CM Perspective: Getting Your Hands Dirty to Understand Your Costs (Part 2)

Last month in my CM Perspective article I discussed the importance of understanding costs for component manufacturers (CMs). This month I want to discuss costs in a little more depth. When we revisited our P&L Statement we wanted to make sure that our numbers matched what was coming out on the P&L. We have always been in control of our pricing model and have never relied on suppliers to set it up. It’s not that they don’t understand our product, they just don’t understand our individual operation. We’ve also used man-minutes for our production department for as long as I can remember. I used to calculate schedule units by hand on each build ticket that came back to production! But it’s one thing to have data and another to use the data correctly. That’s why it is so important  to make sure that your numbers agree with your P&L. We now do a random spot check each month to verify that information. Whether you are using board footage or man-minutes or some combination, it’s essential to capture data correctly and apply real numbers to confirm. 

Next, we made sure that our overhead was properly captured in our costing. I’ve heard from so many people in manufacturing that they keep certain purchases and expenses out of the equation. I simply don’t agree with that methodology. I firmly believe that if you spend it in the company, it should be in your expenses. I look at our business as if it was my own personal bank account. The objective is to make sure more money is coming in than is going out, right? Well, unless you understand what is going out, you probably won’t have an accurate picture of what’s left over! And lastly, our determination to keep our business virtually debt free was a big part of being able to grind it out during the downturn. It’s extremely easy for us as CMs to get caught up in the “who’s the biggest” or “who’s got the best or most plants” mentality when financing is cheap. My advice is to make sure that you can buy the equipment that you need and handle the debt load if your revenue was to fall 50 percent. Some of us during the downturn saw a reduction closer to 75 percent. You never know what’s coming around the corner, so if you’re in it for the long haul, make sure that you have what you need without betting the entire farm.

When I occasionally see CMs pricing jobs well below the field, I realize they very well could have busted the proposal. I’ve done it and I’m sure you have as well. Perhaps they missed a building or left off the girder trusses. Those times are few and far between. It’s when I hear about CMs who consistently price far below anyone else to fill their plants with work that I get a little concerned. Some have made comments that it’s okay because they will go out of business soon. My thoughts are entirely different. I love what we do and am very passionate about this industry. I think we should always strive to present ourselves to the marketplace as an industry that has great value. I mean, come on! Look at how much work goes into our bids and the amount of money we spend in sales, design and engineering. And how about the hundreds of thousands of dollars our equipment costs, not to mention the costs of having the very best people that we can find? After you factor all of this in, why would we give our product away? Our products are the backbone of the building! 

My good friend Joe Hikel does an excellent seminar on knowing and understanding your costs when pricing. And there are many on our board and executive committee that are great sources of information on this topic. So, if you’ve been thinking that you want to know more about understanding your costs and changing the way you look at your business, please reach out for help. In no way does asking for help mean that you, as a leader or owner of your organization, are weak or ignorant. It means that you still have a passion to grow and a heart for success. I was searching for answers constantly during one of the darkest times in our business and found the secret lying in our association the whole time. I can’t tell you enough how grateful I am for the relationships that are made attending SBCA Open Quarterly Meetings (OQM) and BCMC. These events are truly some of the greatest resources that we have as an industry.