A Great Opportunity!
(Improving New Business Proposals)
By Jerry Scrivo, Manufacturing Specialist, eTurboTools
When receiving a request for quote (RFQ), you have an opportunity to gain additional sales. An RFQ is evidence that the requestor is interested in doing business with you; if your proposal is the lowest cost or highest value proposition.
An RFQ is often viewed as evidence that you are pre-qualified and on the approved supplier list. Likely, this is the result of intensive selling efforts. While you may be tempted to celebrate the success of being allowed to submit a proposal, remember that submitting proposals is not why you are in business. There are three possible outcomes when a company responds to a request for quote, only one of them can rightfully be called success.
- The proposal is “too high” – you may lose the business and the potential profit.
- The proposal is “Too Low” – you will gain the business and proceed to lose money on the additional sales.
- The proposal is “just right”- you win the business and make reasonable profits.
Our resources aren’t unlimited. We can only produce so many products and produce so many cost estimates. So how do we get to the success case more often?
3 Step Approach to Growth:
- Respond to more RFQ’s more quickly: Improve your process so that existing resources can respond to RFQ more quickly, allowing more proposals to be presented to potential customers.
- Improve the Quality of Proposals: Improve your tools so that the quality of proposals improves. Errors made while preparing cost estimates can be greatly reduced by developing and using costing templates, standardizing labor and overhead allocations, and developing a database of the cost of purchased parts and materials.
- Become More Cost Competitive: Improving your understanding of what is driving costs is the first step in starting to drive those costs down. Often we focus on the wrong things because we just don’t know, really know, where the money goes.
A successful overhaul of your proposal generating process will focus on all three. Better process, better tools, and better understanding will yield higher profits. This involves improving the process in two primary arenas.
Getting Started: Costs
The first arena is COST because in order to generate a winning proposal you must first have a good understanding of your cost of doing business. Do you know how much it costs to run each piece of machinery in your plant, in your office? It really isn’t as overwhelming as it may seem.
Make a list of the equipment in your facility. You already know which pieces of equipment are the major cost drivers, focus on those for now. Find the energy consumption rates for each, the maintenance and upkeep costs, and the original purchase price. You’re already well on your way to understanding a big piece of the cost picture. With any luck, you will also uncover an opportunity for costs savings by upgrading to newer, more efficient equipment.
Do you own or rent your facility? Either way, you can easily calculate the cost of occupying the space. How much does it cost to heat the building, repair the roof, and fix the floor? Just make a list and then add it up. You’ll be surprised to find how much you already know. Don’t assume your accountant knows more about the business than you do, he doesn’t.
If you’d like to get really sophisticated, you can allocate these costs by square foot and then calculate how much each area of the plant or office should “pay” for the space they use.
How much do you pay for labor? Maybe you are unionized, or maybe you contract your labor from a third party. Either way, you have to pay the people who work for you.
Direct labor costs go beyond the costs paid to employees in wages. Government regulations have added many costs to being an employer, and you need to identify and understand each cost element. It can differ from place to place, but here is a short list of many of the costs you need to consider.
- FICA and Medicare
- Health Insurance
- Unemployment Insurance
- Workmen’s Compensation Insurance
- Vacation and Holiday Pay
- Overtime Pay
Raw Materials and Purchased Parts:
It may seem to go without saying, but it is important to truly understand what you it is costing you to procure the materials you need to manufacture your products. Seldom does the price on the purchase order reflect the total costs.
Who pays for the shipping and packaging? How much does it cost? What about scrap or defective products? Don’t’ forget duties, taxes, and other fees?
Make sure you have a good understanding of each of these elements of procurement costs?
Understanding Your System: Generating Proposals
Build Your Cost Templates:
Although not universally true, most organizations build only a few different type products. There may be dozens, hundreds, or even thousands of different “stocking units”, but most of these are only minor variations on a common product. But you wouldn’t know it by watching the proposal process.
Start by making a list of the products you make. You may choose to categorize these by the product line, or by the process families used to make them. But make the list, you’ll find that it isn’t overwhelming large.
From this list you can start making standardized bills of material (BOM) and bills of process (BOP) for each. Don’t worry about perfection, the key is standardization. These standardized lists become the foundation for your proposal templates. Every time you use one, every time you improve one, your proposal process gets better, and the quality of your estimates will improve.
One of the key elements of a lean manufacturing system is standardized work. In fact, “lean manufacturing” can’t really exist without standardized work. Think of these costing templates as standardized work for the cost estimating process.
The best way to handle the major cost parameters is to put the information in tables and making sure that you always use the same, standardized information will decrease the time it takes to prepare proposals. The key here is to always maintain current information in each data base.
Create a Labor Cost Table:
Identify the categories of labor costs for your facility. It may be by department, or by work cell. In a small facility, you may choose to categorize by employee. However you choose, make sure to take the time to write it down so that we always use the same, standardized numbers. For each category, calculate the direct labor rate, the variable overhead allocation, and the fixed overhead allocation.
To be continued…