be produced. The revenue element of MPI is simply the dollar value of the goods produced. A graph of MPI, similarly, is easy to interpret: you want to see the trend line heading up. Interestingly, Asher suggests not worrying about numbers being precise to the nth degree when filling in the elements of the MPI formula. As long as the measurement methods are reasonable and consistently used, the formula works, Asher claims. Sid Martin, a manufacturing manager with Datel Inc., a $50 million Mansfield, Mass., electronic-components maker, calculates MPI on a weekly basis. That's frequent enough, he says, to notice any trends without getting sidetracked by the "noise" that would be heard with daily use. "It's a great tool," says Martin. "MPI tells you a lot about an organization very quickly." Stanford Telecommunications Inc., Sunnyvale, Calif., is another company that has looked at MPI. Given the margins in subcontracting, says Mike Moore, director of operations at the $153 million maker of digital communications products, "If we spot a trend, we have to manage it right away, so a real-time snapshot is critical." Varying degrees of complexity among the products that Stanford makes has caused it to modify the calculation, however. That leads to an important point: MPI is just one item in the management toolbox. Although it deserves serious consideration, MPI won't replace other performance measures. For instance, MPI focuses only on the immediate performance of a specific production process. Other measures, such as EVA (economic value added), take stock of performance across an organization. Nevertheless, MPI's user-friendliness makes it easy for manufacturing managers to look quickly at their production processes, spot problems, and, presumably, solve them. And you certainly can't fault Asher for trying to help managers crash through the manufacturing sound barrier. "I may be one of the last few people who thinks American manufacturing can still be a competitive weapon," Asher states proudly. Karen M. Kroll, president of Kroll Communications, Minnetonka, Minn., covers finance for IndustryWeek.

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