Profit Mapping

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So far Profit Mapping has created 46 blog entries.

The Winds of Change (Mar 7, 2007)


A business can be like a hanging mobile. Pull on any part of it, and the whole thing will go into a dance until some kind of equilibrium is restored. That’s just what happens when you take one part of a production process and change it. We typically focus on that one part, but all the other parts begin to dance around it, sometimes with unexpected results.

Likewise, if the wind comes along, every part of the mobile starts changing all at once. It’s like that now for businesses everywhere, as shockwaves of the global banking crisis reverberate around the world.

Because we’re powerless over external factors, it’s now vital to optimize the profitability of the processes inside our businesses; and we can’t do that without looking deeply into their dynamic interactions. Tools like Value Stream Maps, and measurements like Overall Equipment Effectiveness served us well as a compass might an explorer or a ship’s captain at sea. But now we’re navigating narrow streets and alleyways for survival itself and we need something with the pinpoint accuracy of a GPS if all’s not to be lost. In short we need a way to put a financial value on the disposition of every workflow, asset, unit of labor, utility, raw material and consumable for every conceivable situation…and be able to quickly what-if the whole thing as each new situation presents. Impossible? Up until recently, yes.

Now, it is possible for a company of any size to embrace this level of complexity. You need Profit Mapping’s analytical engine, PAL and a way to hook it up to your process. That connection is made with a Business Execution Profile from which emerges your Process and Policy Map, (a mechanism we’ll talk a little more about another time). For now the message is this. The technology is here to turn the current situation into an unprecedented opportunity. Thousands of companies are going to fail in the near future, but yours doesn’t have to be one of them. Instead you can position it not just to survive, but to absorb the huge amount of additional business that will become available when the shakeout is over. Business you couldn’t win in any other circumstances. But to do it will take a level of agility few companies currently possess. Profit Mapping can give you that edge. Your time has arrived, seize the day.

James O’Sullivan

The Winds of Change (Mar 7, 2007) 2017-03-25T12:12:21+00:00

Business: A Living Dynamic System (Dec 16, 2006)


Does a dollar saved by efficiency improvement of a process have the same value to the organization as another dollar saved elsewhere say in labor, marketing, or accounting? The answer to this question is: it depends. It depends on many factors and the reasons are not only unique to the organization but also to the current situation. The value of the savings achieved at one part of the business is different depending on where it was saved, when it was saved, and what other consequences result from it. Consequently, more of the same cost savings, which benefited the company bottom-line once, may not have the same effect ever again.

The value of one dollar in cost savings changes as it bubbles through the organization. It may either increase or decrease. Rarely will it maintain its one dollar value on the financial statements of the strategic business unit. The change in its value depends on the various interactions among the different business functions and their current status. For example, savings by off-loading work to increase efficiency are either reduced or lost by an increase in the overhead. One can not add the savings in individual components for the overall gain.

A business is not a random bag of individual functions put together. It is more than a collection of operations, accounting, marketing, sales, and so on. All functions connect with each other to create an ongoing business. Unless all perform collectively for the good of the organization, the business can not flourish; in fact, it would deteriorate. A business is a living dynamic system.

Improving a dynamic system

A system is a connected network of various entities, not a mere collection of individual components. It has built-in influencers that either amplify or attenuate, but surely manipulate, the response of an individual component to any stimulus. The stimulus may result from external factors such as changes in market demand, or from internal decisions to improve financial performance, meet regulatory compliance, and the like.

Any stimulus or cause to one of the components creates an effect, which in turn becomes the cause to other components, and so on. The chain continues to build resulting in a cascade of effects. Unfortunately, just because a component has already been influenced by another cause does not exclude it from being stimulated again, resulting in feedback and stimulating that component repeatedly.

Let’s consider an example. The objective is to reduce cost by $1 million. This could be achieved by one of many ways. The company could implement continuous improvement (such as lean, six sigma, flexible processing, etc) to enhance process efficiency, move operations to a low labor cost region, force suppliers to reduce their prices, reduce sales and marketing efforts, reduce IT infrastructure, eliminate new product development projects, and so on. As evident from this list, all are possible options but none are confined enough to be isolated from other parts of the business. Each has multiple consequences and affects the overall business in complex ways.

Another characteristic of the above options is that their payoff and influences on other parts of business are not at the same time. Each component reacts differently over its own time frame. Before the dynamics of an effect die out, a new cause may, and it often does, arise further complicating the dynamic response of the system. For example, eliminating new product development projects would bring cost savings right now but would adversely affect the business in the future for a lack of new products.

Need for a systematic approach

Efficiency enhancements by continuous improvement approaches generally do not result in long term financial or other benefits unless the operational influences are permanently modified. For example, reduction in inventory brings about a one time benefit unless the role of inventory is changed in the business. Unless the system that caused the bloated inventory in the first place is changed, the reduction in the holding cost would be short lived. Only when it would no longer be possible to let the inventory to increase again without affecting the rest of the operations, the cost savings would become sustainable. This is one of the most significant deficiencies of continuous improvement efficiency initiatives. A change that produces a one time, non-repeatable gain does not contribute to sustainable improvement.

Each component of the system reacts to any stimulus in its own characteristic way. Responses to distinct causes, generally, are not the same. In fact, systems exhibit different responses to the same cause depending on their current situation. The magnitude and the type of the cause along with the current state of the component define the response. If the finished goods inventory is high and the management decides to suspend production of some products due to a lack of raw material availability, the business may not suffer the consequences. Conversely, the business would suffer loss in sales with a lean inventory situation – different response for the same cause depending on the current situation.

Many proponents of continuous improvement methodologies, such as lean, take an enthusiastic approach of doing the right things, yet not allowing any financial levers to guide their thinking. They argue that financials are the result and should not factor into the means. This argument assumes a direct and linear relationship between efficiency improvement and financial gains. Experience shows otherwise. The interconnectedness of the overall system moderates this relationship. Cost savings bubble through the organization in different and constantly changing ways. Consequently, efficiency improvements, although noble things to do, achieve mostly short term gains and fail in the longer run for a lack of a clear financial insight.

Managing a business – a dynamic living system – is to device a moderate path between two extremes: being overly bloated or too lean. Arriving at the right balance requires a clear acknowledgement of risks, and an intimate knowledge of how various stimuli affect the individual components of the business and the resulting cascading effects on the strategic business unit.

Without a systematic approach to ascertain the current status of the system and then to change it, which is to redesign the activities requirement to execute the necessary processes, long term sustainable gains are impossible. In other words, the interconnected influences among the various components of the system have to be reorganized to attain lasting benefits. It is not sufficient to identify the interconnections. It is imperative to also understand the magnitudes of responses in order to meet specific business objectives. Good managers instinctively understand this reality.

Anil Menawat

Business: A Living Dynamic System (Dec 16, 2006) 2017-03-25T12:12:21+00:00

Building a Profitable and Sustainable Lean Organization with Profit Mapping (Jun 13, 2006)


One of the enjoyable aspects of our work is that we interact with a wide array of people in companies, ranging from the executive suite to the front lines. This is a great opportunity to understand the pulse and priorities in organizations from a number of often differing perspectives. Not surprisingly, Lean is one topic with a great deal of mindshare in companies today – and the focus of this article.

The range of opinions and comments we hear about Lean is quite fascinating. On the one hand are the “motherhood and apple pie” perspectives. For these practitioners, Lean is the be all and end all solution to their operational and business challenges. On the other extreme are those that definitively claim that “Lean doesn’t work.” Many more organizations are between the two ends of the continuum, including those who are just beginning their Lean journey and do not have enough data points to quantify their successes or disappointments.

Lean is a driver to improve your business just as Information Technology is a facilitator. Neither is the end game. Lean principles and tools are a wellspring of good ideas and practices. Keep in mind that even if Lean is a stated business objective for your company, it is to achieve a larger objective. Lean is one of many and not the only objective. You have other important objectives such as profitability, customer satisfaction, and so on.

You have to balance Lean with all the other unique objectives and priorities within your company. In fact, regardless of the specific strategy, successful companies emphasize building agile, profitable, and sustainable organizations to capitalize on ever changing opportunities in the global economy. Lean happens to be a part of this larger puzzle. Profit Mapping helps companies achieve their larger goals in conjunction with Lean, if Lean is desired. The goal is not to seek Lean impact, but the impact of Lean on the business objectives.

Lean principles are without question helpful to organizations that wish to reduce various forms of waste and deliver value to the customer. The plethora of Lean tools attests to its popularity. We have compiled upwards of 50 Lean tools available to the practitioner. Some of the more popular tools are 5S, Kaizan, Value Stream Mapping, Kanban, and Poka Yoke.

There are so many tools such that practitioners can get bogged down in tool implementations while losing sight of why they are using them. This is a forest and trees issue. How do you know what tool(s) make the most business sense to use for your company? When should they be used? What will be the overall impact of the outcome on the business? These are but a few important questions for any process improvement approach.

Fundamentally, Lean principles are sound. The challenge is in knowing how to translate sound principles into precise actions that make the most sense for your organization. Yet, actions alone are not enough. Every Lean action must be prioritized and directly connected to achieving your company’s overall business objectives.

In practice, what works for one company is not guaranteed to work for you. Each company has different products, processes, customers, strategies, and so on. Moreover, these factors are constantly changing. That is, your company will always differ in ways, large and small, from others.

You are not operating in a steady-state business environment. The business factors are constantly changing within and around your company. Copying the best practices from yesteryears of other companies is not enough; you have to know why those practices would be better than what you are currently doing given the unique capabilities and constraints of your company.

Since the business environment is inherently dynamic, both internally and externally, how should companies guide their Lean efforts – to ensure success from the outset? This creates a sizable challenge for knowing how, where, and why to implement any particular Lean tool in ways that will create the biggest business impact for the investment in time and effort. This requires the benefit of a structured methodology such as Profit Mapping to help you focus, prioritize, and align your Lean efforts with your business objectives.

Profit Mapping is an intuitive, systematic, and forward-looking methodology for business execution. It is a structured yet flexible approach that is highly complementary to Lean efforts. Specifically, Profit Mapping enhances Lean in the following ways:

• It integrates multiple perspectives, including cost, so that managers can assess the profitability of their Lean decisions. This gives managers critical insight that also helps avoid implementing Lean in ways that could potentially destroy profitability.

• It connects Lean thinking and tools to the business objectives by identifying the parameters that managers can control.

• It shows the impact of any particular Lean project or action across the business, not just in isolation of that segment of the process.

• It creates a roadmap to the desired future Lean state showing the precise steps and actions that will achieve the business objectives. If the future state is not achievable, it can show you what additional process changes, resources and/or investments are required to get there. No other methodology can do this!

• It helps identify which Lean tools are most appropriate to use in any given circumstance.

• It helps extend Lean into situations where multiple products are produced on the same line.

• It helps dynamically adjust and prioritize Lean efforts in relation to changing internal and external factors.

Lean is a way of thinking and Profit Mapping is the execution tool that helps you get the most out of Lean by connecting your efforts to the business objectives and quantifying the financial implications of your actions. Profit Mapping provides critical insight into which Lean actions will be effective and which will not. If your Lean actions are not producing the desired effects, Profit Mapping also shows you how to quickly correct course, avoiding mis-implementation of Lean principles.

Lean is a terrific way to come up with good ideas for reducing waste and focusing on value from the customer’s perspective. But Lean alone is not enough in today’s intensely competitive and dynamic business environment where companies must compete against world prices.

You do not have the luxury of implementing Lean programs and actions, and hoping they will have the intended business impact sometime down the road. You need to know now and in advance if and how successful your Lean initiatives will be for the overall business, not just on a process efficiency. Profit Mapping helps you do this.

Adam Garfein and Anil Menawat

Building a Profitable and Sustainable Lean Organization with Profit Mapping (Jun 13, 2006) 2017-03-25T12:12:21+00:00

Why Current Approaches Fall Short in Creating a Profitable Future (Mar 6, 2006)


The chairman of a mid-size manufacturer recently confided in us the essence of his company’s cost and operational performance improvement mindset. For us, “The process is not dictated by the present. It is dictated by the needs of the future.” He went on to explain how “continuous improvement” does not provide enough competitive bang for the buck; he is most interested in “breakthrough improvements” that provide customer and profit returns that sustain the company’s success.

Such breakthroughs can come from manufacturing advancements, product design, process re-design, and so on. Regardless of the source of the innovation, the innovation must be converted into a profitable customer focused operation. Otherwise, the business cannot survive over the long term.

Today, most companies try to create their future by looking into their past and extrapolating what they find into some sort of concocted view of the environment of the future. Unfortunately, such approaches are inadequate for the task because they (1) do not account for the different conditions of the future, (2) rely on steady-state analytical approaches that incorrectly assume that the business and operational environment does not exhibit variability (3) rely on standard costing, which does not work well for understanding the past (as it has to be corrected by variance analysis), and is therefore even less effective for understanding the future, and (4) lack a systematic implementation methodology that connects specific management actions to achieving the business objectives.

Profit Mapping is a proven management decision tool that overcomes these shortcomings. It:

  • Integrates advanced functional (domain) analysis within current constraints
  • Emphasizes process dynamics over steady state approaches
  • Uses activities-based resources and financials instead of standard costing and variance analysis
  • Looks into the future rather than data-mining the past
  • Connects controllable actions to strategic objectives
  • Constructs a roadmap to achieve the strategic goals

Profit mapping virtually eliminates decisions that have adverse effects on your business. It helps you correct your situation immediately and guides you to where you want to go, like a GPS navigation system.

Adam Garfein and Anil Menawat

Why Current Approaches Fall Short in Creating a Profitable Future (Mar 6, 2006) 2017-03-25T12:12:21+00:00

Pressure on Prices: How will you Respond? (Jan 26, 2006)


Here is a timely article written by Anil Menawat on how companies respond to pricing pressures. It highlights the challenges companies face in becoming more cost competitive in the context of a multi-product and high-variability demand environment. The article was originally published in the January 2006 edition of the Next Generation Manufacturing eJournal.

Pressure on Prices: How will you Respond?

Increased telecommunications technologies are making it easier for customers to shop globally for lower prices. While customers everywhere are enjoying more options and lower prices, here in North America, raw material and energy costs are rising, creating unprecedented challenges for manufacturers. Only a select few are able to pass the increased cost to their customers while most are sacrificing profits to stay in the game. How will you respond to this power shift?Before we begin I would like to say that I am honored as well as delighted on the invitation to be a part of this eJournal. The suggestion of exploring ideas that go beyond the applicability of the “Toyota Production System” is refreshing. In my opinion, this is a very important topic in multi-product and variable-demand environment often found in the SMB (small and medium-sized business) sector.

Where is the Opportunity?

When manufacturers are unable to pass the increased cost to their customers, they usually adopt one or both of the following strategies:
(1) To reduce the internal costs of producing products and services, and
(2) To discontinue the unprofitable products, services, channels or customers.
In either case, they first need an accurate measurement of costs to determine true profit margins for each product and service. Without a true assessment of the costs it is difficult to identify where the opportunities lie and what can be done about them. Furthermore the interest is less in what their costs were in the past and more in what they will be in the future for them to stay competitive.Most companies focus on tracking past performances and then tend to extrapolate from that to forecast future operational requirements and capabilities. Unfortunately, your past performance, no matter how successful, was based on different work requirements, demands, customer needs, and market conditions. Operating approaches and strategies that may have helped you in the past may not produce the desired result in the future because the environment has changed. In multi-product environments where demand fluctuates routinely, such as in high-variety and low-volume scenarios, this is an everyday event.Measuring revenues is not a problem but getting true cost of each product and service is.

Most companies keep good accounting data and the problem is not in adding up the cost. The problem is in distributing them to each product and service. If your product mix, demand volumes, and how you produce your products or services do not change significantly then you can use standard costing with variance analysis to get a fairly good assessment. But, that is not the environment in which the typical SMB operates. The high variety of products and fluctuating demands make the standard cost data misleading. The per-piece cost for each unit of product depends on the dynamics of the operating environment on the shop floor at the time that piece was produced. The product mix and the demand volumes impact the activities required to meet the demand. The activities composition plays the most important role in how to absorb the costs – in particular the costs of technology, capital investment, back office, design, maintenance, holding inventory, etc.

Today your operational environment is different from when the standard cost structure was developed. Today the product mix is different, the demand volumes are different, and in many cases, the policies and procedures are also different. A considerable constitution of the activities by people and machines required to deliver the products or services is new. Most companies in the SMB sector do not have the resources to update their cost structures frequently hence we find them to be out of date in great majority of situations. In some cases we have seen standard cost information to be more than several decades old. Clearly the company made a different set of products back then, than it does today.For the sake of discussion let us assume that we can overcome all these inadequacies, but the main problem still remains that this is historical information and not forward looking into the future. In your quest to respond to the price pressures when you make any significant change in your operating dynamics, you will be operating in a new and different environment. Your decisions on what to do must be made with the cost structures based on the yet unknown future. If they are based on the past cost structures then you are more than likely to go off course.

Uncertainty engenders partial solutions and misapplications

When faced with the rising pressure on prices, we find that managers often jump to conclusions – improve process efficiency, improve throughput, reduce inventory, reduce labor cost, outsource to a cheaper producer, etc. These are good things to do per se, so long as you are taking the cost out of the system and not merely shifting it to another area. In majority cases we find shifting costs to be the more common response. But, more importantly, the elimination in cost must be significant enough to make an impact. Very often managers forget to ask the four basic questions:

  • Can it be done? Is it possible? If not, then what additional capabilities are needed?
  • Will it be profitable?
  • What is the impact of my decision across the product mix and the functional capabilities of the organization?
  • How do I get to my desired future (the roadmap)?

In the absence of answers to these questions, the environment is fertile for half-baked ideas based on correlative thinking and rules-of-thumb, and misapplications of sound principles. Let us consider the implications of this uncertainty. The results are far reaching that affect not only the accountants and senior managers, but also the operations personnel. Process managers are asked to redesign the process and policies that will reduce costs and increase profits in future based on historical information. Without a reliable framework they do not know for sure whether their solutions will bear any fruit. They are left to use vague guidelines, which depend on inaccurate information, without questioning the accuracy and accepting on faith. They shoot in the dark and hope to kill. Misapplications are rampant throughout industry.

An example of misapplication and shifting costs

Let’s consider an example of a truck power-train component supplier. The company manufactured twenty four product families with several hundred individual SKUs. The demand of various products varied from a paltry 2 units for some to several thousand for others over a four-week long period. The plant operated in a batch fashion with two primary routings but no direct connecting flow between workstations. In other words, each work station continued to produce until it ran out of work to do. The plant financials were good with overall net income at almost 7% of sales. Unfortunately, WIP piled up everywhere. Management decided to convert the batch operation into a flow line to improve efficiency and reduce WIP.

Using an aggregated constraint capacity analysis tool they were convinced that their plan was feasible. They sized the buffers based on historical performance and line balancing showed a lot of promise. They estimated the WIP to decline precipitously with overall increase in bottleneck efficiency. Using the standard costing model, adjusted for the expected improvement in efficiency, they believed they were going to save a lot of money.

The reality unfortunately was not as they expected. Reduced WIP choked the flow and the machine utilization rates suffered significantly reducing the overall throughput by about 20%. The financial result was a disaster; the overall net income fell to negative 3% of sales. They not only lost on the bottom line but they also lost on the top line since they could not produce enough to meet the customer demand and had to outsource to fill the gap.

The problem was not in their objectives but in their analytical tools and the applicability of the principles. They were attempting to squeeze a square peg in a round hole. The problems emanated from two causes:

1. The processing requirements at workstations depended on individual product type, and

2. They did not understand how the machine failures would impact the dynamic interactions throughout the process.

If the processing requirements at workstations in a line depend on each product then with each change in product batch the dynamics of the entire line changes. Not having large enough buffers (WIP) in between workstations to attenuate the dynamics of the process flow caused the line to experience significant amount of blockage and starvation. They could not anticipate this because they used a static model of aggregated constraint capacity. These are steady-state models and cannot show the dynamic effects. A dynamic analysis was required for the job. Furthermore, they used the standard cost data from history but the activities composition was so different in the flow line that the old cost structure had no applicability at all.

Response to price pressures

The above situation is a common occurrence in any multi-product shop with high-demand variability. Static capacity models and standard costing or machine run-rate approaches to calculate individual product costs are not valid methodologies. Decisions made using these approaches will always be wrong. You may find partial successes but will never be able to tap your full potential. The activities based cost and management (ABC/M) techniques can help but only after the fact. After all, ABC is an accounting device and not a management tool to create the future. A similar situation would rarely exist in a low-variety with long-run setting. The solution requires a tool that assesses the dynamic changes in the process and the corresponding activities composition to build the resource requirements and financials for the future environment.

Profit Mapping is a tool for aligning operations with future profit and performance. It focuses on the activities performed by people and machines to improve process effectiveness and growth. Here we construct an activities composition of the process, understand the dynamics of how it changes over time, and tie this information to the resource requirements and the cost to produce products or services. As business conditions change – such as changes in product mix, demand, product or service delivery capabilities, vendor performance, business strategy, etc. – Profit Mapping reassesses the resource requirements and cost/profitability implications of the new and changed activities composition. The capability of Profit Mapping is in its ability to directly connect the controllable parameters to the business objectives within the capabilities and constraints of your organization. It is a radical yet intuitive enhancement to operational decision making process that is equally suitable from executive to shop floor decision making.

In subsequent issues of this journal I will explore with you several real-life examples of using Profit Mapping. We will identify parameters that we can control within our capabilities and constraints to reach our financial as well as other business objectives. This is one of the fundamental principles of the Profit Mapping methodology. In applying Profit Mapping we take an agnostic view towards the improvement philosophy and evaluate the consequences of decisions, irrespective of their origin or basis, from the process, resources and financial perspectives. Our focus is not on what happened in the past but to look forward to the future.

I believe the complexity in multi-product and high-variability in demand environment is immense where traditional single-focus methodologies and generic guidelines are not acceptable. A systematic approach focusing on the business goals – not on the intermediary issues such as efficiency, throughput, inventory levels etc. – is imperative.

Dr. Anil Menawat is the founder of Menawat & Co.

Pressure on Prices: How will you Respond? (Jan 26, 2006) 2017-03-25T12:12:21+00:00

Welcome to the Profit Mapping Blog (Jan 10, 2006)


Anil Menawat and I are pleased to announce our entry into the world of blogging. Our mission is to help raise awareness of Profit Mapping by sharing information and resources on how Profit Mapping drives cost and operational effectiveness for both manufacturing and services companies.

Profit Mapping enhances any strategy, improvement framework or measurement approach. It complements what you are already doing and provides the equivalent of a GPS navigation system for the business. Profit Mapping is the only approach that can guide you with precise steps and activities leading to the desired results.

We are currently preparing several articles that explore in more detail how Profit Mapping enhances leading improvement approaches. Our first article will address Lean principles. This will be followed by a Six Sigma article. Others will follow. We will post these articles on the Menawat & Co. web site when they are ready.

Please let us know about your significant business challenges. We look forward to discussing them in this blog.

In the meantime, please take a look at Anil Menawat’s recent article, Pressure on Prices: How will you Respond?, from the JobshopLean journal. This is a timely article on the need to become more cost competitive in today’s global business environment.

You can find more information about Profit Mapping and how it works at our web site and in our book, Profit Mapping: A Tool for Aligning Operations with Future Profit and Performance, from McGraw-Hill.


Adam Garfein

Welcome to the Profit Mapping Blog (Jan 10, 2006) 2017-03-25T12:12:21+00:00
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