Sir, you are under arrest by the Building Material Margin Police for failure to charge the correct price when bidding a project. No sir! Ignorance of the cost does not excuse your margin crime, and failure to follow your company's guidelines does not justify your company's heavy losses. What we have here is a failure to communicate. Selling items below cost does not equate success--it makes you a failure. Do I need to get my rubber hose out and teach you how to sell for a profit? We can do it the easy way or the hard way; makes no difference to me.
Don't you wish there was such a thing as Building Material Margin Police? If there were, I know a lot of people in our industry would be doing hard time. From a practical point, do you have margin police within your own company? It never ceases to amaze me of all the great ideas on margin that executives have. They create some of the most well-written guidelines you can imagine, and then no one follows them. The reason for the insubordination is simple: they don't have a Margin Policeman who is checking business reports on a daily basis to make sure employees are not violating the guidelines.
You will hear executives in their quarterly statement say things like, "We achieved a lower margin because the market was highly competitive." Hang on just a minute. Who sets your pricing, you or your competitor? At Ro-Mac Lumber, management sets our prices, not our competitors (who are experts in losing millions of dollars). Be honest. If you have low margins, look in the mirror for the person to blame. I have told many builders that I can't stop anyone from giving their products away, and if someone wants to be stupid, I can't stop them.
At our company, here are some things we do to act as Margin Police to prevent unapproved prices from occurring:
- Management sets 30-day commodity pricing monthly based on real market costs, that everyone on the team knows. A good pricing strategy should follow the commodity markets with an attitude that is quick to rise and slower to drop.
- Every day, managers and executives review daily gross margins on tickets to stop those who like to color outside the lines. Let's face it: People are constantly pushing the margin envelope, and if you are not monitoring each transaction daily, then oops, you just gave some orders away! I review our daily business report by transaction, looking for exceptions to our guidelines and then I question the manager or salesperson when they are not being followed. It is vital for people to know I am looking. This is one of my late-afternoon, boring projects that is actually very important to my overall commitment to margin.
- Ignorance of price is the biggest problem we have in our industry. We have a competitor who is next to one of our stores buying 2x4 spruce from two-step distributiors and selling it for less than he bought it for. I am convinced they don't know the direction of the market and I'm not sure they can calculate per-thousand costs into piece prices. Like many, these folks are guilty of ignorance of the marketplace, and they are the most dangerous employees in your company. Either educate them or replace them, because they are costing you thousands of dollars.
- Review your guidelines quarterly and assign members of your team to review cost and pricing for slow-moving items. Your managers are closest to pricing in the marketplace. Make sure they are involved in helping you build margins. Assign real responsibilities to them to ensure they have the proper margin mindset.
- Do your paperwork correctly. Our company's chief financial officer, Therese Tucker, has learned to throw a wonderful hissy fit when someone fouls up her paperwork or enters in the wrong cost. Their mistakes cost her time and money. More importantly, their mistakes cost the company money by selling incorrectly. Smart executives give deference to those in charge of the paperwork when you have employees unwilling or unable to process paperwork properly. Don't kid yourself. Some of these "hammer knockers" do their paperwork wrong so they can show higher margins on commission statements.
- Put special emphasis on special orders, and be sure employees understand that because you are assuming huge risks and longer receivable terms, special-order pricing should garner more than your most competitive commodity item. Low-margin special orders are usually set up by an overzealous salesperson or rank amateur. Once again, set guidelines and monitor those orders daily.
If you hope to stop margin surprises at the end of the month, then you must put into place your own Margin Police who will daily look for employees violating your company's law. Some of you have hardened margin criminals who cannot be rehabilitated, so you may have to send them away for life. But for many salespeople, a strong warden and a day or so in the box will give them a change in attitude. Businesses in many cases are like countries: Without law, there is anarchy. If you believe what I have just written, then I now deputize you as a Building Material Margin Policeman. Good Luck!
Don Magruder is vice president of Ro-Mac Lumber & Supply in Central Florida and former chairman of the Florida Building Material Association. This article originally appeared in FBMA's March 4 newsletter.