This article will explain the basic business concept of up time. I’ll continue to explain the concept of ‘Optimal Up-Time’ and another principle related to the breakeven point of operations. The whole goal is to optimize production and the corresponding revenue any asset or process can generate for you in business.
So let’s get started.
Business Concept of ‘Up Time’
I had to give this a lot of thought to express it in such a way that it is easy to understand. So here it goes:
Up Time in business refers to maximizing the opportunity to generate revenue. Whenever the marginal costs to generate revenue are less than the revenue generated, a business is maximizing the opportunity provided.
It isn’t strictly limited to fixed assets or operations but is an across the board concept. I’ll use an example.
My brother and his wife own a liquor store in the south. State law basically states he cannot open the front doors before 9 AM and must close them no later than 7 PM. He must be closed on Sundays, Christmas Day and New Year’s Day. For him, the opportunity to maximize revenue means that he should be open all of the hours that he can generate revenue. In effect, he should be open from 9 AM to 7 PM every day except Sundays.
The Up Time business concept further states that whenever marginal costs to generate revenue are less than the revenue generated you are maximizing opportunity to generate profits. So my brother discovered after about five months of operations that from 9 AM to 10 AM each day, he sold exactly one pint size bottle of vodka for $3.99. Basically the same customer every morning bought the same thing. Well to determine the marginal costs he adds together the cost of the bottle of vodka which is $2.99 and the cost of the employee which happens to be $10. So his total costs for that one hour is $13 and he generates sales of $4.
No brainer for him, he decided not to open his doors before 10 AM as there was no maximization of revenue over costs. Ironically, that same customer just modified his habit and came in about 10:01 each morning.
The Up Time concept is designed to identify the maximum opportunity to generate revenue in excess of costs. The concept is applied across the entire company related to availability to customers, ergonomics applied to employees, utility of equipment and so on. It is not a restricted principle to any one single facet of operations.
To continue explaining Up Time lets go back to my brother’s store. I stated that he basically closed his doors from 9 AM to 10 AM each day. Well, that isn’t entirely true. Explaining this goes into explaining ‘Optimal Up-Time’ in business.
The concept of Up Time seems relatively simple, but application is whole different ball game. In my brother’s case a flat rule of not opening before 10 AM had some drawbacks. First off, not everyday followed a similar pattern. The pattern only existed with real high consistency Monday through Thursday. Friday’s had a different pattern in the morning and so did Saturdays.
This makes sense; think about the customer’s habits. In the work environment there is a whole different attitude towards Friday than on a Tuesday. Saturdays are typically shopping days for many folks. In my brother’s case his liquor store was next door to a grocery store. Saturday is naturally the best day for all grocery stores. People go shopping before lunch time and often early in the morning.
So my brother opened his store at 9 AM on Saturdays to maximize accessibility to the customers. This was easily proved with the retail software program he used and sure enough he would sell over $100 worth of liquor in that hour. Remember the basic formula? If the revenue generated exceeds the marginal costs, you are optimizing Up Time. The costs for that hour were liquor costs around $73 and payroll of $10. So costs overall were $83 from 9 AM to 10 AM and his revenue is $100. Therefore he generated profit of $17 for that hour.
He is optimizing his Up-Time!
It even gets more fascinating. You see in his business his software explained that Thursday, Friday and Saturday evenings from 5 PM until 7 PM had the highest register activity. At first he only had one person operating the register and this person also dealt with customer inquiries, requests for recipes and help with finding product and so on. During these time frames, he made sure another person was available to assist.
Remember the basic concept not only applies to customers but it also applies to the employees and operations. My brother learned that if his employee were to handle a customer’s request for help that every now and then a potential customer just walked out the door. Furthermore, Friday evenings and Saturday evenings the per customer sales ticket volume was even higher than Thursday evening. This makes sense, during this time period customers are buying not just one bottle but often several bottles of liquor each!
For him to maximize the sales in the store, he needed a second employee to do nothing but run the register while the primary employee assisted customers with their respective requests for assistance. Basically on a Friday evening and Saturday evening, there were no less than two employees in the store working out front with the customers. In this situation he wasn’t optimizing the store’s hours, but the store’s performance.
The concept of optimal up-time isn’t a restricted concept.
I’m going to go one step further. On certain days in the year the sales were off the charts. Examples include the day before Thanksgiving, Christmas Eve, and the big one, New Year’s Eve. On those days, it was a ‘All Hands on Deck’ function. He, his wife, his employees, and even my younger brother would help for the entire day. One person bagged or boxed the alcohol while one person did nothing but run the cash register. Again, just a further extension of optimizing the Up-Time concept I illustrated above.
On those special days of the year where sales are very high the Up-Time concept seems easy to identify and work with as a business calculation. But how do you calculate the concept for those really close situations? The business principle involved here is referred to as break-even analysis.
Break Even Analysis
The primary purpose of the break even analysis in business is to compare the costs of operations against the revenue generated from those costs. In effect it is component of the Up Time concept. Above I used the cost of alcohol and the labor to sell the alcohol against the revenue generated from those sales. This is rather simple in comparison to what many businesses have to consider.
In many situations the costs to operate are more complicated than what I illustrated. Let’s use manufacturing as an example.
When you manufacture a product is there an actual sale of the product? In 99 out of 100 cases, the answer is no. So in manufacturing you have nothing but costs and no revenue! OUCH! So another form of accounting is used called cost accounting or sometimes referred to as managerial accounting. Basically the product produced is considered sold for analysis purposes. But when it comes to the cost model used it gets more sophisticated especially addressing volume matters.
In manufacturing the two primary costs are materials and labor to make the product. In addition to this other costs are added such as equipment usage charges (depreciation, maintenance, operational costs, utilities and more), packaging, storage and in some cases costs related to distribution. In most of these situations the cost values are spread over a large volume of individual cases and right down to the individually wrapped units.
Let’s use milk as an example. In its process the milk is first delivered and stored onsite. Next the milk is separated into the various dairy product outputs such as butter, ice cream, cream, regular milk, 2%, and low fat milk. Next it gets pasteurized and then pumped into their containers. Caps are sealed onto the jug and then these jugs are loaded into bins for shipping. While waiting for delivery all of the product is stored in either refrigerators or freezers.
Now think of all the costs to get this done. These costs are shared across not one or two items but literally thousands of units per hour.
Remember with production it is assumed the product is sold. So these costs are added up and divided into the total number of units produced to determine the final cost per unit. The sales price is then determined based on the cost per unit to produce. If the sales price equals the cost per unit to produce it is referred to as the breakeven point.
This breakeven point can fluctuate depending on the Up Time during the production process. What if the equipment can only operate 12 hours a day instead of 24 hours a day? Do you think the breakeven point gets higher or lower? In most cases it actually goes higher because you are spreading the costs of operating the equipment across a lower number of units of output due to Up Time of the equipment or process.
A really good example is in the chicken processing systems. In creating those packages of breasts, thighs and drumsticks the processing plant has to close down frequently for sanitizing purposes. For most plants this is every night. Imagine what the cost would be if they didn’t have to sanitize the plant operations. You could almost double your volume of production and reduce the cost of the product sold to the grocery store.
The goal of this section is to illustrate the importance of Up Time in relation to the breakeven point for operations. It is going to be different in every business operation. For you the key is to evaluate your operation and determine the points of operation that affect Up Time.
In summary, Up Time is a business concept whereby the goal is to maximize profit. The primary tenant is for revenue generated to exceed the associated costs to generate that revenue. The Up Time concept is a thought process that should be applied to all aspects of operations including employees and the process too. Act on Knowledge.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you. If interested in my services as an accountant/consultant; click on ‘My Services‘ in the footer of this article.
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