Michael Rothschild demonstrates a profit topo map that visualizes which products and customers are actually profitable. Using steel and plastics manufacturing as examples, he shows how the tool reveals time-versus-margin trade-offs and helps sales, production, and finance teams align around a single metric like profit velocity.
Now let me show you some examples from the real world. So I can't remember whether this is an aluminum company. No, I think this is another steel company. And when we first plotted theirs, and this is at a very high level of aggregation, you know, you have hierarchies of all these 10,000 products, and then they're in 100 families, and then 10 groups, et cetera. Yes, sir, in the back.
I just wanted to ask with regards to your last slide, Last slide, because we were talking about the different divisions in an organization and something like cutting costs on a product that's got like low margins, which is unheard of. So what can you recommend in terms of reward systems in the organization? Because the sales may have specific targets to get those rewards compared to finance and cost positions and That's a great question, and I'll give you a quick answer.
My view is, unless you have a unifying, we call it common metric, which should be the same one the investors care about, which is how fast are we making money here from the assets. Unless that's available to people, you can't tie incentive systems To something that actually pulls the wagon for the investors who actually own the place. So we talk about linking, for example, sales compensation to the amount of cash produced per period of time, or productivity increases on the production floor that lead to that. So once you have the profit velocity metric, you can actually redesign incentive systems to get people to pull not in 3 different directions, but in one direction. So you're saying that the But in one common direction. So, I mean, there's a lot more behind that, but it's a fundamental problem in all these organizations. The sales is pulling this way, production's going that way, finance is kind of throwing its hands up in the air. I do wanna take questions, but I'm afraid if I do it, I'll blow way past my time, and I'd rather do them, so if you could jot it down. So, at a very high level of product groups, this steelmaker says to themselves, and they had not seen this graph before, hey, we're in pretty good control. We're making $80 a ton on all the different products we make. It's a fairly tight band. There's some good stuff and some lower stuff, but for the most part, the bulk of what we do, we're in good control. We got control over our business. Okay. Looks pretty good. But the devil and the extra money is in the details. If you go down a level, this is when you click on our software and look at it by customer, customer shipped to. So for example, within this, this is a special JV customer that owns part of the plant, but within that one bubble of that customer are all the products that customer buys. If you want to go deeper in detail, this is for every product and every customer combination. So this is the data. We take invoice data, production data, we grind it through our system. Does that look like a tightly run business? This is one of the best, metals manufacturing companies in the world. It's an extremely well-run company. I've seen a lot worse. So to me, this is like if we're doctors and we're looking through— we've always used an X-ray machine. And there's things you can see in X-rays because medicine has been built on it for 100 years. And then somebody wheels in a color CAT scanner. And you get to look through it the first time, and you say, oh Lord, I mean, there's problems here that we could never see before. It's not that these folks are dumb in these companies, they never had visibility into this. They didn't know that there's a huge area here of low and slow margin products. And each bubble here represents the amount of dollars being thrown off. If I did the same graph for you, the exact same graph, and the circle size is the amount of hours consumed on the production line, what happens is the little bitty dots of money turn into big black holes of time that are spent. They spend huge amounts of time trying to make this stuff, and they get very little money back. Conversely, they get a lot of money here, and it only takes a little pinpoint of time, 'cause it goes through so fast. But I think sometimes like the same customer get a lot of money in one product, but to hold this customer you have to lose money in the other product. Absolutely, yes. The question is, would you like to be aware of precisely how much those trade-offs are? They don't know. That is the usual argument of the sales organization, which is, wait a second, wait a second, I don't like where you're going with this because you're going to make me sell more of this and less of that, and my customer really likes it, and plus, you know, we play golf every 3rd Thursday, and the drinks at the club on the 19th hole are fantastic. I don't really wanna have that conversation with him. This is where we talked about why customers don't wanna change. It's 'cause of guys like you. Just joking. But that's it. There is a pattern. When you don't have the metric and you don't know how bad off you are from a health standpoint, financial health standpoint, And suddenly you're made aware of it, that means you're gonna have to change your habits. Changing your habits means maybe he's not gonna invite me to golf anymore, or maybe I'm gonna have to call on a customer who threw me out of the building 3 months ago because they really are a good customer, we just couldn't tell before, and now I gotta crawl on my hands and knees to get let back in the building, and I don't really wanna do that. So we've done lots of companies now, and basically, I don't care how well they're run, they always look like this when you flip it on. And I bring all this stuff together. Here's a company I just went to the presentation last week. They are a plastics extruder. They make, I don't know, 4,000 or 5,000 different shapes of some kind of plastic part used in building products. They make 90% of their margin in 60% of their time. So this piece here, they're only getting 10% more money out of the last 40% of their active production time. Why? When you look at their topo maps, this is the amount of gross margins, so you see these little bubbles here. This is the amount of time. You put a lot of time in. You get almost nothing back. Over here, you put a relatively small amount of time in, you get nice big hunks of money back. Now it's all very simple, right? You're seeing the grass, we're all sitting here, it's all very comfortable, it's all very logical. Who wouldn't buy this? I mean, this is so obvious. I mean, don't you have that feeling? And once you see this stuff, it's like, well, who wouldn't want to do this? Except for the guy in the back of the room there.
