New building sales across the U.S. are way up, and they are showing in lead times of four weeks and more at wood truss and wall panel component manufacturing (CM) companies. And yet even with this demand, I see lumberyard-owned component manufacturers with profits in the single digits. Your CM division should be a huge cash cow, but you don’t know how to milk it.
How much profit should you expect? It is common among independent CM firms to make 15%+ EBITDA margins in normal markets in which sales exceed a two-week lead time. Many independents garner 20%+ EBITDA in the good years … like now!
Here’s how to get what you should be getting.
Admit There Are Problems
Productivity guru W. Edwards Deming once said, “Every system is perfectly designed to get the results it gets.” It’s time for you to realize that the practices you have implemented are, intentionally or not, giving you the very results you are getting. Therefore, you should admit that what you are doing and how you are doing it is not enough, so the current practices must change.
Think Holstically About Improvements
When leaders finally conclude they are ready to make changes, the first mistake most make is focusing all their attention on manufacturing. Yes, manufacturing in your operation always needs improvement, but what about every other area in your company? For instance, it could be that changing your pricing authorities will weed out the poor accounts, while putting in scheduling priorities will generate better-paying orders.
Short Turnarounds Merit Higher Pay
Some customers will argue that their long-term status with you means they deserve better services and shorter lead times without any increase in price. That is a formula for disaster. Any orders that are moving ahead of other orders should be the highest paid ones in terms of margin dollars per man-minute spent on the job. If they are not, why not? You are actually paying the customer to be your customer because they could not find a low price and quick service from the competition. And then, if they leave you for lower price, how are they loyal? The bottom line here is this: If all the competition’s schedules are the same or greater than your long lead time, raise your price for any shorter lead times.
Open Your Mind With These Four Questions
Let’s say your lead time stretches to four weeks. At this point, any orders with high margin dollars per man-minute invested deserve a higher priority than a low-margin project using the same amount of worker time. If you’re not, asking yourself these questions could help change your mind.
1. What are the dollar values of the gains you reap and the money you lose by prioritizing low-margin orders? Are you guessing, or do you actually know?
2. Are you using the proper method of margin derived from the estimated labor time and not a cost markup? See “How a Truck Repairman Can Help You Run a Better Truss or Components Plant” Cost markup of manufactured products is a proven failed method for maximizing gross margin per daily output. Cost markup hides low material cost with labor intensive projects that the common margin percentage of sales fails to display. Margin percent of sales does not show true gross margin gain per time period which can easily be proven with simple math.
3. Are you penalizing the component plant’s management for lower-than-expected numbers by forcing them to process low-margin orders?
4. What is the greater priority, a salesperson’s commission or company profits?
Implementing change is difficult because it is time-consuming, prone to error. Failure is something we all do our best to avoid. Using old, tried-and-true methods may appear safer and create far less resistance from certain groups, but implementing change can and does provide results far greater than many of us would initially believe.
No more excuses. The time to start is now.