Profitability or Efficiency Metrics will be viewed by Production, Operations and Fulfilment/Logistics departments and show the efficiency with which the company is creating and delivering its products or services to its customers.
Typical profitability metrics may include:
1. How much it costs to make the product being sold, e.g. unit costs by product or by product category, total costs of goods sold (in aggregate, or split out by specific item of production).
2. How much money is tied up in stock at any given time.
3. How many stock items had to be disposed/written off in a given period due to, for example, being unsaleable or being defective.
4. How many sales were lost in the period due to faulty goods, production delays, delivery issues or other production- or logistics-related out-of-stocks.
5. How effectively the company’s operations are being run for a given level of headcount or salary spend.
The focus on efficiency (lean operations) will allow a business to improve overall financial performance for a given level of sales revenue. Some operational efficiencies should be possible which will fall straight to the bottom line.
However, there will always be a fine balancing act to be made in where best to make efficiency improvements, and whether they will achieve the intended results.
For example, relentless headcount reductions can lead to lower productivity among remaining employees, and reduced efficiency as they change their behaviour to try to prevent being the next one for the chop.
Quality vs. price will also require a balancing act. Since sales revenue is a factor of both sales quantity AND sales price, businesses may adopt a different strategic approach to operational efficiency. Some choose to maintain a higher quality of production and customer service (perhaps looking for efficiencies elsewhere) and keep selling prices at a higher level reflective of this quality, but expecting some sales demand to drop off in response. Others choose to drive for greater production and customer service cost efficiencies, sacrificing product quality in the process, but allowing the ability to reduce selling prices (reducing list prices, or more discounting) and gaining a sales volume boost in the process.
All these efficiency metrics address internal business factors, and – assuming sales levels remaining constant – would result in an increase in profitability. However, businesses do not exist in a static environment and are at risk of changing market conditions resulting in changing sales revenues. The effect such changes have on the business can be taken into account using Risk Metrics.