The brief: The owner had been in business for nearly 20 years and profitability had been declining year on year. The brief was to figure out why and to find out ways in which profitability could be improved. The solution was to analyse the current costing process looking at margins and changeout rates. The business had lost over $160,000 in the first 6 months of the year and wasn’t improving.
It soon became clear that
- Pricing estimates were being adjusted by the sales rep as a tool to close business.
- the costing system wasn’t well maintained with raw substrate material increases in many cases not being passed on to clients, which eroded profit margins.
- changeout rates for production weren’t being recorded on job estimates accurately with labour cost increases not being updated in the costing system, nor were they monitored against actuals. this meant the cost of both labour and machine time was flawed from the start of jobs.
- reworks rates were unacceptably high. This was due to insufficient training of new applicators.
- Comparing jobs for several randomly selected clients year of year, it was discovered that for the same or similar job (regardless of an average annual increase in raw material and labour costs) was reducing in client invoiced cost by up to 5% per annum in some cases. This against a backdrop of increasing production and labour costs.
- It was also discovered that some repeat clients hadn’t had a price increase in over 8 years on regular baseline jobs, notwithstanding increasing materials and labour costs over the same period.
The solution resulted in several important changes, some immediate to attempt to drive profit into the business quickly. These included
- Raw material costs and labour costs were updated and applied immediately to all new jobs.
- All key clients who hadn’t received an increase for several years were contacted and advised of changes that were coming to pricing. Several looked at competitor pricing, but on 2 from circa 80 regular clients actually moved.
- The costing system was overhauled and updated with direct responsibility for its updating and checking being clearly assigned within the business. Reviews were monthly by the accounts person with sign-off by the owner on a monthly basis.
- A new experienced factory foreman was employed to manage production and ensure that induction and training of new staff was maintained.
- Rework targets were set on a week to week and month to month basis with a small accumulative incentive being put in place to reduce the occurrence of reworks.
- Minimum margins per job were put in place when price estimates were provided and the sales rep was provided with a clear set of KPI expectations which included a small total sales over budget incentive each month. the incentive was higher for new customers in the first year to try to drive new business and not just sales from existing clients.
Over the remaining 6 months of the year we returned the company to breakeven by improving overall margins on all jobs and reducing reworks through training and supervision. The next year the company made just under $350,000 with increasing margins and an expanding client base.