CONSIDERING YOUR CONSTRAINT WHEN PRICING AND SELLING WORK
I'm a big fan of Theory of Constraints (underlying theory in the business school classic The Goal), and I've sought to apply those lessons in a couple of different companies now.
My most recent application has been in reviewing what types of jobs we should bid on at Hanlon Ceilings. Hanlon installs commercial ceilings in Florida. There's a wide range of ceiling designs and materials, from standard "drop ceilings" to high-end baffles and wood and metal ceilings. Those different ceilings bring very different price points and require different skill levels to install. There's many factors to consider when evaluating how to bid / price a particular ceiling.
Traditionally we've focused just on gross margin %, seeking to identify projects that offer a high enough gross margin %. The market clearing price and gross margin % depend on the customer, the industry, and the type of ceiling being installed. More recently we've begun to think about how to price jobs in light of our constraint resource: quality, skilled labor. Knowing that we have a limited pool of qualified installers and that it takes significant time and investment to grow that pool, we should consider pursuing jobs that offer us the best profit per manhour of skilled labor.
We've begun to evaluate jobs based on the estimated profit / manhour and have been able to set a target for that metric, based on our financial goals. Looking at potential jobs this way has shown us that jobs with a high proportion of material cost to labor cost (i.e. material intensive projects) offer us greater economic opportunity per unit of our limited resource. Using this thinking we now have a tool that allows us to lower our price on some highly desirable jobs to be more competitive and increase our win rate on those jobs. We've also begun to look differently at some jobs that, although they offer what appears to be an attractive gross margin %, don't offer us a particularly attractive return per manhour.
Of course there's many other factors to consider in such a strategy. For instance, by pursuing jobs with higher material costs, we are subjecting ourselves to more exposure to quickly changing material prices and increase the risk of mistakes / waste in the field. On the other hand, if my labor costs run over by 20%, I'm not that worried about it because labor is such a small portion of the overall cost on some of these jobs. We're still working through all of the implications.
Has anyone else applied similar thinking in their business? I'm always interested to talk TOC / Goldratt with anyone who's interested, and I'd love to trade experiences.