A former CEO of a dealer with 17 lumberyard locations explained to me that his two component manufacturing (CM) plants had generated only 10% of his sales, yet contributed 30% of his net profits. As a result of the Great Recession, the company lost all of its lumberyards and now only has a single CM plant, which is very profitable again. It is in an area of the country that was among the first to experience the devastating 2008 crash. This situation gave him a unique perspective of having a CM operated by a lumberyard versus independently owned. He stated to me that, looking back during their time when they had all the lumberyards, their CM plants had seemed to be functioning so well that they gave it very little thought. Now he understands they were not anywhere near as good as they could have been, and he wishes they gave it more focus. Investment in employee training and process improvement would have garnered the CM division so much more had it focused on this.
Is your company’s budget only for capital equipment, such as new trucks and buildings, but not formal training for your employees? Any time you think about investing for productivity gains, often the first thing most think about is investing in new equipment. All too often we think we can see this clearly and make the decision regarding a major expense for equipment straightforwardly and without much risk. Yet, I am told the following much too often: We invested in such-and-such and did not get the bump in production we were led to believe would happen. Could you help us get the kind of productivity that we were promised?
Spending money on expensive equipment is easy; investing in training and changing your methods is harder.
Let’s look at ROI for all types of training:
According to Emad Rizkalla, in HR Magazine, companies that invest $1,500 or more per employee, per year, on training average 24% higher profit margins than companies with lower yearly training investments.
The American Society for Training and Development collected training information from more than 2,500 firms and found that companies that offer comprehensive training
- have 218% higher income per employee than those with less comprehensive training;
- enjoy a 24% higher profit margin than those that spend less on training; and
- generate a 6% higher shareholder return if the training expenditure per employee increases by $680.
Now, let’s look at a logic exercise about possible gains. Assume the following very conservative numbers for a typical CM plant:
- Average gross margin (GM) percentage per sales dollar = 30%.
- Salesperson sales per year is approximately $3+ million = $900,000 GM/year.
- Designer output per year is approximately $1+ million (custom designs) = $300,000 GM/year.
- Truss assemblers (builders) build team or a wall panel framing crew output per year is approximately $1+ million = $300,000 GM/year.
- Automated component saw output per year is approximately $4+ million = $1.2 million GM/year
(Note: Use your own existing sales numbers and productivity to estimate your actual GM per hour rate.)
The purpose of using GM per year is to understand your true rate of return for any type of productivity gain. For example, let’s assume you gain just a 5% increase for a designer or the truss building teams. Simply multiply the $300,000 GM they earn by 5% for a result of $15,000 GM dollars. A simple 5% gain in productivity is really a big deal for any group. For the salesperson, a 5% gain is equal to $45,000 in additional GM. A component saw crew gain of 5% is equal to $60,000 GM. If any one of these groups is your bottleneck, the entire GM gain is being added directly to the net profits!
Okay, now many might say, “We have been doing this for decades; if we could add 5% productivity to any of the departments, we would do it in a heartbeat!” Five percent is equal to just 24 minutes per day. Consider the following:
- On average, most salespeople waste an average of 1 to 2 hours per day making phone calls just to find out the status on any project such as shipping or design. Think about it: one simple call is normally a 15-minute interruption. A 5% gain is not having to make 2 calls per day to know when a work order is going to be delivered to a jobsite or completed in design.
- How much time is spent doing the actual task of layout input and component designs within the design programs and not doing some other types of work? Better yet, are there ways of reducing their design time that they could be overlooking? (Most design groups certainly overlook this.)
- Five-blade component saws typically operate at less than 50% of capacity.
- Regardless of automation, assembly tables typically operate at less than 65% capacity. (Email me and I will send you some simple tasks to illustrate the point.)
In each of these critical areas, all I am looking for is an extra 24 minutes of productivity per day. An extra 24 minutes per day gain is at least an extra $15,000 GM for every $1 million in sales. That $15,000 GM is free money to be earned simply by changing your existing practices.
With additional training most can also get gains with fewer errors and better quality. Do you want to improve your quality and have fewer errors in any particular department? How about better quoting methods and winning higher contribution margin orders? Do you really think your methods for estimation cost, establishing margin rates and overall sales price are the best they possibly can be? Chances are, if you have not done any serious refinement to your quoting methods in years, you are losing tens of thousands of dollars for no reason other than an outdated method of quoting. So now, how much is it costing you not to do additional training?
Reasons or excuses that are too common:
- It’s not in the budget that we created for this year. (This lacks understanding of the true gains.)
- We are too busy with our current workload to take the time. (This person is not understanding the short-term pain for the long-term gains.)
- We have been doing this for a long time and there is nothing more that can be shown to us. (This is the bruised ego excuse.)
Every single time I have performed a consultation, I have found far more than 24 minutes to be gained in every department. Are you willing to set personal egos aside and listen to other methods? Are you willing to try new ways of performing the same task? What is really stopping you from taking that step to invest your time and money in something you cannot see sitting on your shop floor, like new equipment, but that you can see in the accounting numbers?