As a business owner this question is a mainstay in the back of your mind. We will be doing a couple of articles dedicated to shining some light on what should be an endless pursuit of refining business processes towards this goal.
Suppose we have two residential cabinetry companies: Company A and Company B. Both companies are in similar socioeconomic locations, are the same size, and have the same capacities. They both have an identical job, with identical revenue, but Company A has a 33% profit margin on the job whereas Company B has an 18% margin. Since both companies are nearly identical, why the disparity?We can safely assume that there is not much variation in the materials expense. Naturally our first suspect is labor cost – and rightfully so. For manufacturing businesses, direct labor is commonly the most dominant variable cost associated with overall production cost. With just the information we have on hand it is almost impossible to discern what exactly happened in this instance, we can only speculate. In order to get to the root of this issue, we have to have more data.Both companies track time. If neither company tracked time, or tracked time to a specific Job we wouldn’t be any better off understanding what happened. So for this example we will assume they track time towards jobs. Company A uses time tracking software that allows for quick and accurate clock-ins to different jobs and activities (i.e. cutting, sanding, edge-banding). Company B uses a notepad that is filled out at the end of the day by each employee. This notepad is then reviewed by the supervisor on a weekly basis and entered into an excel spreadsheet, which in turn is sent to payroll to be reentered into the accounting software. Lets put a pin in that and get back to it later.Both companies finish the job by the due date. Suppose both companies even have the same amount of labor hours attributed to the job. However, Company B experienced a clerical error when ordering materials for the job. This could be several things, perhaps the inventory count on hand was inaccurate causing a shortage. The lead time could have been missed – the materials needed were not ordered on time, or the wrong material was ordered. Any of these instances would cause the correct order to be rushed at a surcharge. Because of the delay – overtime might be required to finish the job by the expected completion date, and lastly, if the completion date is missed, then you have bad PR. All of these negatively affect your company; either monetarily or your reputation.Another factor to consider is the back-office efficiency – how effective they are with the time that they have. The life of a job spans from pre-sale activity to post completion invoicing and time involved gathering data together for analytics. When looking for ways to increase our profit margin, if we focus solely on the production side we will miss some rather large contributing factors. Remember Company B’s method for time tracking? It is inefficient and prone to error. Maybe you use this method at your office – and it works well for you. You have highly capable staff and a system of checks that reduces your error margin to as close to zero as you can expect. I can cut a 45 degree angle with a miter box and a handsaw, but why would I do that when I have access to miter saw? Its not a matter of just having the tool, it is a matter of having the best tool.Because of Company B’s methods they have to have at least one, if not two additional indirect labor employees to handle the workload. They are great employees and capable, but this drives the company’s overhead rate higher, which negatively impacts their profit margin when bidding competitively with Company A that has the lower overhead rate. To even calculate the running overhead for a job would be a hassle for Company B.We all know the old adage “Measure twice, cut once,” but Peter Drucker, the founder of modern management says “You can’t manage what you can’t measure.” In order to improve your profitability, you need to be able to see where your bottle necks are. Some of them may be obvious, like Company B’s antiquated time tracking method. Others may not be so obvious: that it takes Joe in your shop longer to complete a particular task than it takes Ron. We have the best tools available to you to help you identify and measure your profitability, or, lack thereof. We have the best tools that can reduce the time it takes to perform the multiple back office functions that can bog down your company. We have the best tools to bridge islands of information and reduce double entry. Let us show you how to use these tools to make your business more profitable.