Many small businesses operate a job-shop business model for some or all of their revenue.
They do not produce products, then sell from inventory, they sell a product as specified by the buyer, which in the detail will be unique. However, from a higher perspective, there will be great similarity to many other jobs they have done, the experience from which is valuable.
This extends from engineering workshops, toolmakers, smash repairs, printers, and many others. Many SME’s I have seen deploy fancy estimating software that can and does cost the individual jobs down to the last fraction of a cent. The downside of this otherwise admirable level of detail is fourfold:
- It is too easy to make a mistake telling the software what to cost, and what comes out of the computer is rarely adequately questioned. This trust in the output of software can lead to significant blunders.
- The time it often takes from the initial request, to estimate production costs, price approval, and communication to the potential customer
- The customer does not give a toss about your costs, they only want the price so they can make a choice, almost always on a set of factors of which price is only one. Often a major one, but still only one of several.
- The conversion rate from request to sale is often very low, particularly in commoditised industries like printing, so many resources are wasted, or margins are cut to secure a job because the operational equipment may be otherwise idle.
In these circumstances, a guesstimate based on industry knowledge and intimate understanding of the operational costs that comes from long association may be enough. It may not be as accurate in the detail, but will be close, and may meet one of the increasingly potent drives of customer behaviour:
Immediacy.
Take printing for example, an industry where I have had some exposure.
At the ‘small’ end, much of the volume has been taken by local instant print shops. They all operate with the same equipment, same material costs, at standard machine costs per piece printed. The total cost therefore becomes a function of set-up time, wastage, and overheads. In these cases, the conversion rate is more a function of turnaround time and convenience for the customer than anything else.
At the ‘bigger’ end, multicolour offset, and even more bespoke letterpress, price does become a larger factor, but still only one of a number: quality, service relationships, value add services such as storage and part delivery, artwork services, and turnaround times. In these cases, the profitability is obviously impacted by price to the customer, but also very heavily by the flow of jobs through the factory and machine utilisation achieved, to which customers are oblivious and uncaring.
The impact of increasing the flow of jobs that have the costings ‘roughly’ right, but delivered ‘on the spot’ to potential customers is huge. The resultant machine utilisation, combined with the conversion attraction of the quick turnaround sought by customers dwarfs the job profitability added by taking time to accurately estimate the last few percentage points of cost.
In one case, a printer I was working guaranteed a firm price and turnaround time within four working hours of receipt of the request. This often required judgements to be made based on deep knowledge of costs from experience, and a high level of control of the workflow. Early on, some mistakes were made, but the ‘guestimates’ became increasingly accurate when measured against the detailed software estimations, to the point where we needed only a small number of basic job parameters to be crunched by the software to get what proved to be a very accurate costing. Meanwhile, the immediacy of quoting increased the conversion rate substantially, which flowed into greater machine utilisation, which together delivered big increases in profit in an industry suffering poor profitability.
Sometimes informed guestimates of costs are the best way to build profit.
Header photo courtesy Wiki Media.
