Random Rosenisms

GET YOUR ESTIMATORS TO STOP PROTECTING THEMSELVES!

We can almost guarantee that many of your quotes are too high. Why? It's not because you've decided to raise prices. It's because your estimators think they're protecting themselves (and the plant) by building a cost cushion on the jobs they’re quoting – especially large or complicated jobs.

Why are they doing it? One reason is that most estimators are risk-averse, and some jobs make them nervous. Another reason is that estimators only hear about their estimates when there's a cost overrun on a tricky job. So if they always get whacked on the left side of the head, isn’t it normal for them to begin leaning just a little bit to the right?

The cushion may not hurt you on some jobs, but we can promise that you're accidentally losing some really competitive jobs that you should be winning.

When your estimators play it safe to protect themselves, they're not protecting the company. Quite the opposite, they're costing you the opportunity to win some jobs that you should be getting. Yes, your cost sheets might look pretty good, because it's hard to lose money on jobs you don't get. But more to the point, it's impossible to make money on a job you don't get.

Yes, the estimators won't get beaten up over cost overruns on those jobs you haven't gotten, but your plant won’t be as busy as it should be, and your income statement will show a big hole...

The cure is simple: convince your estimators not to play it safe. Set a clear standard for them to follow:

• Figure out the most likely costs to produce the job. Play it right down the middle: no cushions and no playing it safe.

• You figure the costs, we’ll figure the price.

Then you have to act as if you believe what you said, and stop beating up your estimators over cost variations on individual jobs. Twenty years of experience has shown us that if you continue to beat them up, they’ll go right back to protecting themselves and hurting you.

No matter how good your cost sheets look, they’re a poor predictor of financial results.

Yes, if you sell only high-priced jobs, each of your cost sheets will look beautiful, but you probably won’t have enough jobs to cover your costs. That’s because most printers can’t sell all of their capacity at high prices. Meanwhile, monthly costs remain highly fixed, so if there’s not enough work to cover all the fixed costs, the month’s results can be pretty dismal.

The explanation is pretty simple. Your income statement doesn’t know anything at all about your cost sheets. It just knows that you had X dollars of sales and Y dollars of expenses. It doesn’t care how you got there. It just wants more sales than expenses.

One printer had terrific pricing discipline and was generating almost 70% in average value-added content. But they were very fussy about the work they took, and when sales dropped unexpectedly, they didn’t replace the higher-priced sales with any other sales. Their inside costs remained highly fixed (except for saving a few dollars in sales commissions) and the lower sales fell directly out of their profits. Yes, they still had beautiful cost sheets, but their income statement grew a few big scars.

The single thing that sets the profit leaders apart is how busy they keep their plants. They know that you can never make up for having too little work, no matter how good your pricing may be (and no matter how good your productivity is). So they sell everything they can at high prices, and if they have any capacity left, they sell it at the highest prices they can get. But they make sure to sell it. They may wind up with some homely cost sheets, but they also have much better-looking financial statements.

PS: You can match your income statement and cost sheets, but why bother?

Hourly rates reflect a guess as to how many hours will be sold in a given time period, and printers use those projected hourly rates to absorb the fixed costs for that period. In a quiet month where fewer hours have been sold, the actual hourly rate would be higher, since there are fewer sold hours to absorb the same costs.

Of course no one figures their hourly rates every month, but if a slow month’s cost sheets were adjusted to reflect that month’s real hourly rate, they wouldn’t look good at all. They would look just like the income statement.

So you can match your income statement and cost sheets, but why bother? In fact, any printer who goes to the trouble of doing so probably isn’t spending enough time selling jobs and figuring out how to produce the work quickly and profitably.