Throughput #5
Are you steeling for a bumpy ride in 2025?
Looming tariff threats, increasing competition from China and huge technological shifts make the road ahead uncertain at best for manufacturers everywhere.
There’s only one sure way forward, and that’s to become even more productive and selective in terms of where to focus (markets, customers, products).
To do that, there’s one thing you have to know first:
Which products make you the most money?
In our experience, 90% of manufacturers don’t understand which products make them the most money.
They incorrectly use cost-per-unit analysis (based on gross margin or contribution margin) as a proxy for profitability of the business.
In other words, they believe that the highest-margin product creates the highest profitability.
In fact, there isn’t a direct relationship between the size of your margins and their impact on your bottom line.
See our calculations showing how a lower profit margin can lead to higher profit.
Throughput Velocity reveals where the profit really is
Throughput Economics uses an alternative approach – Throughput Velocity – to determine relative product and market profitability.
Throughput Velocity is the rate at which you generate dollar throughput (revenue – raw material cost) for each product you make: once you understand the speed of profit generation (not widget production) in your manufacturing facility, then you can start increasing your net profit by an order of magnitude.
You’ll know what marketing needs to sell. You know what engineering needs to improve. You know what process technology needs to improve.
Now you are managing your plant, rather than having your plant manage you.
[Read more about cost-per-unit analysis vs throughput velocity]
Thanks for reading – and please reach out with any questions or to put this approach into action.
Best wishes for a happy holiday and a prosperous New Year.
— Jack Warchalowski, Montera CEO
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