Adding Efficiency

From 2001 to 2007, kitchen and bath dealers prospered if they could add capacity quickly enough to meet the growing demand from builders and consumers eager to take advantage of the home boom. With the huge demand for housing, new-home construction kitchens and baths were an integral part of many dealers’ businesses, and the boom in home building helped the kitchen and bath industry see astronomical growth during this time period.

Today, however, home construction is down and new-home builders are buying less and demanding more from the kitchen and bath dealers they work with. While many dealers are increasingly focusing their efforts on the remodeling sector, the loss of new-home jobs – along with the more demanding nature of existing jobs in this area – has hurt profits for many kitchen and bath professionals, leaving them looking for creative ways to improve their cash flow.

Unfortunately, as the market cools, dealers cannot look to sales growth to solve their challenges – so they must become more efficient. Meaner and leaner are the hottest buzz words in business today, and kitchen and bath firms’ ability to implement more streamlined, error-free processes can be critical to survival.

During the boom times, many kitchen and bath dealers created a patchwork of business processes to meet demand. These ways of doing business were fine when sales were growing and service requirements were low. However, the labor and errors associated with these business processes are unprofitable when sales are not as strong.

As a result, dealers now need to look inward to find ways to reduce labor and increase quality by streamlining their work. Re-designing inefficient processes will improve kitchen and bath dealers’ profitability and help them weather these more challenging times.

What Job Files Reveal

There is a simple efficiency test that can be completed in less than five minutes to measure a firm’s efficiency. This test follows a very simple concept: A completed job file contains artifacts from all of the business processes that existed at the time the job was completed. Like a fossil record, job files tell the entire history of a dealership and the challenges it faced over the years. They also tell us where lost profits can be recaptured.

A streamlined job file should contain no more than six different types of documents that are used to manage the delivery of a job. However, most job files contain 21 or more types of documents. These extra documents provide clues to where inefficiencies exist. To evaluate your operation, pick a normal job file from your archives and use it to answer True or False to the following questions:

  1. The job file only contains the following: kitchen layout, perspectives, a signed quote, purchase orders, a job information sheet, a credit agreement (optional), and manufacturer acknowledgements.
  2. There are no calculations performed by hand on any documents.
  3. No copies of the job file’s content are being made for other employees, divisions or departments.
  4. The documents in the file are never completed by more than one person to ensure accuracy.
  5. The job file itself is incredibly easy for anyone to find when a customer calls.
  6. If this job has a warranty call eight months after the job is completed, the job file and all of the details of the job can be located in less than five minutes.
  7. All items in the job file were ordered with normal lead times (i.e. not rushed).
  8. Pricing for the estimate did not rely on pricing produced by design software.
  9. All of the parts and work for the completed job were accounted for in the original estimate.
  10. The quote information was never re-keyed onto a sales order, purchase order or into the accounting system.
  11. All job file information is accessible on demand by management in a summary format that does not require manual effort to compile.
  12. If the job folder is lost, it can be reproduced in its entirety in less than five minutes.

Scoring Your Firm

Give your team one point for each “True” answer to the questions above. A score of 12 is perfect; 11 is tolerable. If you scored an 11 or 12, congratulations – you have a very efficient business. Your profit margins and customer satisfaction ratings are likely among the highest 2% in the industry.

A score lower than 11, however, means you have opportunities to find lost profit. The truth is that most kitchen design firms (big and small) are running with a score of two or three, and they need serious help. As high as 75 percent of the jobs that run through their facility do not contribute to the overall health of their firm.

Scores lower than 11 also mean that dealers can improve their operations and stem the loss of profits if they invest in a better, more efficient system for doing business. If dealers automate at the right level for their size, they can recapture significant amounts of profit.

Most efficiency problems can be solved using a few key principles. Below are three that are relevant to the kitchen and bath industry:

  • Type once, use often. The process of typing information into a computer is time consuming and error prone. A busy operator will transpose, omit or erroneously enter information into the computer roughly 10% of the time. Each mistake, on average, costs $150 to correct. In many companies, information from the design software must be re-typed into a quote, re-typed into accounting software and re-typed into the manufacturer’s ordering systems. This creates three or more labor intensive and error-prone activities that add little value. For a company to be efficient, it must look for ways to create information in the computer once and then electronically transfer the information into other software applications.
  • Reduce error opportunities. Mistakes in the kitchen and bath design industry are costly. For instance, forgetting to order a part creates a crisis that drives up costs five ways: 1) People have to drop everything and address the problem; 2) express shipping costs are paid to get missing parts quickly; 3) additional costs are incurred by the need for repeated jobsite visits; 4) product costs for the job are higher than expected because needed parts were not factored into the original quote, and 5) the customer frustration this all creates causes an additional cost in terms of lost satisfaction and the possible loss of future referrals. For these reasons, kitchen and bath dealers should be constantly reviewing their business processes to reduce the number of situations where errors can easily be made.
  • One source. Many operations become inefficient because they have many people depending on the same information to make decisions, but the information is dynamic and stored in different locations at the dealership. For instance, sales, purchasing, delivery and installation people need to be updated on a customer’s order status and they often maintain separate job files. Inefficiency and errors occur when the information changes. It requires tremendous effort to keep all of the different repositories of information consistent. If the information is not updated, people either make incorrect decisions based on outdated information or they spend too much time tracking down the correct information.

Where to Start

Most efficiency challenges are found in four areas and appear after you have five or more salespeople. They are:

  • Quoting Challenges – Too often, design software is being used as a quoting tool rather than as an instrument for creating a quality layout. Design software can serve as an effective quoting engine when sales volume is low, but is inefficient and error prone when sales volume is high. Re-doing a design from scratch in order to get a revised quote is time consuming and requires too many revisions in higher sales volume operations.
  • Purchasing Challenges – When sales volumes are low, salespeople can do the purchasing for their jobs themselves; however, when sales volume grows past a certain point, a central purchasing function is more efficient. The transition to centralized purchasing is difficult. It often creates a need to fill out and fax sales orders to the purchasing department, who then reformats the sales orders into multiple purchase orders that are faxed to vendors. This paper-based process is often more efficient but error prone.
  • Installation Challenges – As sales increase, the salespeople often find it difficult to work with new prospects because they’re too busy coordinating the installation of jobs they have already sold. Paperwork is often created to help the salespeople distance themselves from installation. However, the paperwork often contains product, delivery date and installation information that changes. Challenges occur as sales, purchasing and installation people try to send a consistent message to customers based on the inconsistently updated information they keep at their desks.
  • Control Challenges – A kitchen and bath dealer generally spends significant amounts of time pulling information from paper files or Excel spreadsheets and compiling them into management reports. Management will often do without reports such as profitability by supplier or customer because they are too time consuming to create.

Improving Efficiency

So what are the most common business strategies for improving efficiency? While there is no one type of solution that is a panacea for every dealer’s efficiency challenges, there are three classes of solutions that can be mixed and matched to meet the unique needs of a particular dealer (see chart on the right). The classes of solutions are:

  • Paper
    Using paper forms and checklists to increase the consistency of how a business process is performed and ease quality assurance efforts. A good example is a job information checklist that is used to make sure all of the right information is in a job file.
  • Point Automation
    A software application or piece of automation that speeds up “bottleneck” processes. Design and accounting software are good examples of point automation
  • Process Automation
    Software that integrates the “points of automation” into a seamless process. An example is software that can read an electronic kitchen design and then seamlessly create and place associated purchase orders as well as the sales and cost information into the accounting software with minimal human effort.

The volume of kitchens sold annually by the dealer is the key indicator of what class of automation solutions they should consider. When trying to evaluate potential efficiency solutions, owners should start by reviewing the automation guidelines pictured in the chart below.

Other Factors

Owners and executive teams should consider benefits over a three- to five-year time horizon. They also need to look at these key factors when considering an automation strategy:

  • Volume – At least five salespeople are required for process automation to be justified.
  • Type of work – If the dealer is focused on builders and is “re-tooling” for more retail, the retail paperwork requirements for each job may be significantly more challenging to manage and control.
  • Error Frequency & Cost – A $10M operation with 20% of its jobs each containing a $300 paperwork or pricing error can add $120K+ back to its operations each year ($360K over three years) by investing in process automation.
  • Labor Reduction – The kitchen and bath design business is the business of paperwork and headaches. A kitchen and bath dealership with five salespeople who each spend 20% of their time purchasing can essentially add one full-time salesperson by offloading the purchasing work to a centralized purchasing agent.
  • Customer Service – If a $10M dealer loses 5% of its customers each year from poor service, process automation can add $50K+ per year back to the bottom line by giving the dealer the capability to better serve the customer ($150K over three years).
  • Reporting – Automation usually means much easier reporting. Many dealers fail to understand how much manpower they are spending to compile their management reports. Eliminating this effort and having better information can easily add $25K to $50K to the bottom line ($75K to $150K over three years).
  • Commissions – Most dealers don’t have the automation to track true gross profit by job. This means they are most likely overpaying commissions. If a $10M operation makes no money on 5% of its jobs each year, but still pays a 5% commission, it can easily recapture an extra $25K+ each year ($75K over three years) by implementing process automation with good job gross profit tracking features.
  • Sales – If a dealer can quote more efficiently, that dealer can win more work. If a $10M dealer has eight salespeople and they each can increase sales 25%, they can easily add $200K – $300K in net profit (cash) to the operations each year ($600K - $900K over three years).

Dealers should expect to receive a 300-400% (or more) return on their automation investments. They should concentrate on solutions that put cash back into their operations quickly. Otherwise, it may not be the right time to automate.

For example, a kitchen and bath dealer willing to spend $75K to implement specialized software for process automation should expect a $225K to $300K return on that investment within three years.

The current business environment encourages kitchen and bath dealers to review their operations in search of greater efficiency. A review of paper job files can help managers and owners of kitchen and bath dealerships gauge efficiency or inefficiency of their business.

Efficiency can sometimes be gained by using paper, but most likely from point automation or process automation strategies.
The volume of transactions, quantity of mistakes, cost of those mistakes, quantity of re-typing and a “hassle factor” should be considered before investing in any efficiency enhancing solution. There are rough guidelines that can be used for determining which efficiency solution is right for a specific firm.

The number of sales reps a dealer has on staff is the key indicator of what class of automation solutions they should consider for achieving maximum profits – regardless of the size of the firm.

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