The Picture of Health

No conscientious doctor would dream of treating a patient without knowing his medical history. Are you a conscientious manager?

By Anthony Noel


Since February, we've looked at three communication-based management challenges and their solutions, using the analogy of the doctor/patient relationship (or, in the crystal-clear parlance of the insurance industry, "the health-care provider/benefits recipient association").

As the "Fatal Mistakes" series continues, remember that the goal is to help you, the manager, become as observant and proactive as a physician in identifying and treating conditions which, unchecked, could prove harmful or even terminal for your company — the patient.

Communication was the first of five operational areas we will scrutinize. This month and next, we'll turn our attention to the second operational area: Costs.

If you're thinking "cost containment," that's only part of it — the smaller part at that.

While you should never be content to simply watch costs increase without learning why and seeking to keep them in check, the simple fact is that costs will increase as your business grows. You can grow neither your customer base nor your capacity without seeing a general increase in expenditures. So don't let hand-wringing over this reality freeze you. Being in business costs money.

Your job is to figure out how to make money anyway. The most direct way to do that job is by focusing on what your costs mean, in two specific areas: productivity and your selling price. The perils of not viewing your costs through these lenses cannot be overstated.

Time and again I meet owners and managers who seem willing to assess their businesses' health entirely on the basis of what's in the bank account — rather than by developing systematic cost assessment and pricing tools to ensure they're operating profitably.

Failing to develop such strategies is exactly like a doctor trying to manage the care of a patient whose medical history he knows nothing about. If you — or someone at your company — don't truly understand your costs as they relate to both productivity and selling price, all the woodworking knowledge in the world won't make your business successful.

In last month's segment on "Terminal Friendliness," it was mentioned that managers must maintain the respect of their employees in order to be successful, and that the best way to do this is by holding employees accountable.

Knowing your numbers provides a great tool for doing that.

By tracking the time spent on every job and on given operations, and by doing it all the time, you will develop an ever-more-accurate database of information that can prove invaluable when it comes to evaluating both productivity and accuracy of pricing.

For example, let's say you've tracked the time spent in drawer-making over five jobs. You now have a baseline: it takes x minutes, on average, to make a drawer. In job six, any big overage from that value had better be caused by a commensurate difference in the intricacies of the drawers being made for the job, or result from the work being done by someone new to drawer-making.

If the drawers are more intricate and the overage was not foreseen at the pricing stage, your estimator just became accountable. He merely plugged in the baseline number, missing the fact that these fancy drawers were going to take longer to produce.

If the drawers were pretty standard and took significantly longer to produce, a production manager or crew leader will come in for some hands-on management. Why did he assign a novice to this not-for-beginners task?

Consistent tracking of time spent on jobs also develops smart workers. It drives home the importance you place on profitability. It reminds them that they are there to do a job. And it gives you a better chance to distinguish between valuable employees and those who are just going through the motions. If an employee complains about having to do a little paperwork, remind them that paperwork doesn't seem to bother them when they're endorsing their paycheck!

Tracking Material Costs

Let's turn to material costs for a moment.

When your system for tracking job costs includes the prices for materials used on a project, you develop another database, and this one can help with the cost containment issue we spoke of earlier.

Beginning about the second full week of April, a word started passing from the lips of economists that has for years been absent in most discussions of the U.S. economy: inflation. Although the inflationary trend's roots can be traced to plywood pricing, which for some products jumped over 150 percent in early 2003, this latest, far-reaching round has been spurred largely by an increase in the cost of raw steel.

The higher steel costs began showing up at the wholesale level just after the holiday period and in steel-centric consumer goods in late February. By early April, prices for everything from lumber to coffee had begun climbing.

Maybe you noticed this trend when higher steel prices were reflected in your costs for products like fasteners and cabinet hardware. If you did, odds are good it was because you pay attention to your material costs on a regular basis. Imagine the chagrin of the small sheet-metal fabricator who was not so diligent.

Tracking material costs will not always save you money in the short term. Sometimes you have a quotation out, prices go up, and the quote comes back within your cut-off period, so you are stuck with your price. But tracking costs will make you more aware of inflationary pressures and indicators in general, helping prevent such scenarios. To really learn these ebbs and flows, you must track costs consistently. You'll then know, almost instinctively, when you need to raise (or lower) your selling prices.

One last point: Vendor sales representatives are often viewed by managers as people to greet and shake hands with, perhaps shoot the breeze with a little, and then send on their way. But it is smart, at least a few times per year, to crawl out from under your other responsibilities and spend a few meaningful minutes with your reps. The sum of the information these folks provide can often serve as an early warning system about important material pricing trends.

Next month, we'll look at the Fatal Mistake of negotiating your selling price.



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