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Case Study- Enhancing Profitability
This case study is representative of a situation typically found in a job-shop or production environment, and is provided as an example of the impact that we can have on the operations of a business.
The company operated in a custom fabrication environment where raw materials were fabricated into finished product, and sold to both end users (retail customers) and wholesalers. At the outset of the consulting engagement, a few issues were immediately apparent:
- The company was producing $800,000 annually in revenues, and was operating at a loss equivalent to 8% of revenues.
- There was no efficient bidding system in place; the bids produced for work could vary by as much as 30% according to who did the bid.
- There was no effort made to perform a job re-cap at the end of each job, to ensure that the actual financial results on the job matched the financial targets included in the bid price.
- The bid rate (percentage of bids won to total bids) was not being tracked, and it was later discovered to be relatively high.
- The majority of the bids were prepared by company management.
- The concept of pre-engineered profit was non-existent; profit what was left over after both direct and indirect expenses were paid.
We quickly identified the major opportunity for improvement with this company; it was the bidding process. We immediately solidified the process of pricing jobs, and after the appropriate amount of background work was performed, provided a bidding template that included the following features:
- Identifying all direct costs that went into creating the finished product, including: the raw materials needed to produce the product; the cost of the tools required to do the job; the labour needed to create the product; and the cost of the subcontractors.
- Calculating the company’s overhead rate, and ensuring that an appropriate overhead adjustment was made to the bid price for each job that was bid.
- Calculating a breakeven point (a dollar amount) for each job, so that the company management could be more accurately informed when the decisions were being made as to whether or not to lower the bid price to get a job.
- Based on a pre-determined profit target, calculating a selling price that covered all direct and indirect costs and the appropriate level of profit.
In addition, the company was directed to track the number of bids that were submitted. Recall that the existing bid rate was high (close to 90%); this was an indication that the price of bids was too low, and money was being “left on the table”. A bid rate of closer to 70% was achieved, with the company being a lot more selective about the jobs that it accepted.
Inasmuch as the proper bidding of jobs was the most important function to address, an almost equally critical function was the proper post-production re-capping of the job. This was to ensure that the results attained in the execution of the job were consistent with the financial targets on which the bid was based.
A system was created that allowed the company designee to be able to compare the pre-production bids with the post-production financial results, and any deviation from the bid was then addressed by management.
Historically, the most common problem had been cost overruns, due mainly to errors made in the production process. Creating a proper job re-cap system allowed company management to be able to quantify the magnitude of the errors made in the production process, and corrective action was initiated for preventable errors.
The Client Company Today
The end result of the consulting engagement, based on subsequent conversations with company management, is that the company has increased its revenues from $800,000 annually to over $3 million, and the target profit margin of 10% is met consistently each year. This company has now positioned itself to be the premier provider for custom fabrication of its product in its market.
The primary reason for this improvement is that the company owners have been freed from the responsibility of having to be involved in the bidding process, since a lot of the guesswork that the process previously entailed has been replaced by an efficient bidding system.
This has freed the owners to be able to take a more active role in business development. They are now more secure in the knowledge that the internal processes that were instituted as part of the consulting engagement will ensure that the company will be successful in both the bidding and production processes.