If asked, most executives would probably tell you that they would rather concentrate on selling their highest-priced product line–or at least the one boasting the most attractive margins. Certainly, that would have been Rene J. Robichaud's response before his oil services company began using the Maxager 7 profit optimization (PO) Web-based solution.
Back then, NS Group, a $600-million Newport, Ky.-based maker of tubing and pipe for the oil industry at which Robichaud is CEO, used basic margin comparisons to determine its manufacturing mix. Today, with the Maxager tool, NS has added one additional element–velocity–to its calculations and that has made all the difference. "Typically, managers will say I make $100 on product A and $200 on product B, so it makes more sense to produce more of product B," says Michael Rothschild, CEO of Maxager Technology Inc., a provider of an online "profit-optimizing" service. "But what if product A is produced more than twice as fast as product B? Strikingly, most people don't think like this. Our product, Maxager 7, gives you that information. We have a set of methods and algorithms, 100% Web-based, that allow us, on the fly, to calculate at whatever level of detail you want, the profit per minute, or 'profit velocity', of each product line."
According to Robichaud, the Maxager approach has led to significant changes in corporate strategy. "We've had products that had a very high price, which we thought were better for us to sell," the CEO says, "but we have now found that some of our lower-priced products had a much higher profit per hour." Robichaud says that since the company has been running its factories "full-out," it becomes obvious that the focus should be on making the latter products. "I know we've dropped products because of the new information we have."
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While Maxager may be unique in offering a product that focuses on determining profit velocity, John Hagerty, vice president and research fellow at AMR Research Inc., says there are a number of other companies competing in the same general area of "understanding and maximizing profit." Beyond relative newcomer Maxager, other notable names in the PO market–which can refer to price optimization as well as profit optimization–include best-of-breed providers like Acorn Systems, Metreo Inc., Rapt Inc. and Zilliant Inc., and enterprise software giant SAS Institute.
As Hagerty explains, "This market is still in kindergarten. As companies are compelled to try and improve their profit picture, the next few years could see many more companies turning to these approaches, and trying to bring a multi-level, multi-dimensional view to their analyses."
A closely related market is price management (PM) software. These solutions attempt to track actual implementation of pricing policies by sales, analyzing how, why and where discounting or extension of terms are in the best interest of the bottom line, for instance. Vendavo Inc. is generally considered the leader in this segment. A year ago, The Yankee Group, a leading tech industry analytical firm, called the PM/PO segment "the best- kept secret of early enterprise adopters, many of whom are using these solutions to outmanuever competitors and gain market share."
"What they all have in common," says AMR's Hagerty, "is the idea of trying to get away from the traditional fixation on pure margin, to a more holistic view of profitability."
Of course, the Maxager analytics may not fit all markets equally. "I think the idea of comparing price velocity of different product lines falls apart in a slow market," explains NS Group's Robichaud. "For example, if I'm not working our employees six days a week, I can always have them work on a product that might take longer to produce. But this is really something that's useful when you are approaching the point of major bottlenecks in operations." Even in rocky markets, Maxager's Rothschild suggests that profit velocity or any of the more holistic approaches to analyzing profitability can help companies avoid making major–and potentially fatal–decisions like moving production offshore, or surrendering markets unnecessarily. "Take this company that was in the acrylic sheet business," he says. "They were withdrawing from the commodity end, which was producing four-foot by eight- foot, quarter-inch-thick clear sheets, and leaving that to foreign producers, because the price was low and the margin thin. They wanted to concentrate on three-inch-thick military-spec sheets, which have tremendous margins. But the fancy stuff requires making special molds and changing them all the time. They ended up giving up their core business with catastrophic results."
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