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Consulting Services
Three Elements of Profit
Lane Parks of Dick's Rancho Glass in Fair Oaks California has just received the bad news from her install employee. The employee has to go back out a second time to a job that was scheduled to only take two hours. Parks knows that this will mean a loss on the job. Going through her mind are how did this happen, who estimated the job, and how can she prevent this the next time. Now she wants to know how much she lost.
What Parks has learned through her days in the glass industry is that time is money. Parks focuses on three elements in her business, and she does not even know it. Specific actions in the retail glass industry will affect three elements of profit. Lane Parks and other glass shop owners introduced me to what I will call the "Three Elements of Profit." This all came out of observing what owners and employees are doing in a glass shop.
Material Profit
Determining the cost of any piece of material is at the basis of producing a profit.
This should be the easiest elements but in the glass industry it is not. Receiving glass for the lowest cost is not always a sure way to profit. Being focused on reliable, consistent and accurate pricing, and product, from your vendor will always be less expensive in the long run.
Ford Motor Company is a shining star when it comes to focusing on material profit. Ford revolutionized the production line so they could develop reliable, efficient automobiles, starting in 1903. But Ford was one of the best companies at the time to focus on material costs, and ways to control material costs. Today, Ford has an extensive cost accounting department to manage their material handling. For Ford to select a vendor they must be a reliable, consistent and accurate and price competitive in product before they select a supplier. Managing material costs is vital to Ford.
The simple way to determine if you are making a material profit is to review the "estimated" cost verses the "actual" cost of any material item. Estimated cost has several components to it. What did your estimator determine the cost for the Quote? What number did he receive from the fabricator? What was the anticipated markup (60% or 20%) from the fabricator? Then, find the actual invoice from you fabricator and determine the actual cost. This comparison will determine the dollar profit, the markup and any variation from your vendor.
Did your estimator estimate the correct cost? Did you achieve the expected profit on the material? These are key questions to determining your profit. You are performing this task to determine what went right and what needs to be corrected to consistently and reliably achieve the same profit on every glass item you purchase (some retail glass shops will tell me that they do not need to do this because they roll the material cost into the "whole job," including labor. This is another topic to be addressed some other time).
Now put this process into your daily activity for all your orders. Performing this task will determine your reliable vendors, consistent estimators and assure that you are making a profit on your largest material item, your glass. You are also looking for exceptions to manage those issues. The best way to perform this task is with a computer system that can easily perform the calculations for you.
Labor Profit
Evaluating the profit, in both dollars and margin is important to determining the value of your company. It is not a simple matter of charging more for your labor but determining how to charge.
The glass industry charges many different labor rates. Charging by the job, hourly rate, distance rate or difficulty or job are some of the charges and are all acceptable routines for charging labor. If you employ all of them and have a structure to do so then you could be ahead of the game. But make sure that you are evaluating your charges to control your labor profit.
What does your labor cost? Sure you pay the employee $30.00 an hour (for this example lets use $30.00). Make sure that you add in the "cost burden" to the hourly rate. The "burden" is all the other costs related to the hour. Do you pay insurance? Do you offer estimates for free? And do you supply a truck, tools and drive time to a job? Do you pay health insurance for the employee? All these additional costs, and more, should be added to the $30.00 rate to determine your labor costs. Now subtract that from your labor rate and your profit is what is left. Determining what your margin, or profit percentage, on a given job will determine what your mark up is for labor.
Costs go up and your labor rate should reflect the increase in labor costs.
Job Completion Success
On each job you want to determine if your estimators are assigning the proper number of hours to a job. One way to determine the job success rate is to compare the workers hours put in on a job and the estimated time, by the estimator, to complete the job. Do they match? Is it taking workers longer to complete most jobs or less time? Is travel time affecting the bids?
Taking the time to step back and review the work completed will tell you a story about your company and your employees. Reviewing jobs that go well is just as important to understand, if not more, that what went wrong with a job. If employees are doing a good job in "meeting estimate expectations" tell them about the success. Reviewing the job with the estimator will show that you take an interest in his success.
Evaluating the estimated labor and the actual labor on a job should be completed on every job. Over time, estimators need to know how to adjust their hours assigned to a job. Determining workers success rate needs to be compared to other workers and to completion rate and time. Reviewing every job will determine if your company is meeting the profit targets (Profit targets will be discussed in a future article).
What did Parks understand when her employee said that he would have a call-back in the morning? She reviewed the order to determine how the profit on labor would be affected and how that would affect the overall profit on the job. Parks knows that for every one hour call-back she receives that her company will be affect for two hours. The hour that is lost going back out to the job is money down the drain. What Parks also knows is that the hour is also a loss of future revenue on a new job. Two hours lost.
Summary
Focusing on the three elements of profit will improve your profits, workflow and employee moral. Determining the correct material cost, labor cost and job completion success will improve your success in bottom-line numbers. The indirect affect from focusing on these three elements will improve the health of your business, employee moral and job satisfaction.
Computer systems present you with the data needed to evaluate the Three Elements of Profit for you from the data collected on your jobs.
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