Far too many companies are losing a significant amount of money because of bad practices. Practices such as using imprecise labor estimations (e.g., board foot (BF) labor estimation) and establishing project pricing using the common cost markup method result in companies losing tens of thousands of dollars. Simple math can be utilized to challenge our long-held beliefs of what we consider are best practices.
In addition, too many take offense at the idea of using something other than BF, which is ridiculous. Unless a company is using man-minutes properly, as derived from motion and time studies that are updated for existing equipment and practices, the labor estimation versus the actual for individual projects are all over the map. BF supporters argue that the average over time works out. However, every production supervisor knows that BF is truly a poor estimation when comparing high BF projects with low setup times, such as pole barn trusses, to low BF projects.
Below are a couple of suggestions to try:
Suggestion 1) To prove the validity of using man-minutes versus other units, such as BF, track the actual labor for each assembly crew in man-minutes and BF. Then compare which more accurately represents what you expected the time to be. If you are using anything other than properly derived man-minutes, you will find that individual batches of trusses have wide swings compared to proper man-minutes. The labor accuracy is needed to fix the flawed pricing that most are using.
The fallacy of a cost markup to derive a project’s margin and, therefore, the overall price is costing many companies dearly. Instead, a company should be renting the tables to its customers instead of marking up the cost of the projects.
Many are mistaken if they think a company can make a consistent net profit weekly if it applies a cost markup. A cost markup is undercutting the daily margin earnings when it is processing orders with a high labor time (lots of man-minutes) and yet also have a low material cost project (hip roof versus AG trusses).
Everyone should always use cost markup to generate what they think the competition is charging for a price, but your margin’s baseline should be calculated this way: margin baseline = $ rate x man-minutes; man-minutes = table + saw + support (shop only--does not include any office, trucking or admin personnel); and sales price = ($ rate x man-minutes) + material + labor + shipping.
Suggestions 2) Compare the actual labor of the shop labor (at least the table of man-minutes) to that of the gross margin to derive a margin/man-minute for past orders. Then, tally the daily gross margin dollars for the day, week, and month. Hopefully, everyone can see what I am driving at for this exercise. If you start paying attention to the margin dollars per man-minute, it will do the following: allow low margin/man-minute projects to go to your competition and therefore not tie up your company’s assets on these orders; enable low margin/man-minute orders only for spare capacity; and make more net profit by focusing on higher margin/man-minute orders.
The combination of properly estimated labor using man-minutes, plus calculating your project based on the same man-minutes instead of a cost markup will make any company more net profit. It happens every time. Now, is your company doing this already or are long-held beliefs and practices going to prevent your group from at least proving which method is best?
