Maximize Profit with Existing Resources
Companies need the right blend of internal business processes and optimization software to increase profitability
Most companies want to produce goods in a way that increases revenues and adds to the bottom line. To get there, companies work toward efficiency improvements, cost reductions and higher customer satisfaction levels—all of which can contribute to higher revenues, productivity and profitability.
Others pinpoint certain aspects of their supply chains and over-optimize them, hoping those changes will help mask broader issues and make those networks run faster. What they neglect to realize is that product demand comes with a high degree of variability, so simply making and distributing your best-selling products faster doesn’t necessarily translate into a better bottom line. Variable demand usually stops this approach short, mainly because there’s always going to be some demand for slower and middle-speed products. That demand comes in different quantities and ratios—a variability that can impede a company’s mission of doing the most profitable job possible every time out.
These complexities accelerate as organizations grow, become more complex and start making and distributing hundreds, if not thousands, of different products. The question becomes, how do we reach a point where we’re continually producing more and improving our bottom-line profitability with the people, processes and other resources we have?
This is a question that more organizations are asking themselves in the current business environment, where everything from labor shortages to rising business costs to persistent market volatility are all threatening to take a chunk out of their bottom lines.
All Organizations Want to Make Money
Ultimately every company is in the business of making money, with profitability being the common denominator for companies that want to eke more out of their existing resources. Sure, you can meet a million units of demand for a product that generates a very low profit. But why would you do that if you could instead dedicate your resources to higher-margin products? You may sell fewer of those products, but you’ll be making more money from each of those sales. But what if the product with the highest margin is also the one with the lowest demand? Or perhaps it is the slowest to make. Or perhaps it uses a lot of capacity on a bottleneck resource. All these would be reasons to deprioritize the highest-margin product.
When a company says that it wants to meet more demand, really what it should pursue is meeting more of the “right” demand. Doing so ultimately comes down to the factor that combines the different competing forces, volume and yield, into one metric, and in most cases, profit is that metric.
An outsize focus on cost cutting can lead you to become laser-focused on cost and wind up manufacturing and selling less profitable products. And if you focus solely on maximizing volume (i.e., the “making more of a certain product faster,” mentioned earlier in this article), you may wind up sacrificing profits. Profit, though, is the common denominator that companies can use to pull everything together into a single metric.
An Interesting Mathematical Problem
Growing a bottom line with existing resources also requires a close look at outside factors that could interfere with even the best-laid plans. Demand and capacity are two metrics that tend to fluctuate; distribution strategies and system constraints also come into play here. For example, you’ll need to know how much raw material you can buy, how much product you can ship on a specific lane and then how long it will take for those orders to get to your customers or distributors.
Balancing all that and more becomes an interesting mathematical problem. Even companies that have mastered the issue using manual means will get to a point where “doing it all in your head” just doesn’t work anymore. When that tipping point is reached, organizations need a system, like supply chain optimization software, which can balance all their priorities and policies, specifically geared towards maximizing profit.
The work doesn’t end there. Companies also must take a disciplined approach to analyzing, and where acceptable, following the system’s outputs. If they decide to interrupt a production schedule because a customer complained or because the CEO wants to use a different approach, for instance, then the resultant suboptimal performance will negatively impact profits.
Avoiding this trap requires the right blend of internal business processes to support the optimization software that’s been put in place to help maximize profits using existing resources.
Since you ultimately will have to pull the trigger, having a solution that helps you manage all the upfront planning and optimization will allow you to evaluate the options—even those you wouldn’t think of yourself.
