Lots of people are not clear on how you get financial benefits from increasing productivity. In Module 3 of my course, I use an example to illustrate this. Recently, I’ve had several questions on this, typically, “Is it based on a real company?” and “Is it too simplistic?”
The figures are indeed based on a real company in Europe and, while the example is simplified a little for clarity, it does illustrate well the financial benefits that you can get from increasing productivity. The logic is perfectly sound. Here is the example.
“Yes, of course.” I went to the flip chart. “Let me show you using dummy figures.” I wrote on the chart, explaining each line as I came to it –
Before BtB –
Sales of blister packs = 10m at $1 per pack = $10m
Material costs = 40% of sales = $4m
Direct labour and overheads = 40% of sales = $4m
Thus contribution to fixed overhead and profit = $2m
Unit cost per pack = $0.80
After BtB (assuming a productivity increase of 50% and increasing sales to fill the freed capacity) –
Sales of blister packs = 15m at $1 per pack = $15m
Material costs = 40% of sales = $6m
Direct labour and overheads remain the same = $4m
Thus contribution to fixed overhead and profit = $5m
Unit cost per pack = $0.67
I then explained the figures. “The key to this improvement is the increase in productivity. That means we put more through the same resources – the same direct labour and overheads.
“So, by increasing productivity by 50%, which I think your program could readily achieve, and I have done it before in similar circumstances, you increase your profit contribution by 150% and reduce your unit costs by over 16%. What do you think? Worth having?” I looked at Ken and the others around the room. .
Ken smiled and nodded. “I’d love to have that opportunity”.