Profit Velocity
Remember where we began with this - the argument between the Marketing guy and the Plant Mgr? The fight was about different performance measures.
The first step was to take all the products produced in this plant and put them through a simple program to evaluate their profit velocity, (margin over the constraints time) which I now called pV.
The results of the product analysis were astounding. The new math dramatically altered the profit picture for some of the product groups.
What if...
- we could build a set of goal posts using the mathematical formulation based on a real cost base? Think football...goal posts, nothing subtle. If we could develop a process that would measure true throughput profit every organization would want it.
- we could create a common measure based upon a logic that was bulletproof? These measures would drive everyone in the organization toward the same point. The simplicity of the concept was obvious.
- we could develop a process that would measure true throughput profit?
- we could create an information tool that would allow the organization to manage price against value?
I realized however, that this was more complicated than could be mastered with a simple spread sheet and as a result I began a process which would eventually create a software company called pVelocity (www.pvelocity.com) to provide a new set of tools for the manufacturing environment.
These tools I hypothesized would allow manufacturing organizations to truly understand their cost base and their true product margin. Further, this kind of information could shape their marketing efforts, redirect and remove some of the conflict that existed across functions, drive process and capital improvements and dramatically improve profitability.
Even then I was trying to articulate my path forward. I quote from an article I wrote in 1994 which discussed the RP project.
An Overview of Profit Velocity 3
Time is Money
Time figures prominently in every facet of manufacturing and is fundamental to corporate success....
Time figures prominently in every facet of manufacturing and is fundamental to corporate success....
The Financial Throughput Engine
Classically, we look at production lines as taking in raw material and producing a product that is sold. If, on the other hand, we are thinking about profit velocity, these lines are considered as financial throughput engines that convert raw material into money when the product is sold. To achieve a target of 30% gross margin-that is, to produce $20 million in financial throughput margin each of the 4 throughput engines (specific discussion in the article) must generate an overall average of roughly $2800 per hour. (reference to uptime discussed in article). I hypothesized that a tool could be developed that would be able to simulate simple things like the financial impact of reducing constraint vessel time utilization and the overall impact on the vessel’s capacity. I could see that we could use this process to price products based on profit velocity targets. Even then I was trying to articulate my path forward.
Visions of yachts began to appear.
But, the practical implications were daunting. First of all, I knew nothing about software, never mind running a software company.
This wasn’t just about changing the math, it was about how to create a different discipline of management. A discipline that drives different strategies and different operational values. It is about running a company completely differently. I underestimated how difficult this was to sell.
The problem we struggled with was that the pace of the adoption of these ideas by our potential clients occurred at a snails pace. For Rhone Poulenc even with the huge success at Mississauga and a number of very supportive senior people, acceptance to move the software to all plants in the division took years.
It wasn’t that the senior people didn’t understand the paradigm shift that was required. The reality was that the status quo system, even with all of its flaws, had created a kind of stability and for most people the devil they knew was better than the devil they didn’t. The implementation acceptance was painfully slow.
Two things had to change to a create cultural transformation... A young transplant from Paris, Christophe Clemente1, who was CFO had to buy into and take on the mandate of change and a tipping point of emissaries had to be attained. Once the new value system had become ingrained into the culture, organization and behavior change became clearly visible. I spoke to Steve McLung2 one of the early adopters who is an old friend and a senior executive at Rhodia and he gushed over how effectively the software was working.
I admit that I never really wanted to develop the software for its own sake. I saw it as a very sophisticated diagnostic tool that could be used to effect organizational learning and change and I didn’t know how to make the two concepts merge.
In 2005 Edgestone Capital made a significant investment in pVelocity. Their vision was to have this software as a new standard in manufacturing and as such they worked very hard putting in the infrastructure to enable vast expansion.
To be honest I was a thorn in their side. I saw the process of growth very differently from the new CEO that they had hired. My days at pVelocity were numbered.
Reflections
In 2006, I was fired. It might seem to be a bit of an understatement, but when you have just been fired from the company you created it is a good time for reflection. Why did we not get the wide acceptance that we should have gotten, given the power of this tool? What could I have done differently to enhance the acceptance?
What I realized was that profit velocity didn’t mean anything to most CEO’s. For the most part they believed that if they could get their cost system set up properly they could do the same thing we were doing with profit velocity. “No you can’t!” Yes I can, I am putting in SAP”. Trying to explain that margin is a static metric based upon average data, while profit velocity dynamically measures constraint time utilization AND this data could be then pumped into SAP to enhance all the good things that this enterprise system does, turned out to have relatively little impact.
Needless to say, I was not a happy camper. Somewhere in the midst of this reflection I realized that my consulting practice was math driven and that I had the unique capability to see patterns where other people don’t. I guess you could say I was a mathematician, not one of the black hole guys, but someone who can find and understand statistical patterns in companies and maneuver them to drive profit. My post grad specialty was research methodology. As my kids were growing up, I drove them crazy pointing out how math impacted every day activities. Sometimes to the absurd.
The math in this case was perfect or so I assumed. Why didn’t customers sign up?
After much painful reflection, I realized that most CEO’s could not see the benefits of this solution as it did not seemingly drive their key performance measures. We didn’t seem to be addressing their priorities. If someone doesn’t feel that they have a problem and you are telling them that your solution will make everything more effective you are unlikely to get much acceptance.
As luck would have it, I found the solution to this conundrum with my next major client.
Next... Indalex The Journey toward Customer Value Management.
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1 Christophe is now VP General Manager Europe at Rhodia Novecare
2 Steve McLung - Steve was an early adopter of the concept of profit velocity as the plant manager in Winder Georgia. He envisioned how this process could change the way the organization made decisions. Later as an Asset Manager, he was instrumental in driving the organization’s use of pVelocity’s software. Steve is also a good friend.
3 Agility & Global Competition, Vol. 1, 42-58 (1997) © 1997 John Wiley & Sons, Inc. CCC1085-3235/97/010042-17
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2 Agility & Global Competition, Vol. 1, 42-58 (1997) © 1997 John Wiley & Sons, Inc. CCC1085-3235/97/010042-17
