Almost every conversation I have with gear industry friends these days seems to start with “How’s business?” When incoming orders are slow it helps to have an agreed upon method of evaluating potential opportunities. Otherwise you can get loaded up with projects that don’t return enough profit or clog the system and prevent fast action on future orders.
I have used a point system to rate manufacturing opportunities based upon their suitability for the company’s facilities and open machines. When times are tough it helps maintain profit margins while still allowing flexibility on getting new customers and new markets. The theory is that the more a project uses resources that are currently being “wasted” the lower its profit margin can be.
Manufacturing is a high fixed cost business. Even when the plant is shut down for vacation or a holiday, property taxes, interest on loans, and other expenses continue to accrue. One accountant referred to unused machine hours as “heads of lettuce going into the dumpster.” In his opinion it was better to sell that lettuce at a discount than throw it away.
You can’t suddenly cut the price of every “head of lettuce” though so we developed the point system with five categories: Financial Risk, Technical Difficulty, Suitability for Existing equipment, Order size, and Potential for Future Work. In each category five points were available based upon our assessment of situation. Total points for an inquiry determined if we quoted the job and what profit margin was built into the price.
A job that accrued 7 points or less was automatically no quoted; there is no point in working hard for no return. For 8 to 12 points we offered a proposal but with a 50% profit margin to account for the uncertainty involved. 13 to 16 points got our standard profit margin plus 5 percent. 17 to 20 points was priced as a “normal job” while any project with 20 or more points got the standard margin less 5%.
Side benefits of the “point system” were improved communication within the company and a better understanding by the sales force of what made one inquiry “good” and another on “bad.” In upcoming blogs I’ll go over the questions we used to assign points.