McKinsey analysts have said the problem is that manufacturers typically lack precise enough measures to understand how real-time variations can erode returns in efficiency. But there is a solution. They feel companies can eliminate profit-draining variations by using advanced analytics to better manage performance. They recommend manufacturers refine their measures down to “profit per hour” as a means to improve resource productivity and attain a more detailed view of fluctuations in the operating environment. This also provides a clearer measure for both CEOs and department managers and can be shared quickly enough for them to affect change. Manufacturers then can use advanced analytics tools and data captured from sensors to discover patterns and create self-learning models to spur continuous improvement.
“The insights create a new information backbone, linking real-time performance at the ground level to company profitability and allowing managers time to make the necessary trade-offs,” the analysts said.
Profit per hour has long been discussed for more than a decade and often deem “the missing metric” in manufacturing. Michael Rothschild, chairman of Profit Velocity Solutions, said that while all manufacturers measure their product margins, not all use tools to precisely measure the speed of profit flowing from their equipment.
“Variations in efficiency, previously likely to continue for days, are now eliminated within hours on average thanks to new ways of working across the facility.”
Manufacturers should strive to attain visibility into not only their total profit per hour but also to break that down in even more detailed increments to identify room for improvement.
“Every CEO knows his margin level, but virtually none know their profit per machine hour…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,” Rothschild said.
Technology is certainly making this easier. Companies now have the sensors and processing capabilities to generate usable data and measure the performance of operations with real-time precision. Third party, cloud-based applications make it relatively simple and cost-effective for manufacturers to attain detailed and real-time insight into minute aspects of their operations. That data can be shared to management and staff throughout the organization to make improvements on the fly. As more effective analytics become available, manufacturers can find greater scope to widen their profit-per-hour analysis beyond simple critical processes.
Larry Fast, founder and president of Pathways to Manufacturing Excellence, said that most productivity measures at plants “are not robust enough to represent reality.” He said plants often discount for things not directly in control of the shop floor that can affect product costs. Fast said leaders around the entire business often think productivity is the responsibility of manufacturing and become cheerleaders instead of doing their part in their own functions. He suggested quantifying productivity measures in dollar results with a direct link to financials. “If the productivity you report can’t be found on the income statement and/or balance sheet, then it didn’t happen. From a financial standpoint, that’s the final word,” Fast said.
But to further refine the effectiveness, manufacturers need to refine these measures and metrics to an hourly basis. McKinsey said that doing so enables manufacturers to more rapidly identify and respond to inefficiencies. “Variations in efficiency, previously likely to continue for days, are now eliminated within hours on average thanks to new ways of working across the facility,” the analysts said.