Drummond Extols A-1's Use of Reliable Unit Measurement
Todd Drummond Consulting has not performed consulting services for A-1 Industries, nor are they endorsing the services of Todd Drummond Consulting. A-1 Industries provided permission for the references and quotes included in the article.
We can always learn things from industry leaders, whether we work with them directly or simply appreciate what they have accomplished. A perfect example comes from A-1 Industries and their commitment to using industrial engineering practices and work minutes. The company’s story reinforces a message that I cannot repeat enough: You must use reliable methods for basic unit measurement for pricing, scheduling, and shop efficiencies.
Recently, the Structural Building Components Association (SBCA)—of which Todd Drummond Consulting is a member—published a video by A-1 Industries explaining their facility and some of their lean practices. A-1 is considered one of the premier component manufacturers (CM) for wood trusses. Mike Ruede, president and chief operating officer of A-1 Industries of Florida and A-1 Industries of Georgia, has served many years as a leader within the industry, as a past president of the SBCA and in other prominent positions within the association.
According to John Herring, CEO and chairman of A-1 Global Holdings, Inc., "Using the latest state-of-the-art automation and our proprietary software, A-1 is in the top 5% of the country in single-site production for quality and efficiencies. Our facilities cover over eight acres located on 140 acres. We have room to grow, unlike anyone else in the industry. What sets us apart from all others is our people, our software, and our facilities. Our mission is to use technology to change the way America builds homes."
At the minute 3:30 mark in the video, Ruede begins to talk about how they measure every piece using man-minutes, which also can be defined as work minutes, reasonable expectancy (RE), or scheduled units (SUs), in which RE and SU represent 1/100th of an hour or minute.
"We measure every single piece every single man minute that goes through our plant, and that's how we've derived our pricing programs” Ruede says in the video. “That's how we've derived our efficiencies and in applied man minutes and RE's, which are reasonable expectancies to everything that we do, number one to keep costs low for our vendor Partners. Number two, it keeps our wages competitive through the RE system and through the bonus system.”
Brian Klementowich, A-1 Production Supervisor, says "A-1 has kind of dialed in their production to Olympic competition levels. If they had an Olympic truss building competition, we would definitely be gold medalist in it. We know exactly how long it takes a piece of lumber to go from the lumber yard to the truss stack in the back of the plant so that we can batch and schedule a job on Monday that's going to deliver on Tuesday and know for a fact that it's able to be built and shipped to the customer on time."
Although I have not worked with A-1 Industries, I immediately recognized how this company is implementing the best practices of lean manufacturing industrial engineering that are so lacking in our industry. From the smallest to the largest multi-location CM operations, most still use board foot and other outdated, unreliable methods for basic unit measurement for pricing, scheduling, and shop efficiencies. Regarding pricing, using work minutes is equivalent to A-1 using a rifle when hunting for new orders, whereas most of their competitors use a shotgun. With the changing market conditions of added CM manufacturing capacities and declining housing starts, who will be better positioned to be more competitive?
Most CM’s existing labor estimations typically have six to 12 different factors, and many have fewer. For most gantry table and saw configurations to calculate the reliable time standards accurately and consistently, they typically need 60 to 80 different defined factors for the various material, equipment, and practices. How many does your company have? When did you last look at your software's labor configuration and pricing methods?
Once a CM has accurate time standards, pricing can and should be compared to the estimated gross margin per minute, not just a cost markup.
Here is a better pricing method explained via truck repairing example: Let us assume you are having problems with a truck’s transmission, which must be repaired or replaced. The local mechanic explains the hourly rate for service and that the cost of any parts needed to fix the transmission is extra. The hourly charge he is billing is to cover his operating expenses and create a net profit. Note that the cost of the parts they are replacing has no bearing on the hourly rate. The cost of the components is an add-on expense on top of the established hourly rate. What does this have to do with roof truss or wall component sales? The answer is a lot more than most may have considered in the past.
If your company was not selling manufactured components, how would you maximize the gross profit for your manufacturing facility? It is quite simple. You would rent or lease your facility at the maximum dollar rate per month. It would be a natural idea to lease at the maximum dollar rate the market would allow, whether monthly, weekly, daily or even per hour. What a tenant uses the facility for and the cost of materials used to manufacture their products are irrelevant to you. When you sell a component project to your customers, how is this so different from leasing your manufacturing facility? When you manufacture a customer’s project, it uses your facility’s hourly work hours.
Most component manufacturers establish the selling price based on the cost of the material plus the labor cost and then use some multiplier to establish the total sales price. The material costs of lumber and truss plates are like new auto parts for a truck. What does that mean? As stated before, mechanics first establish how long it will take to make the repairs, then add the cost of the new parts to the bill. They do not use the cost of the parts, plus the cost of labor, and then mark it up. The cost of the parts has nothing to do with how much of the hourly garage time the repair will consume. The cost of parts is always a separate line item from the hourly charge.
Drummond’s Pricing Formula
Material + Labor Cost + (Dollar Rate * Expected Hours) = Sales Price
Hours, Minutes, RE or SU May be Used for Defining the Time Units
Using the material cost, which fluctuates from month to month, to establish the margin rate skews the margin. It has nothing to do with the hourly processing time within your manufacturing. Using a cost markup, you are giving yourself an hourly pay cut for your company any time the lumber cost drops when you process the same order types. What can you do to provide a consistent baseline to establish your gross margin markup for each project?
This pricing formula will yield higher margin dollars per-hour projects than prior sales. This is because you will be able to view the gross-margin dollar rate per estimated hour for comparison to an established margin-per-hour baseline and recognize the high and low margin dollar-per-hour projects at a glance. An example of this would be if your baseline is established at $60 per work hour, you will see at a glance which orders are above or below your baseline of $60 per work hour. You will have a much better understanding of which orders are worth the effort and which ones you will pass on to your competition. As a ratio of the order, total material cost will not negatively affect the established baseline margin rate. This will lead to a more significant net profit at the end of the new year - a 3-point gain at a minimum.
So many CMs are spending millions on new equipment and other capital investments, yet they are unwilling to spend a fraction of that investment on process improvement. Process improvement includes enhancement of unit measurement and refinements to better pricing methods. Maybe, just maybe, your company should make a small investment in process improvement training embracing lean manufacturing industrial engineering practices.