Last year should have been a record profit year for wood truss and wall panel component manufacturers (CM). Many of my clients have mid- to upper-twenties EBITA. A few made it to the mid-thirties of their total sales. Yet, so many find this hard to believe. Too many believe mid to high teens for EBITA is something to be proud of, but anything more than that cannot be considered. Despite the reluctance of nonbelievers to admit it, the numbers are real.
Those who have above-average profits do conduct their business differently than others. The Drummond Method is based on these high performers’ best-in-class practices. To achieve higher performance, they quietly operate using methods that are not so widely known or embraced. Of course, manufacturing is one key element, but so much money can be lost or unrealized in other areas of their operation. The Drummond Method helps every department work in concert to focus everyone’s attention on improving the bottom line.
The highest performers have very low employee turnover and vacancies. They all know that no matter which department has high employee turnover quality and capacity would suffer severely. Capacity would, of course, suffer severely with too many unfilled positions. Compounded by today’s employment issues, many poor-performing operators consistently have a terrible rate for both the turnover and vacancies, and they think nothing can be done. High employee turnover operations are at about 60% or less efficiency. An example of a terrible turnover rate would be having only 1/3rd of the manufacturing employees possessing three years or more experience. Many things can and should be done, but the reluctant companies will not embrace the necessary corrective measures. In contrast, the highest performers have resolved the employment issues. If your company suffers from high employee turnover and vacancies, you need to recognize that doing what you have always done is not working, and you have to be willing to try new practices.
Pricing methods for the highest performers are closely held secrets that do not rely solely on the margin percentages of sale orders. Believe it or not, the standard method of margin percentage of the sales price, embraced by so many companies, is an unreliable measurement tool for understanding order contribution to profits. (Example: 30% vs 35% margins) This bears repeating in that the expected percentage of gross margin can be deceiving for knowing the true profit potential of any particular order. There is a far better method that is very easy and consistently shows the true profit potential.
Those who exceed best-in-class profits do not rely on Board-Foot (BF) units for their CM operation. There is a far more significant reason they do not rely on BF beyond manufacturing. First, let me repeat a section of last month’s article, “How to Lose Millions of Profits with Linear Saws and Two-Person Crews”:
Figures 1 & 2 – Figure 2 clearly shows the vast discrepancy of using BF/Hour for labor efficiencies. If we used a high BF with low setup order (AG trusses) compared to a low BF with high setup order (Complex hip roof), the numbers would be far worse. I have written numerous articles on this very flawed labor measurement method; see, for example, “The Drummond Short Schedule Time-Standard System” and “Estimating Truss Labor Using Board Footage Versus Proper Man-Minute Time Standards.”
Best-in-class performers know that pricing is the most significant factor for not depending on BF. Think about it for a moment. If BF is unreliable for scheduling capacity, labor efficiencies, and incentive programs for roof truss manufacturing; why would you use it for pricing? Best-in-class performers do not, and neither should your company.
Following almost twenty years of labor time standards development and refinement, the Drummond Method demonstrates there is only one reliable method for proper pricing and scheduling, accurate measurement of manufacturing efficiencies, and implementation of production incentive programs. Only properly developed motion and time standards that estimate man-minutes (MM, RE, or SU time units[SV1] [TD2] ) will be effective for roof truss manufacturing.
So, knowing that these three critical areas for best-in-class employment practices, pricing, and truss labor estimation lead to better profits, what will your CM operation do for 2022?