Using your financial statements, you can calculate how much value your plant produces in converting raw materials into finished goods per hour of direct labour (in dollars).
Goulet calls this the value-added index and says it’s a more precise measure of profitability than gross profit margin.
"This is the value being added between the four walls of your plant," says Goulet, a mechanical engineer and expert on lean manufacturing. "If you are able to increase that number, it means your plant is more productive and more profitable."
Uncovers relative product performance
It allows managers to see the relative profit performance of different products.
Then, they can talk to the sales and marketing staff about how best to adjust the product mix. The company can also implement operational efficiency projects.
Steps for improving profits
Here are some of the steps a company might take to boost profits.
Lower the price on your most profitable products to increase their sales.
Increase the price on your least profitable items, or eliminate them altogether.
- Enlist the support of employees to streamline production and cut waste through lean manufacturing techniques.
"You can show your employees that individual product lines are not competitive as currently produced," says Goulet, who has used the value-added index to help improve the performance of numerous manufacturers.
"That’s a great way to encourage their participation in design and process changes that will make your operations leaner and your company more innovative and competitive."