erosion

How to prevent margin erosion before it starts

Why do people put a fence around their property?

Mainly to keep the good in and the bad out.

Why is there any difference within our business?

Auditors even have an expression called boundary control.

The idea is if you have the right rigor at the boundary you can prevent the garbage in garbage out syndrome.

Sadly, we have noticed commercial flooring companies adopt the opposite approach.

How many times have we, or you, heard:

“How did we lose so much money on that job? “

Our research has revealed about 50% of the root cause or profit erosion is a lack of rigor on the boundary control.

i.e. the job was set up wrong before it was even born

 

Let’s think about the reality of what happens:

  • Our salesperson says I won a job at 25%.
  • We are only too pleased to celebrate, so we ring the bell and move on to the next thing
  • Back at the ranch there was a potential error in the quantity take off or estimate
  • The salesperson used the wrong version of the estimator spreadsheet
  • The estimated costs were outdated
  • The labor rates we used are no longer valid
  • We are dealing with a material we are not familiar with
  • There were calculations errors in the spreadsheet
  • We did not consider the multiple mobilizations
  • We assumed the phases would be in our favor
  • And the excuses keep coming out of the woodwork.

 

Unfortunately, at the point when the project is almost complete (which is when the unpleasant surprise is discovered) it is TOO LATE.

We see huge energy and finger pointing at this late stage. Margin recovery is almost impossible, and relationships get strained.

The bigger problem:  GROUNDHOG DAY.  The same thing happens on the next job, and the next.  In fact we get so numb we expect it to happen and it becomes an accepted norm.

So, how do we get better?

At Flooring by the Numbers we assert the numbers and data will set you free.

At the end of every job, or every significant job we review what went well and what did not.  We quantify the margin erosion and we identify the root cause.

We see patterns

  • Incorrect take off caused by inconsistent spreadsheets
  • Outdated material pricing
  • Training issues
  • Handoff and communication

This give you the ability to establish boundary rigors so the error becomes:

  • More manageable
  • We have a way to isolate the error to execution only
  • We can plug the holes in our process (ongoing learning)
  • We have a way to say no before the problem happens

In future place the rigor on the estimate before it is submitted to the customer. It may take a little more work but that effort is a lot more pleasant than living with the problem.