KPIs 101.4: How Many Deals Can We Actually Do?
As discussed in KPIs 101: How Much Can Your Business Improve?, every quantifiable Key Performance Indicator that has ever been devised falls into the following categories:
Size - how big is the deal?
Number of - how many deals are on the table?
Velocity - how fast does the deal take to work through?
Capacity - how many deals can we actually do?
Statistics - averages, conversion rates, ratios, standard deviations, skew, correlation etc. etc. etc.
If you use them together, you can quickly work out how much your business can improve.
Today we will discuss #4: Capacity - How Many Deals Can We Actually Do?
Everything in this universe has a finite size. That size more or less determines how much of another substance will fit inside the object.
(For the purposes of this part of the the discussion, I am setting aside the fact that some things e.g. acid can change the properties of other things e.g. plastic, and therefore can change how much the containers they are put in can actually hold e.g. by burning holes in them and rendering them unable to hold anything.)
For example, if you have a bath tub which holds 200 litres, once it is full, it cannot have any more tipped in without overflowing.
However, the interplay between capacity and velocity means that a bath tub may be able to process far more than 200 litres over a given time period.
Let's say that the plug is pulled out and the bath tub drains at a rate of 40 litres per minute. In 5 minutes, a full tub will be empty. If the tub is constantly refilled at the same rate, the tub can effectively process 2,400 litres an hour. That is 12 times its actual capacity.
Your business is no different in theory...
...in practice, capacity is a juggling act, and the key is not how fast the work comes in, but how fast it can go out.
Every process has multiple steps. Each step is bound by capacity i.e. the capacity of the person or machine completing the step or the facility in which the step takes place.
For example, Bob is a machinist on the old faithful green machine. The capacity of the green machine is 15 mins set-up per job, and a rated speed of 6 units produced per minute. But Bob only works 8 hours a day, and there is no-one else to work the machine if Bob is not there. Therefore, assuming Bob works an 8 hour day, the green machine's production capacity per day in a single run is 2,790 units.
That is: 8 hours x 60 mins - 15 mins x 6 units per minute.
Jemima is a welder who can weld 1 unit every 3 minutes. Her capacity over an 8 hour day is 160 units. For the welding department to keep up with the green machine, 18 welders are required or the green machine will have underutilised capacity.
As the green machine's costs must be split over the sold production, the impact on profitability of underutilised capacity cannot be overstated. For example, if the green machine's costs are $55,800 per year, and we assume that there are 200 working days per year, and that each day's production is a single run with set-up time, then 558,000 units will be produced by the green machine at a cost of 10c each.
However, if we assume that Jemima works all alone, and the product cannot be sold unless it is first welded, then Jemima can only produce 32,000 units. This increases the costs of the green machine to $1.74375 per unit.
If we assume that Jemima is paid $40 per hour, and she uses consumables of $40 per hour, her welded cost per unit is $4.00 ($80 / 20 units per hour).
The total cost of the product at this point is somewhere between $4.10 and $5.74. If it is sold for $8.00, the fall in profit is $1.64 or 42%.
Assuming that all production can be sold, by employing more Jemimas and increasing the throughput capacity, the business turnover and profitability will radically increase.
...by reviewing the design and production processes, it might be possible to reconfigure the product to allow Jemima to produce a welded unit in a reduced amount of time. This would be the same as increasing the size of the plug hole in the bath tub.
The key to any good business is to understand what capacities are required across your facilities, machines and workforce to support the level of turnover and profitability you require.