Perusing Profitability

For plastics operations, on the supply or processing side of the business, it’s easy to miss the forest for the trees. I’ve said many times that “it’s all about pounds on the ground”. While it sounds good, it also isn’t true, at least not entirely. In fact, it’s really all about dollars in the bank; resin going through your equipment is just the means to that profitability end. And the real metric is overall productivity, business wide, not just coming off your lines.

An interesting press release crossed my desk recently from productivity software maker Maxager Technology, containing a survey of U.S. manufacturers on their use of software-driven productivity measurement tools. Ninety-two per cent of respondents felt that the ability to analyze the speed with which the organization produces the most profitable products or serves profitable customers and markets was very to somewhat important. Seventy-one percent do not have software or systems in place to analyze combined margin and production run-rate data. Only 5.7 per cent of respondents use profit-per-minute to measure profitability.

It’s clear that industry still measures productivity with the accountant’s perspective, or by the “seat of the pants”. Is that good enough today? I’m guessing that if it is, it won’t be for long.

But software and big money consultants won’t help if you can’t decide how to measure productivity. For example, say a new mezzanine racking system lets you convert some warehouse space into production floor. On a unit-produced-per-square-foot basis, you’ve increased productivity. But relative to overhead costs, you’re no further ahead because the space is only a bonus compared with the hypothetical cost of expansion to the same production floor area.

Another example is the switch to just-in-time delivery, now common for OEM customers. You have to get your parts to their door on-time, every time, so unexpected downtime has to be reduced as much as possible. There are three ways to meet your on-time production commitments.

One is to upgrade equipment, add predictive failure analysis, tough PM requirements and redundant systems. The second is to run at less than full capacity, effectively leaving a productivity reserve in either machine time or even idle equipment, ready to fill in the gaps during a breakdown. The third is to simply inventory some parts to fill in shortages during downtime.

The first method increases productivity, because there’s less downtime. The second decreases it because you’re using your equipment at less than optimal rates to buy insurance against downtime. The third is productivity-neutral, because stockpiling is an after- processing strategy that doesn’t affect how you make your parts

What’s best?

The answer is simple: what’s lowest in cost. But from a production perspective, the lowest overall cost strategy might not be the most productive. It all depends on how you measure productivity. Eliminate downtime, sure, but sometimes there’s a cheaper way to make money.