Loss of revenue is a critical issue for any business, but in my experience, the biggest problem with slippage is the effect it has on morale within the company. Of course, it hits the owner of a remodeling business hard because it is money out of his/her pocket, but it effects the entire team because it usually results in finger pointing and loss of trust within an organization.
What is Slippage?
Is slippage simply the difference between what we want to make and what we sell it for? Is it the difference between the estimated job cost and actual job cost? Or is it something else?
In our Production Manager Roundtables meeting, the members submit financial job cost data from the 6-month period our last meeting. By reviewing this data, we can see three things: the GP (Gross Profit) a company wants to hit, the GP that all jobs and projects were intended to hit, and the GP that they actually achieved in production.
In many cases, the GP that the combined jobs are sold for is less than what the company needs. That means that even if production achieves what was estimated, it still reads as slippage.
After working with hundreds of companies over the years, I have seen leaders focus more on the production issues at hand and not enough on the entire process, from sale to completion.
It is important that everyone within the organization is ready to take responsibility for their part. My suggestion is to establish two measurements when looking at slippage; (1) Did sales estimate and sell the project for the right GP, and then (2) did production produce the project for the job cost estimated?
1. Sales Slippage
Slippage on the sales end can be one of three problems:
- In order to get the sale, we give things away. Let’s just admit that we do this from time to time! So, the GP looks good but the job cost is artificially low because the item we gave away does not appear as a job cost on the budget.
- In order to get the sale we drop our sale price, thereby affecting the margin of that job.
- We make mistakes in estimating. It is, after all, estimating! This results in higher job costs for those items because they simply cannot be done for what is estimated. This is most common in labor, but also occurs in trade contracts.
The solution to numbers one and two is to learn a better way to sell. I know that is a broad statement but focusing on charging for what you are actually providing is critical to maintaining your GP.
The solution to number three is to use real data in creating your estimate. In other words, you base your pricing on what it actually costs you and your company to do the work. Saying, “I think it should cost this much” without consulting data on what it really costs will almost always result in lower budgets than needed.
2. Production Slippage
Many companies I work with know the losses are on the production end, but they can’t tell exactly where they are happening. The biggest takeaway here is to have a process within your organization for identifying them, analyzing them and then finding solutions to eliminate them from your process.
Truth be told, slippage on the production end has many sources; too many for one blog post. But here are a few to consider in production:
- Lumberyard runs: In most companies that I have worked with, the cost of lumberyard runs is literally 2-3% of annual sales volume. (In two companies, it was 7-8%!) Find ways to consolidate or drive this cost down, or more importantly, make sure you include it in your job costs.
- Production Manager: Someone must track data, analyze it, and then make changes to what is being done. In my opinion, this is where a production manager pays for themselves. The other day I was speaking to a business owner that was going to hire a production manager that would increase his GP% by about 1%. When we looked at this we decided that there was at least 2-3 % waste in the production department and if he could find it then he would pay for himself.
- Take Responsibility: The most important thing in production — when it comes to slippage and job cost — is to simply be willing to take responsibility for their actions and find the slippage themselves. Pointing the finger at sales never solves the problem, it just reoccurs. Identify it, analyze it and find ways that it can be avoided in the future.
Slippage within your organization is likely a multi-faceted problem. Look at it from both the sales and the production perspective and identify ways to reduce and eliminate these lapses. Once everyone within the company takes responsibility and finds solutions, you will start to achieve the GP you have been working so hard hit.
Want to Learn More About Slippage?
Join me for a webinar on Thursday, June 15th at 11:00am EST. Click here for more information.
JUNE IS SLIPPAGE AWARENESS MONTH!
Remodelers Advantage has declared June as “Slippage Awareness Month”! In addition to Tim’s blog post above, don’t miss his Webinar on June 15th at 11:00am EST. This webinar is a great way to look at this this critical business issue for remodelers everywhere! More information about Slippage is coming this month! Infographic/poster, social media posts and more!