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Profitability improvement projects often fail to deliver sustained results.
Many companies take up improvement projects to improve the company’s profitability as a % of sales revenue. For example, if a company is operating at a profit of 10% to NSV, it may focus on improvements to take it up to 11%. However, most such projects don’t live up to expectations in the medium term.
The primary reason is that teams’ focus shifts from improving profits for the company, which is the goal of most companies, to improving profitability %. Let me explain with an example.
Suppose a company is currently operating at NSV of 1000 cr, profit of 100 cr, profitability of 10%. Would you drop projects, which don’t require additional investment and take the NSV up to 1500 cr, profit to 135 cr, but drop the overall profitability to 9%? Such projects are often dropped, which is the unfortunate result of moving the focus from profit to profitability.
TOC nudges us to focus on Throughput, Operating expenses, and Investment, which is the right framework to improve profit as well as return on investment.
If your company has a profitability improvement project, think hard as you may be compromising some easy profit enhancing opportunities!