Now, let’s look at what to do if the key constraint is external … like tariffs-related, for a timely example.
First, let’s get this out of the way: Cost-management is the knee-jerk reaction to tariff-created problems.
Instead, we suggest using Throughput Economics tools to answer two critical questions for a profitable path forward:
- What are your most profitable products? What makes you the most money?
- Where are the new markets you can sell them to?
These questions seem obvious, but getting the answers right is the trickier part.
Throughput Economics is based on understanding how much Throughput dollars (primarily the difference between revenue and raw material costs) you can generate, and how fast, and what that means for market / customer segmentation.
Throughput Economics principles are fundamental to our Flow Management System methodology that is designed to prevent the negative impact of variability (customer demand, supply chain and manufacturing operation) on plant throughput.
When tariffs hit, you are likely losing or changing customers and markets.
In our current climate, this will generate much soul searching for both Canadian and U.S. manufacturers and significantly impact both sides.
As the impact is felt, you may not get the same volume of sales any more, exposing your plant to lower overall productivity (note that volume covers a lot of sins, i.e., you may have a high volume of low profitability products).
So this is the time to rethink how to sustain business profitability by keeping overall throughput dollars steady or to speed up the rate of throughput generation – not just get the initial revenue back.
I covered the basics of why to use Throughput Velocity instead of Profit Margin to determine which products are your most profitable in a previous newsletter (see this article for a recap).
For example, maybe you can sell 50 units of product B to generate the same throughput dollars as selling 100 units of product A as you did before or simply focus on selling higher Throughput Velocity products.
Once you understand which are your most profitable products, you can turn your attention to which markets you could be and should be serving.
You may lose some customers in the U.S. market, for example, and gain others in Canadian, EU or Asia as you shift the product mix driven by throughput economics analysis.
You may find that you can increase production of a product you previously saw as less profitable and ignored because your profit margin calculation gave you the wrong indication.
Suddenly it becomes the diamond in the rough that you didn’t know existed.
For more on Throughput Economics – I suggest these two classic books:
- Throughput Economics: Making Good Management Decisions by Eli Schragenheim, Henry Camp and Rocco Surace, and
- Throughput Accounting by Thomas Corbett.
If you need help with this product profitability and marketing analysis, please reach out.
Thanks for reading!
— Jack Warchalowski
Montera CEO