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How Making Money Really Works: Key Concept #3 – Productivity

Looking back at the last two posts we have introduced two Key Concepts. The first was Key Concept: Throughput-margin is Additive.  The second was Key Concept: “Lost” Time.  In today’s post we’ll review the third Key Concept: “Productivity”.

In the Throughput World we have a definition of productivity that is likely very different than the definition you use for productivity.

Many shops measure productivity by tracking “labor efficiency”. The closer to 100%, the better.  After all, if your workforce is more efficient you will make more money, right? Not exactly.

This is perhaps the greatest myth in the “cost world”; the myth that if we keep everyone busy all the time, we would make all money we could. That is simply not true.

Keeping folks busy does not help you make money; only getting more jobs completed, shipped, and invoiced makes you money.

Making more money is The Goal.  Now and in the future.

Recall in the last two posts we showed you a base case in which we completed three jobs in total and the “Lost” Time example in which only two jobs were completed.

Now imagine the opposite situation.  For whatever reasons, because the company was more productive, Job 4 also was completed, shipped, and invoiced in the time period.

We call this improved “Productivity”.  Perhaps the company implemented Dr. Lisa’s solution for job shop scheduling, Velocity Scheduling System, which is designed to help job shops “get more jobs done faster”.

So, what is this very different method of defining productivity? Well, for starters we call it “Financial Productivity”. Secondly, Financial Productivity is defined for the company as a whole, not for a worker, work center, or a department.

Financial Productivity is defined as the ratio of Throughput-margin (“money-in”) over Operating Expense (“money-out”) for the time period.

Notice how there’s no mention of labor, other than the fact that it is included in Operating Expense.  Financial Productivity is concerned only with generating more Throughput-margin for a given level of Operating Expense.

So, let’s take a look at what a more Productive company would look like.

In this Productive example, Job 4 adds Throughput-margin to the total, which is now much more than Operating Expense, and the company is highly profitable for the time period.  In the example, $70,000.How Making Money Really Works: Key Concept #3 - Productivity

But each job was not “more profitable”.  Each job has the Throughput-margin it has.  The reason the company made a lot more money was the fact that it completed, shipped, and invoiced Job 4 in the time period.

Clearly there is a lot to be said for being more productive. One of the largest sources of increasing Productivity is commonly overlooked: reducing wait times.

If you were to look at the jobs in your shop, it’s very likely you’d find that jobs are in the shop far longer than you actually work on them. (Check out Dr Lisa’s job shop scheduling webinar or Job Shop Productivity| Machine Shop Productivity article for an explanation.)

Financial Productivity

Now that we have seen the additive concept of Throughput-margin work across three examples, let’s review an example of Financial Productivity.

Financial Productivity

What is truly unique about the measure of Financial Productivity is that it relates back to the financial statements for the company as a whole.

Many times, companies utilize local efficiency metrics in isolation – which is to say there is no connection to the financial results of the company.

If you cut more parts than can be welded or machine more parts than can be inspected, you have not truly increased your Financial Productivity. You’ve simply made more parts.

Only by getting more jobs done faster can you increase your Financial Productivity.

To find how to increase your shop’s Financial Productivity (and its bottom-line), sign up for a free Strategy Session.  We’ll go deep to determine what’s possible for YOUR shop!

To find out how to increase your shops Operational Productivity, check out Velocity Scheduling System, visit www.VelocitySchedulingSystem.com