How Much Money Is Your Operation Losing You?
From 2001 to 2007 cabinet dealers prospered if they could add capacity quickly enough to meet builder’s growing demand. Today, however, home construction is down and new home builders are buying less and demanding more from their cabinet dealers. This business environment hurts a cabinet dealer’s profits and leaves them looking for ways to improve their cash flow. Dealers cannot look to sales growth to solve their challenges – they must become more efficient.
Many cabinet dealers created a patchwork of business processes during the boom times to meet demand. These ways of doing business were fine when sales were growing and service requirements were low.
However, the labor and errors associated with these business processes are unprofitable when sales dip. Cabinet dealers now need to look inward to find ways to reduce labor and increase quality by streamlining their work. Re-designing inefficient processes will improve cabinet dealer’s profitability and help them weather these tougher times.
Based on over 100 collective years of industry experience, the team at CompanionCabinet created a simple efficiency test that can be completed in less than 5 minutes. It has proven to be an accurate test and follows a very simple concept:
A completed job file contains artifacts from all the business processes that existed at the time the job was completed. Like a fossil record, job files tell the entire history of a dealership and the challenges it faced over the years. They also tell us where lost profits can be recaptured.
A streamlined job file should contain no more than 6 different types of documents that are used to manage the delivery of a job. However, most job files contain 21 or more types of documents. These extra documents provide clues to where inefficiencies exist. To evaluate your operation, pick a normal job file from your archives and use it to answer True or False to the following questions:
- The job file only contains the following: kitchen layout, perspectives, a signed quote, purchase orders, a job information sheet, a credit agreement (optional), and manufacturer acknowledgements.
- There are no calculations performed by hand on any documents.
- No copies of the job file’s content are being made for other employees, divisions or departments.
- The documents in the file are never checked by more than one person for accuracy.
- The information contained in the job file is incredibly easy for anyone to find when a customer calls.
- If this job has a warranty call in 8 months, the job file and all the details of the job can be located in less than 5 minutes.
- All items in the job file were ordered with normal lead times (i.e. not rushed).
- Pricing for the estimate did not rely on pricing produced by design software.
- All the parts and work for the completed job were accounted for in the original estimate.
- The quote information is never re-keyed onto a sales order, purchase order or into the accounting system.
- All job file information is accessible on demand by management in a summary format which does not require manual effort to compile.
- If the job folder is lost, it can be reproduced in its entirety in less than 5 minutes.
Give your team 1 point for each “true” answer. A score of 12 is perfect, 11 is tolerable. If you scored an 11 or 12: congratulations – you have a very efficient business. Your profit margins and customer satisfaction ratings are likely among the highest 2% in the industry.
A score lower than 11 means you have opportunities to find lost profit. The truth is most cabinet operations (big and small) are running with a score of 2 or 3 and they need serious help. As high as seventy-five percent of the jobs that run through their facility do not contribute to the overall health of their business.
Typical Problem Area
Scores lower than 11 also mean that dealers can improve their operations and stem the loss of profits if they invest in automation. If dealers automate at the right level for their size, they can recapture significant amounts of profit.
Most efficiency problems can be solved using a few key principles. Below are three that are relevant to the cabinet industry:
- Type once – use often - The process of typing information into a computer is time consuming and error prone. A busy operator will transpose, omit or erroneously enter information into the computer 10% of the time. Each mistake, on average, costs $150 to correct. In many companies information from the design software must be re-typed into a quote, re-typed into accounting software and re-typed into manufacturer’s ordering systems. This creates three or more labor intensive and error prone activities that add little value. For a company to be efficient, it must look for ways to create information in the computer once and then electronically transfer the information into other software applications.
- Reduce error opportunities – Mistakes in the cabinet business are costly. For instance, forgetting to order a part creates a crisis that drives up costs five ways. 1) People have to drop everything and address the problem, 2) express shipping cost are paid to get missing parts quickly, 3) additional costs are incurred by repeated jobsite visits 4) product costs for the job are higher than expected because needed parts were not factored into the original quote and 5) the cost of customer frustration. Cabinet dealers must review their business processes and reduce the number of situations where errors can easily be made.
- One source – Many operations become inefficient because they have many people depending on the same information to make decisions but the information is dynamic and stored in different locations at a cabinet dealership. For instance, sales, purchasing, delivery and installation people need to be updated on a customers’ order status and they often maintain separate job files. Inefficiency and errors occur when the information changes. It requires tremendous effort to keep all the different repositories of information consistent. If the information is not updated, people either make incorrect decisions based on outdated information or they spend too much time tracking down the correct information.
Where to Start
Most efficiency challenges are found in four areas and appear after you have 3 or more salespeople. They are:
- Quoting Challenge – The design software is being used as a quoting tool rather than as an instrument for creating a quality kitchen layout. Design software can serve as an effective quoting engine when sales volumes are low but is inefficient and error prone when sales volumes are high. Re-doing a design from scratch in order to get a revised quote is too time consuming and requires too many revisions in higher sales volume operations.
- Purchasing Challenge – When sales volumes are low, salespeople can do the purchasing for their jobs; however, when sales volume grows a central purchasing function is more efficient. The transition to centralized purchasing is difficult. It often creates a need to fill out and fax sales orders to the purchasing department, who then reformats the sales orders into multiple purchase orders that are faxed to vendors. This paper based process is often more efficient but error prone.
- Installation Challenge – As sales grow larger the sales person finds it difficult to work with new prospects as they coordinate the installation of jobs they have already sold. Paperwork is often created to help the salespeople distance themselves from installation. However, the paperwork often contains product, delivery date and installation information that changes. Challenges occur as sales, purchasing and installation people try to send a consistent message to customers based on the inconsistently updated information they keep at their desks.
- Control Challenge– a cabinet dealer generally spends significant amounts of time pulling information from paper files or Excel spreadsheets and compiling them into management reports. Management will often do without reports such as profitability by supplier or customer because they are too time consuming to create.
Common Strategies for Improving Efficiency
There is no one type of solution that is a panacea for every cabinet dealer’s efficiency challenges. There are three classes of solutions that can be mixed and matched to meet the unique needs of a particular cabinet dealer. The classes are:
The volume of kitchens sold annually by the dealer is the key indicator of what class of automation solutions they should consider. When trying to evaluate potential efficiency solutions owners should start by reviewing the following automation guidelines:
Other Factors to Consider
Owners and executive teams should consider benefits over a 3 to 5 year time horizon. They also need to look at these key factors when considering an automation strategy:
- Volume – Usually at least 3 salespeople/designers are required for process automation to be justified.
- Type of work – If the dealer is focused on builders and is “re-tooling” for more retail, the retail paperwork requirements for each job may be significantly more challenging to manage and control.
- Error Frequency & Cost - A $10M operation (average sale of $5K) with 20% of its jobs each containing a $300 paperwork or pricing error can add $120K+ back to its operations each year ($360K over 3 years) by investing in process automation.
- Labor Reduction - The cabinet business is the business of paperwork, headaches and bloated staff to help manage it all. A cabinet dealer with 5 sales people who each spend 20% of their time purchasing can essentially add one full-time sales person by offloading the purchasing work to a centralized purchasing agent.
- Customer Service– If a $10M dealer loses 5% of their customers each year from poor service, process automation can add $50K+ per year back to the bottom line by giving the dealer the capability to better serve the customer ($150K over 3 years).
- Reporting – Automation usually means much easier reporting. Many dealers fail to understand how much manpower they are spending to compile their management reports. Eliminating this effort and having better information can easily add $25K to $50K to the bottom line ($75K to $150K over 3 years).
- Commissions – Most dealers don’t have the automation to track true gross profit by job. This means they are most likely overpaying commissions. If a $10M operation makes no money on 5% of its jobs each year, but still pays a 5% commission, they can easily recapture an extra $25K+ each year ($75K over 3 years) by implementing process automation with good job gross profit tracking features.
- Sales – If a dealer can quote more efficiently they can win more work. If an $10M dealer has 8 sales reps and they each can increase sales 25%, they can easily add $200K – $300K in net profit (cash) to the operations each year ($600K - $900K over 3 years).
Dealers should expect to receive a 300% - 400% (or more) return on their automation investments. Dealers should concentrate on solutions which put cash back into their operations quickly. Otherwise, it may not be the right time to automate. For example, a dealer willing to spend $75K to implement specialized software for process automation should expect a $225K to $300K return on their investment within 3 years.
The current business environment encourages cabinet dealers to review their operations in search of greater efficiency. A review of paper job files can help managers and owners of cabinet dealerships gauge efficiency or inefficiency of their business
Efficiency can sometimes be gained by using paper, but most likely from point automation or process automation strategies. The volume of transactions, quantity of mistakes, cost of those mistakes, quantity of re-typing and a “hassle factor” should be considered before investing in any efficiency enhancing solution. There are rough guidelines that can be uses for determining which efficiency solution is right for a given situation.
Appendix – Brent’s Test (Questions and Answers)
1. Why is getting the job file down to a kitchen layout, perspectives, a signed quote, purchase orders, a job information sheet, a credit agreement (optional), and manufacturer acknowledgements so important?
Whether you sell to builders or remodel clients, your job folder probably has some extra stuff in it. We’re all pack rats in the end, and I’ve seen job folders in excess of 100 pages for retail jobs. I always tell everyone that paper in a job file is similar to carrying a cabinet in inventory.
Whenever you see inventory anywhere in your warehouse, you imagine it as stacks of dollar bills. Because it really is costing you money to sit there.
It’s the same with your job folder. Each piece of paper costs you at least $5 to create. The $5 is someone’s time, energy and effort to create it, track it, correct it, report on it, change it and retype it on some other piece of paper or system elsewhere in your dealership. Removing paper saves you money – period. Now count up the number of pieces of paper in the job file, multiply by $5, then multiply the number again by the quantity of jobs you did last year. That’s what you paid for all that paper. If you’re feeling sick to your stomach, it’s time to check out some automated solutions.
2. Why are manual calculations a problem?
A calculation of anything by hand means mistakes. And even if you triple check it, it will still have mistakes plus your labor cost of triple checking it. You simply cannot have perfect math with hand calculations. The only thing you can count on is that a mistake will eventually cost you lost profits.
My Dad used to tell me he was the only person who could do a quote right 100% of the time – then I looked at his job folders. That’s when I realized the only way to be right 100% of the time is with a computer.
3. Why is multiple copies of a job file’s contents a challenge?
I was at a dealership once where they had one copy of the job folder for the salesperson, one copy for the office, one copy for purchasing and yet another copy in the warehouse. That’s 4 complete copies of the job folder. There was this poor lady at the copy machine and all she did most of her day was make copies. The real horror of the situation was that in every job we looked through, there were inconsistencies between each person’s job folder. Someone changed a date and sales didn’t know about it, sales made a last minute change and purchasing didn’t know about it; it went on and on. You get the picture – if companies need to make copies of their job folder for others, it costs a lot of time, money and confusion so it’s time to invest in some automation.
Trust me, it will be less expensive.
4. Isn’t it “Best Practice” to quality-check your documents several times with several people?
I read a weight loss study once where overweight individuals were given access to snacks between meals. When they were asked afterwards about what they ate that day, an overwhelming majority of them had no recollection of the snacks. It was almost as if the snack itself was so small in comparison to the meal that it didn’t even register.
I think of this when owners tell me they have some of the lowest error rates in the industry, and no real automated system.
Of course they are double and triple checking their employee’s work late into the evening or on weekends. Yet when I ask them about the time they or their employees spend on this effort, they seem to think it doesn’t cost them anything. They have some of the lowest error rates in the industry, but they set the record for the highest labor required to process a job. The opportunity cost of time spent selling versus checking paperwork is off the charts!
What if that time could have brought in another sale?
5. Isn’t it enough that only the salesperson knows how to find the job file?
If you have to tell a customer that you’ll call him back because mentally you’re thinking you have to call the sales rep on that job (who is on vacation) so he can get into his trunk to look through his job folder just so you can answer an inquiry, you have big issues. The worst part about this issue is no one really sees it from your customer’s eyes. Customers really don’t appreciate asking questions about their job and having to wait. Most of them just promise themselves to never do business with you again.
6. What is so important about being able to find old job files quickly?
This is more of an archiving question than a job in process question like above. I visited a large operation once where the third floor was called the “Hall of Shadows” because the height of the stacks of paper would cast creepy shadows across the floor. No one liked the Hall of Shadows because you could never find anything – it was a literal graveyard of older job records. Customer service would joke around that you would be lucky if you could find your job in 2-4 hours – most of the time you wouldn’t find it at all. Now imagine the cost of all of those people’s time and the number of customers who never received an accurate answer when they called in…
7. Why are rush orders considered a problem?
I remember when I worked at Ernst & Young and FedEx was a thing of convenience. Why mail it when you can just FedEx it? I remember one guy even used FedEx to mail his grandmother a birthday card. It was all so much fun until the partner told us that in one month we had amassed over $8,100 in FedEx fees. I think back to that time and imagine how the partner must have felt. Most of the time owners find out after the fact that the job didn’t make money. Rush orders are black holes that suck the profits out of jobs quickly. If your job folder has a lot of items rushed, you have big challenges – probably in estimating or purchasing . And if your rush orders have a consistency or a pattern to them, you have even larger problems which need to be addressed immediately. Before you add yet another body to double check for problems, take a step back and start automating.
8. What’s the problem with pricing from design software?
I talked with an owner of a $10M operation who didn’t want to invest in automation because he thought design software was more than adequate for pricing. Then in the last 6 months of the year, he realized the cash in the bank was much lower than it should be. After digging into the details he realized that the salespeople were too busy and didn’t install the latest design catalogs on their PC’s like they were told to. His sales staff was quoting 17% below margins for a full 6 months before he noticed he was losing money fast.
If you have around 3 or more salespeople, you need to seriously consider centralizing all the catalogs, pricing and costing in a single system that all salespeople can use easily. Once you do that, you will also save your salespeople tons of time during the revision process with customers. That’s because salespeople can use a central quoting database to crank out options quickly instead of spending hours going back to design just to get an updated price for cabinets.
9. Why is the estimated cost of a job so important?
The original estimate contains your estimated profit which you should compare to your actual profit on that job in your accounting system (if your accounting system knows the concept of a job, that is). If the actual cost on the job is higher than the original estimate’s cost, you have eroding profits and you need to know why. If you don’t have access to this information for every job, you’re flying by the seat of your pants.
10. Why is re-keying data so bad?
Rekeying is probably one of the most common causes for lost profits on a job. It’s like doing math by hand, at some point you can count on the fact that someone will make a mistake which costs money. Some dealerships only key summary information into their accounting systems. But then when I look at the paperwork they use for shipping and receiving, I realize they just spend a lot of money creating shipping paperwork because their accounting system lacks the detailed items needed to print receiving documents and pick tickets automatically.
11. Why is it so hard to create meaningful management reports?
If you keep all your business information on paper and store it in a physical job files (or imaging systems) – all kinds of important business information gets buried. A backlog of quotes, open orders, gross profit by salesperson, customer and manufacturer performance are all reports cabinet dealers need but don’t produce because they are too time consuming to create.
12. How could you ever reproduce a job file in only 5 minutes?
Everyone thinks I’m talking science fiction here. Seriously though – 5 minutes or less. It can be done, dealers are doing it as we speak and saving themselves countless hours and hassles. And this does not mean that you have to scan every single document because that is just way too much work, wouldn’t you agree?
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