Drummond: CMs are Losing Tens of Millions of Dollars
Despite the fantastic profits these past few years, some of the largest wood truss component manufacturers (CM) are losing tens of millions of dollars hidden in plain sight. Talk to any of the executives at these CMs, and they will be able to rattle off the EBITA or other P/L results, yet they are blind to simple basic production accounting numbers they see daily. In this article, I will prove that some companies are losing tens of millions because of outdated, standard industry-accepted productivity reporting methods.
Todd Drummond graphic
Resistance to the obvious, Case 1 - An interesting fact from studying zebras in Africa is very applicable to this topic, and it has to do with what happens when someone stands out from the crowd. After observing the behavior of single zebras within a herd, zoologists quickly discovered they would lose sight of individual zebras because their stripes rapidly blended in with those of other zebras as they moved around. The researchers used a paintball gun to mark the zebras they wished to study more closely. This marking of individual zebras, however, proved detrimental to the painted zebra’s health as the lions quickly chased them down and ate the marked zebras. By making the animals stand out from the herd, the lions easily singled them out, focused the pride’s attention, and encircled and captured the marked zebras. Any Ph.D. Organizational Behavior trained person will tell you this is the same behavior for human beings—don’t stand out from the crowd unless you are willing to risk being eaten.
When someone is involved in sales long enough, this is one of the most troubling factors to learn about the decision process. Too often, the decision for a person to agree to a sale (purchase) is not based on the best decision for a company but on the choice considered the safest. The person may feel that another vendor has a much better service or product, but they cannot take the chance and must protect themselves from being called out for taking an unnecessary risk. The larger the company, the more these practices, or making the “safe choices," are in play. The same thing applies to repeated practices mandated within a company. Everyone will follow what is required, no matter if it costs the company millions of dollars and is counterproductive to the profit of the company. Only those willing to risk losing their jobs would dare to speak up. Please keep the “standing out from the crowd” and “risk decision process” factors in mind as you continue reading. Other people have witnessed the same thing I have for many years but have failed to make the needed changes. As an industry process expert, I can attest that I have witnessed very large corporations losing tens of millions every year based on standard industry-accepted productivity reporting methods year after year.
Anyone in roof truss manufacturing whose work is based on board foot (BF) or piece count (PC) knows there are simple ways to game the system that benefit them but cost the company millions of dollars over time. If you are unaware of how they take advantage of the system, here is what they can do to make more money while getting accolades for doing a good job, yet the CM loses money because of their hidden activities.
Roof truss designers’ work based on BF or PC. This is easy for designers to make more money based on BF or PC. When I do a consultation, I walk around the finished yard to review the completed trusses ready for delivery to review the manufacturing and design quality. You would not believe how often I have witnessed a large scissored truss with a flat filler on the bottom chord matching the same 2x6 or larger chords of the structural truss. On every occasion, I ask the same question: What is the designer’s productivity based on? What do you think I find in the yard if it is BF or PC? How about 2x6 or larger bottom chord fillers, unneeded webs, and basically the most poorly wood-optimized roof trusses one could witness. A good designer can save the CM 4% to 6% in additional material costs for most roof truss projects with proper optimization. Not only does the company lose millions of dollars in unnecessary material costs, but they also lose additional manufacturing capacity because of the extra wood being cut and handled. And if the designer is called out for failing to optimize any project properly, they will give them the standard excuse of, “It was just that one job, and I was pressed for time.” Every CM basing the compensation of the roof truss designers using BF or PC is exchanging millions of dollars in the form of lost production labor and material cost for a few extra tens of thousands for the designer’s compensation.
For companies compensating their designers using BF or PC, what do you think the results have been over the past two years with record lumber costs or manufacturing constraints?
Every industrial engineer is taught that a unit of measurement must be consistent over time and under changing conditions. If the measurement variation falls outside acceptable limits, such as +/- 5%, then the unit of measurement cannot be used. BF and PC variation is laughably outside the acceptable limits for standard accepted industrial engineering practices.
Production personnel productivity based on BF or PC. This seems to be the executives' most significant blind spot. No single production manager I know will tell me that BF or PC is a reliable means to judge the productivity or scheduling of wood trusses. Not one. Every single one has witnessed the BF count jump substantially for any large runs of AG or commercial projects with large chord sizes and few setups. The same applies to PC when the setup count is low and the runs are high.
For those who apply an “average” setup time to each piece when using PC and think that the automation will compensate for variation, think again. Not even the fully automated 5-blade component saw is immune to the wild variation. When you use an average setup time assigned to each piece, the variance may be as much as 3x the actual. For example, cutting three pieces versus cutting twenty pieces, the time per piece is actually skewed by a multiple of three because of the average setup time applied to each piece.
For those whose productivity is based on BF in roof truss manufacturing, here is how to game the system to be compensated more while the company loses millions. Never properly staff the assembly tables with enough team members. It works against you every time. For instance, if you are assembling 24’ to 30’ trusses, only assemble them with two assemblers, not three. Keep one person on the table while the other throws all the wood onto the gantry table. The BF/Work hour will substantially increase, but the volume will drop drastically. They don’t worry about the lack of overall volume since they are being compensated on BF/work hour, not the sales volume. Those who believe they can reduce the number of personnel on the assembly tables falsely believe labor savings based on BF per work hour rates. For every needed assembler on a wood table, the rate is approximately $3,000 to $3,500 in sales per shift. Translated, this means that when there are only two roof truss assemblers when there should be three, the company loses $3,000 to $3,500 in additional sales per shift per workstation. For more about this subject, see How to Lose Millions of Profits with Linear Saws and Two-Person Crews.
If your company makes your production teams fill out forms using BF/work hour rate, you are pushing them to game the system, which is costing your company tens of millions of dollars for larger corporations.
Resistance to the obvious, Case 2 - A true story as an example of emotional investment: Three people were sitting in the back seats of a minivan during a trade show: myself, a salesman from a plate vendor, and a prominent CEO of a large company that both the salesperson and I hoped to influence. I was seated next to the CEO, and the salesman was behind us. I discussed work minutes with the CEO and talked about how they are more effective than BF for pricing and manufacturing efficiency benchmarks. This is precisely what the industrial engineer John Houlihan did many years ago, with whom he was familiar, except John referred to them as realistic expectancy (RE) or scheduled units (SU), which are the same as work minutes. As I told the CEO about my proven ideas, he became pleasantly animated and asked questions because he was very interested in these new ideas. While this conversation took place, I could see the salesman behind us getting physically agitated; his face turned red, and he started to shake. I did my best to ignore him. Finally, the salesman had enough and literally yelled that BF had been used for decades. It is still being used every day, and to say otherwise is ridiculous. Both the CEO and I were so shocked by his outburst that the three of us hardly spoke for the rest of the ride. To say it was confrontational and downright unprofessional is an understatement. Why did this salesman behave in this fashion? Because he saw that I was gaining the trust of this CEO and that I was a potential threat to his perceived authority of knowledge for the CEO. Also, the salesman’s ego overruled his ability to use a proper response. Many like him have an emotional investment in their current practices and perceived best practices. Remember, I was discussing units of measurement, not anyone’s perceived skills or knowledge, just basic units of work minutes versus BF. By the way, I do not begrudge the salesman about his behavior. Every one of us has made mistakes, and it isn't very reasonable to allow any single incident to define any of us.
“You will never understand bureaucracies until you understand that for bureaucrats, procedure is everything and outcome are nothing.” Thomas Sowell
If you are the company executive responsible for the P/L, keep a few things in mind. How many millions does your company spend on capital investments and other projects to generate additional income? If BF or PC is such an entrenched measurement tool, what kind of risk is there, in adding extra columns of estimated versus actual to use work minutes (Minute, RE, or SU) to the reports? Of course, you must have properly developed time standards to estimate good work minutes for the estimation column. Which the development of proper time standards should not be taken lightly. TDC has been developing proper work minutes for wood trusses for twenty years and can attest most CMs have no idea how to develop them properly. They are not something that can be derived from historical numbers or simple observations. Side-by-side comparisons of PC or BF to properly calculated work minutes are not even close. How do you think this plays out for production scheduling, incentive programs, and even pricing? And when pricing (margin) is compared to minutes, the net profit gains can be shocking. (Use Man-Minutes for True Labor Estimations) The evidence is overwhelming, and the only thing stopping you is possibly playing the role of the zebra or perhaps the salesperson protecting your emotional investment.