Three Conditions for Smarter Margin Application to Make Healthier Profits for Roof Truss Manufacturing

Establishing a proper margin to maximize profits for your roof truss component sales is not as easy as most people think. Most do not have a clear understanding of how small changes make a significant impact on the company’s profitability.

The ironclad golden rule about margin and profitability:

It is not the percentage of sales of margin that determines profitability but the total accumulative margins dollars that lead to a profit or loss.

For an understanding of common terminology, the margin is defined as the total sales minus direct cost of manufacturing (material and labor).

Case #1 – Markets collapse, and your company has spare production capacity.

Example:

• Sales average 35% margin at 100k per month, which is $35k per month.
• Sales are only producing 50% of production capacity.
• Problem – Break-even to cover the indirect cost is greater than $35k per month.

Imagine a worst-case scenario that, in order to reach 90% capacity, the additional sales of $90k are only at a 20% margin rate for a combined sales of $190k. However, combined with the normal 35% margin, the results are a 27.89% margin rate of $53k. Granted, this is an unlikely scenario because once margins start dropping in a market, every component company within the given market sales are negatively affected, and nobody wants to lose a sale. Too often, it can become a race to the bottom, and no one should want that for their market. However, this exercise does clearly show that when your capacity is less than full capacity, your company could be making more profits by dropping the margin for some sales.

Case #2 – When your company is at full capacity, are you raising your margin rates to maximize monthly total margin dollars? When I speak to clients about how they define what is considered full capacity, they normally respond by stating they have a schedule that is anywhere from four to six weeks. For orders with higher margins, they will make room to do them a little quicker. I will then state to them that if your production never needs to be reduced for output for say a week, meaning the schedule never drops below five days of work for the shop employees, and no one’s hours need to be reduced below a standard forty-hour workweek, how are you not at full capacity? Why are so many of a mindset that you need to be out four weeks to be considered at full capacity? In the early 2000’s, I witnessed a company in Alberta Canada with a schedule of greater than sixteen weeks go bankrupt in a market where all they had to do was raise their margins and delivery the orders quicker. The market would have easily allowed higher pricing if only they would provide the orders quicker. If your competition is out four weeks for new orders and yet you are only out one week but are making higher margins because you are higher priced, why would you lower your margins to be scheduled out for four weeks? Every company should ask themselves how dynamic your margin practices during the year are, and are you maximizing your accumulative monthly margin dollars each month, or is it a static rate?” Most companies have a fixed markup rate and are not maximizing their monthly total margin dollars.

Case #3 – Margin percentage of sales can lead your company to lower net profits. Let us look at a simplified example to explain what is meant by this statement.

1. One large order requires total production capacity for a single day and produces $2,500 margins dollars.
2. Three small orders require total production capacity for a single day, and the combined orders produce $3,500 margin dollars.

In this example, a single day’s capacity is defined, but it can be an entire month’s capacity to demonstrate the same points. I hope you have notice something in these two examples of total capacity. The cost of material, boardfoot (BF), number of pieces, total sales dollars, or even the percentage of sales were not given to illustrate the total margin per day. The only defined term that was stated was that the total capacity for a given days’ worth of production that could be produced, which could only be correctly expressed in man-hours, not BF or number of pieces because only man-hours correctly define the capacity. An example is ten people on the assembly tables for eight hours means there are eighty man-hours of capacity. (minus break times and other non-work time) not BF, number of pieces, or some other unit of measurement that has nothing to do with actual capacity. An assembly crew can have an outstanding day assembling AG trusses as defined by material cost, BF, or piece count compared to 1-1-1 orders being produced, yet they worked just as hard and put in the same number of man-hours. Why do so many still insist that BF or piece count is good enough for roof truss manufacturing?

Drummond’s Baseline Margin Rate formula:

Material Cost + Labor Cost + (Dollar Rate * Expected Hours) = Sales Price

Any company which is still using BF, piece count, or a cost multiplier for establishing the pricing (margin) of their roof truss manufactured components is losing money compared to those who base their pricing on a properly defined margin rate per properly calculated man-hour. Once you start using this formula, your margin percent of sales will vary. This formula creates a baseline for which to adjust your margins to maximize total net profits per given time period.

Most common statements from clients at the end of a consultation:

• “Todd, I never knew how much and how in-depth all the information you were going to give us would be. We are very pleased.”
• “ Todd, at times, it was like drinking from a fire hose with all the detailed information you gave us. I am glad you are sharing all the training material and the written report to implement all the much-needed ideas to help us improve our operations.”

The implementation of the suggestions by TDC services produces an average gain of three to six points in net profits. Is pride prevented you from calling TDC?

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