Those of us who have been around this industry long enough have a general feeling of cautious optimism. We have all been through the economic ups and downs, the building cycles, and all the rest. We have sat listening to economists at BCMC every year. We have read so many detailed articles over the years that tell us to watch this indicator or that indicator. I recently noticed that many of the articles are, while written by different authors, very much the same as those published after the last downturn.
So, I’m here to tell you that the best thing most younger people can do is listen to those who have been through it before. And, you old timers, listen to your gut. You know what it looked like and what it felt like the last time. It feels to me like opportunity is approaching. I don’t know for how long or if there will be another protracted economic slide, but I do recognize the feeling that there is an opportunity for everyone right now. We should be taking advantage of it.
It seems, that after every downturn, some interesting things happen. The fear that we are still not out of the woods lingers longer than it needs to. As an industry of risk takers, we should start moving the needle as soon as possible. Next, we usually have a large group of manufacturers who are willing to sacrifice profit because they haven’t been busy in a long time and have this overwhelming need to fill the schedule even though the jobs are barely profitable. They consume capacity and make it challenging for everyone. Then builders, knowing there are some manufacturers still taking on low margin work, try to push the market even lower.
None of this is good for our industry. I was recently at the SBCA quarterly meeting in Providence, RI. Don’t ask me why Providence. That is a whole other rant and will fall into the category with BCMC locations. But, during the course of the meetings, I had the opportunity to speak with several manufacturers while enjoying a beverage or two. Not remarkably, each said they were slammed with business. They were working like crazy to get jobs built and shipped. I asked about profit margin and they all said the same thing – it is too low. I told them that only they can control it. They gave me a variety of reasons why that is not the case. Some other supplier is low-balling the market, the customers are forcing them to reduce prices, or they’re trying to equalize production week over week and labor is eroding margin. I heard a lot of stories, but my supposition is still correct. Only they can control the market. There comes a point when the guy undercutting prices is at maximum capacity, thus allowing prices to rise. Lead time is and has always been the great equalizer. The customer loses profit if they can’t get the product within the construction schedule. Being able to deliver product when the customer needs it has value. I have watched for years as a friend of mine has used lead time to improve margin. When his customers call and say company X has a lower price, he tells them they should buy the product there. Then the customer says they can’t get the product delivered for six weeks. My friend tells them he can deliver in one week, but the price is what was quoted. He has built a solid business based on meeting customer needs, but at a price that values service and lead time. That is opportunity realized.
When builders try to push prices lower, manufacturers must ask themselves the question how badly they want the work. Being busy and not making profit is a sure recipe for long term financial ruin. A manufacturer must know his costs and must price products taking into account all of the costs associated with producing the product as well as profit. There are a number of things to consider besides material and labor. How about taxes, insurance, equipment maintenance, fixed and variable expenses? All of these considerations must be a part of job costing. Yes, some manufacturers have little or no debt service. That allows them to have a slightly lower overhead cost. Still, you want to make sure you aren’t undercutting the value of your product.
The key question has always been knowing what the market will bear. This can be the most challenging part of any business. My advice is: know your costs, all of the costs. Identify your profit expectation and price accordingly. Test the market. Make sure you aren’t leaving profit on the table. Lastly, periodically check your labor formulas, especially after adding equipment, improving equipment, or modifying a process. Labor is something component manufacturers can control. Make sure you are updating regularly. I spoke with another friend about labor and he said they are looking for some help updating their system. He said it was correct ten years ago, but they had never updated the labor factors. They just keep adding arbitrary modifiers that they think are correct. The only way to know your true costs is to examine them regularly.
Be ready for those opportunities. Examine your business and make opportunities work for you!