Production Incentive Plans Increases Profits
Production Incentive Plans Increases Profits. My client, a large commercial roofing company, hired me because the business had not made a profit for three years.
Several problems are stopping this business from being profitable. In this article, I am going to explain the one major issue.
The owner of the company was an engineer. He did the job estimates and produced the bids for the commercial roofs. When a job came in to quote from the sales department, he would personally develop the proposal. The completed quote was given to the sales department to deliver to the customer. The company was relatively efficient at winning the bids. The business had a very healthy backlog of work, and their field staff was always busy.
Production Incentive Plans Increases Sales and Profits.
I asked the owner to show me the cost accounting reports for five recent jobs. I reviewed the detail of each compared to the estimates. The materials used were equal to the budget, but the actual labor cost of each customer’s roof was materially over the forecast.
I asked the owner about the process of starting each project. He explained that he gives the cost estimate to the supervisor responsible for the job. The supervisor orders the materials to have them drop shipped to the location at the start of the new roof. The crew would be assigned and start the job until completed. It appeared that the teams took their time and there was no incentive to finish the job with a profit. The supervisor knew what the breakeven point was for each project. The manager supervised the crew not to go past the estimated price to complete the job.
Production Incentive Plans Increases Sales and Profits. The solution to this production problem was straightforward to implement.
First, we stopped providing the supervisor the estimate for the job. The owner calculated the labor hours to complete the roof. We agreed to reduce the number of hours for the roofs by 20% compared to the job quote. The owner did not tell the supervisor that we were cutting the labor hour budgets.
Second, we stopped all overtime pay. No one in the company was permitted to work more than 40 hours per week under any circumstances.
Third, we created a new incentive plan for the crews. The crews earned a 50% bonus of the savings (actual labor hours vs. the budget) for each job.
Production Incentive Plans Increases Sales and Profit — the result of the changes materially impacted the profitability of the jobs. Labor hours dropped by 40% and the crews finished the roofs 25% quicker. Sales for the company increased for the year by 30% because the roof crews were completing the jobs much faster. Therefore, sales grew, and the company was profitable immediately.
A Production Incentive Plans Increase Sales and Profits for this client.
First, this problem was simple to resolve. It materially improved the productivity of the field workers, cash flow, and profits. It made the workers happy because they were receiving bonuses that they never had before. The owner should have been able to resolve the issue quickly without my help. When I suggested how to correct the problem, the owner smacked himself on his forehead. Then he said that he should have been smart enough to figure this out without my help. He was right; he should have.
But the problem was that he, like many business owners, was working in his business rather than on his business.
He was too busy doing estimates for future business rather than making the changes to his company to make every job profitable. The owner was too busy doing other things rather than looking at the job results (estimated vs. actual) and seeing that he had a labor productivity problem. He was too busy doing other stuff rather than managing his direct reports, including the field supervisors.
Every Business Needs a Leader.
Production Incentive Plans Increases Sales and Profits. If the owner is doing the estimator’s job, he is not the leader of the company. He is not doing his job. His responsibility is to manage his direct reports to make sure that they are doing their job. The president’s professional duty is to know the financial results of the company and resolve problems when there are problems. His job is to make sure that his management team is managing their staff PROFITABLY! Unfortunately, none of this was happening.
My message to the readers of this article; there was only one problem in this business, the owner was not doing his job. The other issues were just a result of this one problem.
My name is Robert Curry, and I am an Author, CEO Coach, Keynote Speaker, and Turnaround Specialist. Over the past 20 years, I have worked with more than 70 companies taking their businesses from Loses to Profits.
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