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Profit Mapping -- Creating A Roadmap From Operations Decisions To Results

Sept. 29, 2006
Profit Mapping provides insight into which changes drive bottom line results while meeting customer requirements.

In the new book, Profit Mapping: A Tool for Aligning Operations with Future Profit and Performance, authors Anil Menawat and Adam Garfein, explain that Profit Mapping is a systematic and holistic method for business improvement. Profit Mapping helps companies bridge the gap between strategy and execution, linking operational decisions to bottom line results. It creates a highly detailed roadmap for execution showing the specific actions that will lead to business success - not just isolated improvements in one area but not for the overall business.

IndustryWeek posed a few questions based on the principles discussed in the book.

Q: You state that until a company can " connect financial performance to process performance" it cannot demonstrate the value of operational change. Can you provide some examples of companies who understand this concept and are applying it?

A: In the global economy, CEO's, CFO's, plant managers, and other senior managers are reticent to fund operational improvements unless the expected benefits outweigh the costs when all factors are considered holistically. Management does not have the luxury of hoping that the proposed change will be successful -- both in operational and financial terms. They require detailed insight about future performance including cost and profitability in advance before committing limited resources.

We see many instances where a company may have become more "efficient" when viewed though a process improvement lens, but not necessarily more effective as far as the business is concerned. A tier one automotive supplier, which we shall call Inmotion to protect confidential information, is an example of a company that now understands this distinction. They had a profitable line with about $25 million in annual revenue. Management felt they could further improve profitability by redesigning the line and changing some operational policies to reduce "waste." Although well intended, this change was disastrous as the line became unprofitable.

Through Profit Mapping, management was able to uncover the specific actions that destroyed profitability. This enabled them to quickly recover from their process "improvements" and return to the black, while meeting throughput and quality objectives. In this case, they returned to the original "batch processing" design, which may seem to be a counterintuitive action, and made some policy changes to reduce their work-in-process. Profit Mapping showed that making the policy changes rather than creating a continuous flow maximized its profitability.

The success with Profit Mapping led management to expand their efforts into other areas. The company had recently grown through acquisition and had redundant capacity in multiple facilities. The challenge was how to rationalize products, lines, and plants. Senior management incorporated the Profit Mapping analysis results into their strategic planning.

This input helped them create a strategic roadmap guided by the financial impact of line in the new "merged" organization based on the actual capabilities and constraints of each plant. This vastly reduced the "gap" between management expectations and what each plant in the new environment was actually capable of achieving in financial and operational terms.

In another example, a global manufacturer has a single large line that produces multiple products and generates well over one billion dollars in annual revenue. As one manager described their challenge, it is "important to understand our cost and operational bottlenecks." They have lots of smart people who can "fix" operational issues on the plant floor. However, they need to justify the cost and business value of their efforts while seeking to maximize profitability.

Profit Mapping is giving them insight into which changes drive bottom line results while meeting customer requirements. This enables them to focus their limited resources to where will they will have the greatest impact on the business. What are the actual production costs by product? What is the cost and impact of improving first time quality? What is the "best" maintenance policy for each operation? What are the ideal buffer sizes between operations throughout the process? These questions are all the more challenging to answer due to the complex processing dynamics on the plant floor. Profit Mapping is helping them answer these questions and more so managers can make the right decisions for the business.

Q: You illustrated the Inmotion case study in detail in your book. Can you describe the purpose of the Business Execution Profile, and specifically, how Inmotion used the ProFIT-MAP component?

A: The Business Execution Profile is a tool for quickly articulating the nature of business challenge. It connects the business objectives to the parameters that managers can control. This helps managers strike a balance between their often competing interests for the common good of the organization. It does this by articulating the business opportunity holistically from multiple perspectives.

There are seven dimensions to a Business Execution Profile: roles and stakeholders, strategy, decision level, assessment focus, ProFIT-MAP components, enterprise tools and data, and parameters. The ProFIT-MAP components, which are the focus of your question, are used to describe the analytical areas of interest. Here, the practitioner specifies the components that are necessary to answer the business question.

In the prior question we highlighted Inmotion's challenges as identifying precisely why a line became unprofitable and then correcting the situation. To address these challenges, management elected to include several ProFIT-MAP components in their investigation and analysis: the process to be improved, the deployed capital, human and equipment resources, inventory and work-in-process policies, additional fixed costs, and product income. By going beyond a single dimension focus on the process, to include other resources, policies, and financial information, Inmotion was able to quickly identify and fix the problem. For more information, including the completed Business Execution Profile, see the case study in our book.

Q: You talk about how operational philosophies are often disconnected in practice from the business objectives. You cite lean and Six Sigma with regard to Delphi as a case in point. Please explain what you mean by this disconnection.

A: Companies all have their own operational philosophies, whether they are explicitly defined or not. Some are home-grown while others adopt popular improvement approaches such as lean and Six Sigma.

The disconnection occurs when the particular operational philosophy is applied only to parts of the business, but not to the intentions of the overall business strategy. In other words, we tend to translate the strategy into individual actions in discrete areas. As managers, we have learned to segment our decisions to increase the likelihood that they will produce the desired composite business results.

The problem is that while individual actions may seem intuitive they often only produce localized results. Because the operational environment is complex and dynamic, actions frequently compete against each other. We cite numerous examples in the book of how "improvement" actions taken in isolation, without a holistic understanding of the overall operational context can actually harm the business. Such actions can produce counterintuitive results (e.g., reducing "waste" from a process or inventory perspective can actually raise cost) or cause managers to focus their limited resources in areas that may be important but not sufficient for boosting the overall business.

Delphi is a recent example of the latter issue in North America. They were early adopters of lean as they copied the practices of Toyota. They have won numerous lean awards for manufacturing performance. That's the good news. In October of 2005, they filed the largest bankruptcy in U.S. history. That's the troubling news. How can this be?

While implementing lean was an important objective for Delphi, its problems were of a larger magnitude and lay somewhere else. Lean operations simply could not provide a sufficient financial boost to overcome the other ills. Delphi made the classic error of investing in local optimization and not looking at the big picture.

Improvement philosophies such as lean and Six Sigma are simply tools towards an end. The end is not lean or Six Sigma, but using these tools effectively for achieving your strategy. Knowing when and precisely how to apply them to your company is critically important for business success. Profit Mapping complements these and other improvement approaches by connecting them directly to the business strategy. This is as we like to say, how you win before taking action.

Anil Menawat, Ph.D. and Adam Garfein, Ph.D are cofounders of Menawat & Co., which provides business and manufacturing services to small business as well as Fortune 500 companies.

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