What was widely expected has finally happened. Years of very profitable high sales led to vast increases in capacity to meet that demand, but now we have declining sales volume—the classic too much supply versus not enough demand to maintain margins. Some like to call this margin compression, while others see it as lowering prices to keep paying the bills. Suddenly, what was considered safe or reliable customers are now offered attractive quotes from your competitors. As a component manufacturer (CM), how can you effectively counter margin compression while maintaining profits? Besides the constant battle of lowering manufacturing costs, there is one major thing your company may do to combat this never-ending struggle. Those who have done this have been very successful (though they prefer to remain quiet about it).
“If you change the way you look at things, the things you look at change.” — Wayne Dyer
Product Material is Irrelevant, and Time is Far More Important — This may shock many, but when you sell roof/floor trusses, you are not selling lumber units. You are selling products that happen to be made with lumber and truss plates. If it were cheaper, faster, and comparable material, would anyone care if they were made of other materials? Think about all the time and effort needed for communicating information, engineering designs, processing purchase orders, manufacturing, and delivery. There are a whole lot of steps involved in the entire process. One overriding common element is time. When orders are processed, everyone consumes the resources of your operation by varying degrees of time. Regardless of size or automation, every CM only has a limited number of hours in a day to process all the orders, and all have limitations. Knowing that time is the crucial element, not material, is vital to improving margins.
Renting the Manufacturing Table Time to Each Customer — For over twenty years of providing my services, I have claimed that every CM should be comparing the cost markup pricing method versus a margin based on work minutes (Man-minutes, R.E. or S.U.). Every single client who started using the work minutes per margin dollar method has improved their net profits. Let me repeat this to you. Every single client improved their net earnings by using a pricing method of establishing their margin based on work minutes, which is calculated time, and comparing this to the cost markup pricing methods. To understand why margin per work hour is so effective, all you need to think about is each time an order is being processed, you are renting the table time to the customer.
Board Foot Pricing is Highly Flawed for Roof Trusses and Should Not Be Used — A margin per work minute time is not the same as any Board Foot (BF) pricing calculation, which is a highly flawed pricing method for roof trusses. BF truss pricing falls apart when you compare roof truss orders with larger material chord orders versus smaller chord orders, such as 2x4 vs. 2x8, or orders with long runs versus many setups, such as common runs versus hip roofs. With BF pricing, you must constantly mentally adjust to account for all varying discrepancies. If you have correctly developed work minutes into the truss program, no matter the setups or lumber size, the time needed to complete the order is calculated. Again, BF is NOT the same as work minute calculations for roof trusses.
Lumber Prices Do Not Matter — When a CM starts using the margin per work minute pricing method, how much the lumber pricing fluctuates is irrelevant. The processing time does not fluctuate based on the cost of lumber, so why should the shop’s baseline margin dollars per hour fluctuate? Each CM should establish a margin per hour baseline rate for the roof truss tables to charge their customers. They then add the margin per hour estimate to the material and labor cost to establish the sales price, which is all done with the plate vendor software reports. The same pricing report compares the margin per hour costs to the traditional cost markup methods to see if it is above, at, or below the margin per hour baseline. Establish the minimum margin rate per hour and watch how much more your operations produce in margin dollars per any given time period. This method will weed out poor margin-per-hour orders while improving orders that produce at a much higher rate per hour. You can expand this same method to know your actual profits daily because the margin per work hour is correctly calculated on every order when properly functioning. Why wait until the month’s or quarter’s end to know your net profits?
More information may be found in these past articles:
To enhance your communications and reduce errors, please see last month’s article, Maintaining Successful Project Management Communications.
If your location is using Eagle Metal software, ask them about using TDC roof and floor truss time standards. TDC and Eagle have an agreement for this service. Then, start using properly developed work minutes for your pricing, scheduling, and shop efficiencies.
The TDC team is your best source for learning about proven and practical lean manufacturing best practices combined with industrial engineering principles to keep your company at the leading edge of competitiveness. No one is better at providing your team with proven results for good employee practices, pricing, truss labor estimation, and so many other best-in-class practices. TDC’s tailored solutions are for the client’s specific needs. Go beyond the typical software and equipment vendor recommendations for your operations and do what many have dared to do. Embrace the Drummond Method, and your company can experience cost savings and net profit gains that usually take months or years. These gains can be accomplished in weeks or months, resulting in an average of 3 to 6 point net profit gains for CMs. All areas are addressed, not just manufacturing. Please do not take my word about TDC’s services, though. Read the public testimonials many current and past clients with decades of expertise and experience have been willing to give: https://todd-drummond.com/testimonials/
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