Question
We do woodwork and finishing for a major boat manufacturer. Recently we have been asked to provide a detailed quotation for all of the products we sell them. They want us to include raw materials, direct labor, subcontract labor, and even profit. They say this is now "corporate policy" and this is part of the "Six Sigma" system.
I am not sure how to feel about providing the information requested.
Forum Responses
From contributor M:
I came from the 6 Sigma system world in my past life as a manufacturing consultant. Your work is getting ready to be shopped to any and all competitors. The 6 Sigma system is based on gathering as much information as possible and measurements have to fall within a 6 Sigma bell curve. It is a scientific method of cost reduction that is very restrictive if followed to the letter. In real business talk, it means your customer is going on a scorched earth cost reduction crusade. The 6 Sigma theory is used by some manufacturing companies that are leaking dollars and having trouble in their market based on price. Usually this system is applied in the automotive/truck industry as well as aerospace and medical. Be careful and stall as long as possible and get ready to reduce your price in the future. If you are as efficient as possible and your profit is 12% or below, you will be okay. If you are sloppy with direct and indirect and are showing more than 12% profit, you will be given an ultimatum to lower cost or lose the business.
"Salary, stock options, country club dues… and for that matter, just give me a copy of your CEO's tax return and company P/L statements." That would be my response.
The Six Sigma people use a strategy that is summarized with the acronym DMAIC:
Determine where you want to be.
Measure the difference between where you are and where you want to be.
Analyze the situation to come up with a strategy to close the gap.
Implement the strategy.
Control things in a way that you don't deviate from this strategy.
This is part of globalization. If this company does not minimize the fat, they will soon have to compete with somebody who did. In which case, your body of work would be gone anyway.
Eventually, the only ones left standing will be the ones that run a lean enterprise. This does not mean that the only ones left will be big; it just means that the niches will be rearranged.
Can you imagine what it will be like when the only ones left are lean? It's easy to predict the outcome when lean competes with fat. What will it look like when lean meets lean?
This boat company builds 42' - 68' production yachts. We supply pre-finished (90% sheen polyester) hardwood trim, both straight and patterned. This client comprises approximately 30% of our gross.
The product we provide is extremely difficult and other vendors have gone belly up trying to comply with the demands (two others in two years). So go figure, my costs are substantially more than they were.
I feel we could replace the revenue in short order, so I am going to tell them we will not play ball on their terms.
The question I would pose to them is simple - "I don't understand how our company providing you with a quote, which is so detailed and time-consuming, that contains a bottom-line number vs. our standard pricing, same materials and specs, also containing a bottom-line number, which is less without an adjustment for increased administrative costs to provide and administer the previous detailed quote, is beneficial for either of us. Not only will this process increase our administrative costs, but it will increase yours as well, as you will have to sift through it all. It will end up costing both of us more to accomplish the same goal. I understand from a business perspective how important the bottom line is, but as long as the specs for your RFP remain the same, you can get as many quotes as you wish, and you can then make a decision on your supplier based upon your past experience with your current suppliers, the quality you receive from them, and the bottom line of what it will cost. After all, there is also the increased risk of bringing on a supplier you have no history with, and the potential production/time delays/customer dissatisfaction this could entail, and negatively affect your bottom line."
This if you plan on not participating - in letter form: "Mr. Customer, it is our belief that we've enjoyed a mutually beneficial relationship in our dealings over the years we've worked together. You've been and are an important customer to our company, and we hope that we have fulfilled our commitments to you in a satisfactory manner. That said, after serious consideration and reviewing the impact on our business from all aspects, we find it necessary to decline your invitation to bid under your new Sigma Six guidelines. We hope that you keep us in mind should you find yourself in need of our proven quality products and services, for which you've become accustomed. We wish you the best in your new program, however, should you wish to resume our successful relationship, or if you would like to make alternate arrangements, we are only a phone call away..."
As a side note, they may be looking to glean from you production/labor/material costs to bring it in-house.
However, a yacht is different from a boat only in the carefully selected materials and craftsmanship that went into its interior and exterior appearance. The whole idea behind a yacht is to show the status of the owner. Therefore, a yacht costs a lot of money to own simply because the builder ensured (or should have) that everything on this yacht is built to yacht standards.
Should the builder force his vendors to cut costs, he should know that the first area a smart vendor will cut from is materials. Such a vendor will look for cheaper and lower quality woods, adhesives and finishes. The second area to cut from is production time.
The builder will end up with a cheaper product built with lesser craftsmanship.
So, he is going to sell his clients the idea of owning a yacht, while it is actually a boat with a flashy interior.
Don't get me wrong - there is a market for this type of yacht and it is mostly supplied from Thailand and even China. (Again, American owned.) I know Johnson yachts manufactures cheaper units for the American market at prices matching American-produced yachts. The sad thing is that the traditional idea of what a yacht represents has been lost on the people who are shopping for them now.
I would talk to this builder and explain that you can reduce the price of your product, but quality is not going to be the same. There is no way that anybody can expect you to work just as hard as before for less. Something has to give and in the end it will be quality.
This builder should be raising his price and marketing his yachts for the quality workmanship.
Your client is forced to cut costs because there are yachts on the market today that have the same appearance as his at lower build cost, which can, on appearance alone, offer more to the local shrinking yacht market at the same price.
I would be curious how they define direct labor. One thing you can do in your pricing method is alter the pricing to include machine time and tooling billed at certain rates, ie move what may be current overhead costs to direct costs for this customer, ie unloading the truck for their material is a direct cost. Beam saw run 1.5 hours is $85 per hour plus $45 for the operator.
Eliminate "out of the bin" costing (screws, sandpaper, dowels, and any other small items that you expense and include in the price).
First, it was applied internally to determine manufacturing efficiency. Then it spread to accounting and purchasing. It can be an ugly tool to beat down vendor prices, as noted above.
Honestly, I'm surprised they haven't required you to be ISO9000 certified! When talking about cost controls and the global marketplace, it goes hand in hand.
I have had one potential client in the past four years ask for this type of info with a bid. I asked for a non-disclosure agreement and the same info from them to insure I was dealing with a profitable company that paid on time, etc. They declined and so did I.
However, I own my business and what profit I make and how I make it stays within my shop. I will not submit to a business rectal exam for anyone.
I will do everything I can to get my costs down. If this Six Sigma is worth doing by the boat guys, maybe it could help you. Buy I'd do it behind my doors and give them the results.
I too was in corporate America. Every two years, upper management came up with some sort of bull-poop that the grunts were supposed to embrace and we were going to be one big happy family. The new one was not like the old one - it would work. Crap. If they spent as much on listening to the people as they did feeding them little seminars on "empowerment" and "Customer First", they would be much better off.
I won't even get into the possibilities for IE from such a policy but, I will say it just isn't worth dealing with control freaks unless you're going to be compensated very, very well.
I must confess that I am not familiar with this system, but from what has been posted here thus far, I am at a loss as to how changing your current system, which works for the other 70% of your sales volume, should be changed to accommodate the minority of 30%, for one customer... I agree 30% is a lot of sales volume, but if they expect you (which I have no doubt is the goal) to absorb the added expense of administering their program, should this 30% still be considered "good" business (i.e. - pays all expenses, including you personally, and retains the profit margin you have determined to maintain the health of your company).
Also, I don't believe this is an accurate comparison of companies. As an example, if I have a guy or gal who is compensated above what is considered to be the industry norm, but I do so because of his/her experience and craftsmanship vs. another company's with someone much less experienced, this fact cannot be accurately portrayed in a series of numbers in a column. They are both considered "labor" for the purposes of the quote, but the chasm between their experience and craftsmanship is not represented in that number.
Basically, my perception of this sigma system is that of a fishing expedition of your profit margins, and how they can reduce it for you to their benefit. Another way of
putting it... micromanaging your company, while they have no understanding of how it is run or its complexities.
Their business may be 30% of your gross sales, but what percentage do they represent in net sales? I suspect much less, and thus easier to replace when looked at from that perspective. Let's say it is 15%. In the short run, increase your profit margin on new business enough to recoup this loss. Spread over the other 70% of your business, you would only have to increase your profit margin by a modest amount...
$500,000.00 (100% gross sales)
$150,000.00 (30% customer)
15% profit margin:
$75,000.00 (100% gross sales)
$22,500.00 (30% customer)
For new business, not the other 70% of your base, if you increase your profit margin by 5% to 20%, you will only have to make up $112,500 in gross sales as opposed to $150,000.00 gross sales.
If you increase your profit margin by 10% to 25%, you will only have to make up $90,000 in gross sales as opposed to $150,000.00 gross sales.
Your other option would be to increase your profit margin across the board on your current 70% customer base by only 6.5% (bringing it to 21.5%), which is very doable, and you negate the loss of the 30% customer altogether. And you do this without having to increase sales, so the $350,000.00 in gross sales, at a profit margin of 21.5%, brings your company the same profit as $500,000.00 in gross sales at a profit margin of 15%. Good business! Just imagine what you will do if you replace the bad business and bring gross sales back to $500,000.00, but at the new profit margin, that's an extra $32,500.00 in profit for your company.
I don't know your specific numbers, but whatever they are, plug them in and the formula remains the same.
A $10,000 order only becomes $10,650... You get the idea.
How about this:
Talk to this company and tell them you are willing to come up with the information they want if they are willing to show you their books. Tell them anything that is going to help both your bottom lines is a great idea. Next, definitely have an agreement drawn up and signed off that they will not use your info to shop your rates around or begin their own internal process, taking you out of the picture. If they are not willing to sign, then their motive is to screw you. If they are willing to sign, then they are serious about keeping you on board and streamlining everyone's process and increasing bottom line for all involved.
This is where you make the situation work to your advantage. Immediately start working on this 6 Sigma system to analyze your business, but string out the info you give them for as long as possible. Use this research to increase your company's capacity and bottom line. Start to slowly bring in business from elsewhere to offset this 30% to make sure that if it doesn't work out with them, you still have enough work. Now by the time you give them all the information they need, you should have implemented all changes to increase your company's profitability and output. If they are serious, they may give you pointers to increase your output and profits even more. If they are not, then so what! You have used this to make your company better and you have been taking in more work from other areas during the interim.
Worst case scenario is they pull your contract, and you are running leaner and meaner than ever before because of the knowledge gained.
Best case scenario is they keep your account, your output is higher with the same amount of people and overhead and you have increased your total sales with them and new accounts.
Fortunately, we are not in your situation, but this premise of the 6 Sigma system has me thinking that we may be able to use it to help us run more efficiently. Any of you ex- corporate guys have suggestions on books or other areas where I may get the information I need to make our business better?
Just like learning more from mistakes than doing something right, use all negative effects to make them positive by learning from them, and make your company better than before.
That said, be careful with using your precious energy and capacity to adopt one of the corporate systems that are so highly acclaimed. If you own a business with 20 employees or less and are not mass manufacturing products that are very similar in production methods, adopting a system may not get the results needed. I have said this before on this forum, and it is the truest information I have ever seen work.
Our customers only pay us to deliver a product. Period. You can count, measure, analyze, make charts, use SPC, do process improvement projects, etc., but your customer does not care. They want their product to be correct and delivered when they want it. If you truly want to make more money, then you need to find the system that removes all activities that do not change the shape or color of the wood. Most of us can do this if we use our common sense and listen to our employees. If you are having a quality problem, very few of us need to fill out non-conforming paperwork and document our process improvements to fix the problem. If you have a problem, fix it. You don't need to write it down, enter it into a computer and put together a process team to find out what the problem is.
I did this stuff for a living for quite a while and really believed it for some time. But when we went to market these systems to small companies, I saw we were hurting more than helping. Us small shops are entrepreneurs who live and die our business. No profit eating system can tell us what we don't already know. Work hard, be smart, do what you say, answer your phone when it rings, return messages, tell everybody the truth without being a jerk, don't gouge customers, pray to your god and tell your significant other you love them. That's how you make money and get to live the dream.
This is what Six Sigma is about - improving quality by reducing defects through the use of carefully constructed, measured and controlled processes. It's not about cheaper materials or labor.
What you need to determine is if this customer is willing to engage in this venture in a mutually beneficial manner. Since they have been happy with your service to date, then they need to bear the brunt of the costs incurred and show good faith regarding those costs to you that they can't bear. By this, I mean a partnership of sorts. There needs to be a contractual obligation on them beyond the non-disclosure/non-compete piece. They need to commit to using your services for some period into the future if they want your cooperation and support.
Six Sigma is "just another fad" - for the same reason they all are - businesses don't make a real commitment to them. If this customer wants you to support six sigma, they had better commit to you by making it worth your while.
I have always been of the opinion that improvement must be an ongoing process, but not of the opinion I must pass all of the benefit on to the customer. For example, if we were to find a way to cut our labor costs by investing in a better machine tool, I should be the one reaping the reward, as I am also responsible if the labor costs are too high.
Also, an update. Our customer has agreed to not impose the Six Sigma standard on us; they have only requested the report on raw material. I agreed as long as I was provided with a non-disclosure agreement. They also said they will send at no cost to us their in-house consultant to help with our process. I agreed again, as long as they do not try to negotiate our costs.
