Benchmarks - Part Two
Last month we discussed how production should be the number one benchmark you track for operational success. You can find last month's column here. Let's delve into your production benchmark a little more.
Think of your company as a factory. Your primary product is customer service (this is true even if you're in the construction business). Plumbing, heating and/or air conditioning may be the “boxes” in which you deliver customer service, but you're still producing customer service.
Deciding what constitutes a unit of service is part of your job as the production manager. As mentioned last month, if you're a flat rate contractor, your price books are based upon a given number of production units per year, my preference being 1,000 units per truck per year. If you charge by the minute, you might use 1,500 or more units per year, even though many of those production units have more to do with driving a truck than they do with customer service. This will become your production benchmark.
Whatever production unit you use, remember that your cost of production must be divided by the number of production units you can produce.
Beating The BenchmarkOnce you've defined your benchmark, you have a target to shoot for. Before you can beat the benchmark, however, you have to have standards in place. One way is to make sure your plumbers/techs use task numbers for all jobs performed. Each time an invoice is created, add up the number of production units delivered according to the “labor” quantity in the tasks. (This is why it is important that you consider your price book system when determining your annual production target).
Note: If you're a T&M contractor, just make sure your plumbers/techs are billing enough hours to meet the production standard.
Dividing overhead costs by producing more units is how factories lower prices and increase profits. The same holds true for PHC “factories.” To beat the benchmark and improve profits, all your plumber/tech has to do is deliver more production than called for in your budget. For example, if you settled on an annual goal of 1,000 units per truck, you may have set a goal of 20 production units per week. If your plumber/tech delivers 20 production units or more, you're in the high profit zone. Less than 20 and your profits are eroding because you're not producing enough “boxes” to cover all the overhead.
How Production Benchmarks Improve BusinessMany contractors like to look at the average sale as a sign of good performance. High average invoices are nothing to sneeze at but with a production focus, you have more options to offer customers. A repair produces production units, maybe even more production units than some replacements, even though the selling price is a bit lower. Your company is profitable if you deliver the “boxes” regardless of whether they repair or replace. Either way, your customer made a great choice because they chose you to do the work.
Once your production standard is set, other benchmarks can be created with confidence.
A sales benchmark is the gravy on top of the production benchmark. I am convinced that to find the happiest customers in your files, look for the ones who have spent the most money. But in a production environment, sales is not the lone performance benchmark. There's not as much pressure to push for a big ticket when other options are available so you can set a lower gross sales benchmark. Your sales benchmark should present an achievable goal to your lower performers while providing your top performers the recognition and compensation they deserve.
A simple way to do this is to set your sales benchmark by using the current company average. There is one very important rule about sales bonuses: Bonuses should not kick in until the production goal has been met. Remember, falling short of the production benchmark means overhead is being paid out of your profits. On the other hand, once the production benchmark has been achieved, you can offer fairly liberal bonuses on sales and production. That's when it's fun to hand out checks, cash and awards.
Some Benchmarks That Don't MatterThere are two benchmarks that you don't need to worry about:
Your Producers Understand ProductionStart talking about increasing billable efficiency, gross profits and lowering labor percentages and you'll see the glaze creeping across the eyes of your service professionals. These percentages are nebulous concepts that are difficult to visualize. Production benchmarks are something service professionals can sink their teeth into. Talk about who can set the most toilets, troubleshoot a pesky boiler or find leaks the fastest and you'll get more interest because production is the result of getting things done. What's even better, the more production you have, the more service you've delivered to customers.
Trust is another factor that comes with production. If you base performance bonuses on percentages, factors, efficiencies or other calculations, you open the door to manipulating the numbers. You and I both know you wouldn't stoop so low, but we also would agree that it's much simpler to just count boxes. That's what you do when totaling up your production units. Your service professional will always know where he or she stands in the hunt for bonuses because he or she is dealing with “real” numbers rather than fuzzy percentages. Keep in mind that your production benchmark creates a very tantalizing carrot because exceeding it will unleash the production bonus as well as the sales bonus (if you create such a system).
Another benefit of the production benchmark is that it applies to the entire company. If you have a weekly benchmark of 20 production units per truck and you have five trucks, then the company benchmark is 100. Everyone from your call taker to your warehouse clerk can get on board with helping your service staff deliver the production. They can watch the numbers add up by the hour and, with your coaching, can begin to support the effort. Production is much more tangible than percentages.
This is what benchmarking is all about, setting standards that actually help your company grow and improve so make sure the benchmark fits your company, not some “going rate.”
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