Strategy and Implementation Summary
Inroads into the stated trophy home market in the Hartford area will be made by contacting and selling Comgate’s new CAD features to those architects and interior designers who are best known for residential work in this price range ($3-$15 million), by sticking to the company’s newly formulated costing/pricing method, and following through on the recent administrative control and reporting changes.
5.1 Sales Strategy
After having successfully priced the job to insure an adequate profit margin after all expenses, it is important to close and bring back the sale. The person to do this is the owner himself, Andrew Comins. To free up his time to network with design professionals it is important that he be able to rely on his office manager to administer properly in his absence (see the chapter on Management Team) and he must be able to rely on a production manager for proper flow in the plant (see Chapter on Management Team Gaps).
The most important aspects to be considered in closing the sale are:
- Clearly stating in the proposal the scope of the work.
- Clearly stating when: both must understand what the schedule is.
- Both parties have to agree to the terms of payment.
- The price must be clear, as well as what is included and what is not.
The proposal must get there on time and get to the right place. A log should be kept of all bidding efforts. Follow up is necessary.
5.1.1 Sales Forecast
There are two sources of revenue:
Plant Produced Sales: This revenue comes from manufacturing custom cabinetry, paneling, and other wood products. To project revenue we have chosen several representative items that make up the majority of plant produced sales. The materials for each of these items have been carefully calculated, as has the labor hours going into each item. The material inputs will show up in the direct cost of each item. The labor hours information allow us to determine how many items we can produce with given manpower and machinery. The cost of the labor is calculated in detail in the Personnel Plan Table. As this plan is being written in October, 2000, the actual sales revenue from January through September will be averaged to arrive at a monthly amount for that period. Projected sales will begin as of October, 2000. The representative items chosen are:
- 250 linear feet of Crown Molding
- 16 Pilasters
- 20 Haunched passage doors (paint grade)
- 20 Haunched passage doors (stain grade)
- 45 linear feet of cabinets
The Costing/Pricing Work-up Sheet in Appendix C will break down, in detail, the various materials going into each of these items, as well as the labor hours for each. Labor break-downs for each phase in the production of these items is also included. For example, the Crown Molding (250 linear ft.) requires a total of 4.25 man hours and only one material. The Pilasters however needs two materials in different quantities. Since 4 man hours per pilaster are needed (see labor break-down sheet), 16 pilasters will require a total of 64 man hours. These 64 man hours have been split equally between the two materials (8/4″ Mahogany and the 4/4″ Mahogany). From the totals in Appendix C the total labor input for the above items is 390.4 hours. Since production is limited to 160 manhours per week (8,000 manhours per year), these above-listed items can only be produced 20.5 times in one year. Total yearly full production, assuming only these items are produced, would be:
- 5,125 linear feet of Crown Molding
- 328 Pilasters
- 410 Haunched passage doors (paint grade)
- 410 Haunched passage doors (stain grade)
- 922.5 linear feet of cabinets
These items have been projected in the attached table on a monthly basis beginning October, 2000 and on a yearly basis for years 2001 and 2002 assuming 80% of full production October-December, 2000, 85% in 2001, and 90% of full production efficiency in year 2002.
Contract Site Labor: Revenue is also derived from providing carpenters/installers at certain work sites. There are six site workers listed with an “S” next to their name. Below are listed the all-in costs of these workers as well as the rates that they are billed out at.
|Worker||All-In Wage Rate||Bill Rate||Hours||Net Revenue|
Total net revenue from Site Services comes to $89,924.80 annually assuming a full 40 hour week for 49 weeks. For projection purposes we have chosen “hours” as the unit. The average sales price is $35.33. The average cost is $27.69.
Note: appendices A – K have been omitted from this sample plan presentation.
|Haunched Passage Doors (Paint Grade)||234||348||369|
|Haunched Passage Doors (Stain Grade)||234||348||369|
|Total Unit Sales||13,164||17,876||18,236|
|Haunched Passage Doors (Paint Grade)||$592.35||$592.35||$592.35|
|Haunched Passage Doors (Stain Grade)||$783.09||$783.09||$783.09|
|Haunched Passage Doors (Paint Grade)||$138,610||$206,138||$218,577|
|Haunched Passage Doors (Stain Grade)||$183,243||$272,515||$288,960|
|Direct Unit Costs||2000||2001||2002|
|Haunched Passage Doors (Paint Grade)||$142.05||$130.53||$130.53|
|Haunched Passage Doors (Stain Grade)||$269.76||$247.88||$247.88|
|Direct Cost of Sales|
|Haunched Passage Doors (Paint Grade)||$33,240||$45,424||$48,166|
|Haunched Passage Doors (Stain Grade)||$63,123||$86,262||$91,468|
|Subtotal Direct Cost of Sales||$349,165||$522,813||$534,584|
5.2 Marketing Strategy
The marketing strategy, as explained in other chapters, is to leverage Comgate’s special CAD capability, as it relates specifically to custom woodworking, with design professionals (interior designers and architects) to increase the type of high-end work taken on, as well as to “jump” the bidding process by creating a situation in which Comgate must be given the bid. A good place to ask for the names of the interior designers with the best reputations is to speak to the designer workrooms. These are the workrooms that carry out the work connected with interior designers’ concepts for window treatments, fabrics, etc.
The best known of these workrooms in and around New Haven are:
- Fall Creek Sewing.
- Andrew Smith.
- Fortress Lines.
- Jones & Jones.
- S. Brandt & Company.
- Tapper Works.
A polling of these workshops indicates the following interior designers are often sought by trophy home owners:
** Names have been removed for confidentiality.
Architects are another important group of design professionals that work in concert with interior designers on trophy homes. The latest edition of the Directory of Architectural Firms in Connecticut is available to the members of the CSA. The directory lists 750 architectural firms in Connecticut. Details of each company are given alphabetically, including location and phone numbers as well as the type of work the firm specializes in. The back of the directory gives a listing based on areas of practice. The category of “Residential Work” lists about 300 firms. Although an architectural firm is likely to have work outside of the city where it is located, it would be a good start to find out which of those 300 residential architects are located in those areas of New Haven with the greatest concentration of trophy homes.
5.2.1 Positioning Statement
Comgate’s CAD capability is an especially strong marketing tool. It allows the mill shop to build the desired items using the most practical methods of construction without interfering with the design concept. It automatically calculates the exact dimensions of each element and produces exact material lists. These features allow simpler elements to be subcontracted to other mill shops, thus allowing the company’s productive capacity to be used to produce the higher end elements.
By pushing this capability with architects who have reputations for designing homes in the $3-$15 million bracket, Comgate will position itself to receive the gravy of this price-insensitive, recession-proof work, while at the same time building an image for the highest quality, most-challenging work.
5.2.2 Pricing Strategy
Simply stated, the goal of the bidding process is to price to get the job while still making an adequate profit. To facilitate this, a dual mark-up system has been developed. One mark-up for materials and another for labor. The reason for the separate mark-ups is that in custom woodwork the mix, or ratio, of material and labor changes with every job. Therefore, a system is needed that accommodates the variations. The system is fairly straightforward and uncomplicated and, once set up, it reduces the bidding process’ complexity. The system requires two separate overhead factors to be computed–an administrative overhead and a factory overhead.
The concept is founded on the belief that everything which is sold, whether goods or services, must pay its fair share of the administrative overhead. Whether we use material in manufacturing a product, or merely resell it as is without further processing, it should still make a contribution. So a multiplier factor is calculated and applied to everything sold including direct labor, plant-processed materials, “buy-outs” (out-sourcing to another mill shop), installations, etc.
The administrative overhead mark-up factor is arrived at by dividing the total administrative overhead expenses by the total of materials and direct labor. Appendix B shows the calculations based on expenses in 1999. Total administrative overheads were $123,821. Total direct labor and materials came to $324,495. The resulting .3816 translates into a multiplier factor of 1.3816. By applying this to everything sold it means that the company is setting aside 27.6% of every dollar to cover the cost of bidding, the cost of paperwork to execute the job, the cost of collecting the money, the cost of interest if the money’s late, etc.
This mark-up is only applied to labor. It’s calculated by dividing plant overhead costs by direct labor. The resulting .837 when added to the .3816 (administrative overhead) builds to a multiplier factor of 2.218 (1.00 + .3816 + .837 = 2.218). The reasoning here is that an item sold that involves plant-processed labor should contribute to defray a portion of those plant overhead expenses (machinery depreciation, insurance, machinery maintenance, etc.) that would not be there if everything were merely sold without any value-added milling by factory millworkers.
With application of the above-described overhead factors, pricing is now reduced to calculating the total materials (including wastage) involved in a job, and projecting the labor input in hours needed to complete the job. Assisting in these calculations is a Job Costing Library which lists the actual materials and the actual labor input involved in similar past jobs. (See a sample section of the Job Costing Library in Appendix C.)
Performing the “take-offs” from blue prints and converting this to materials and labor hours needed to complete the job requires skill, but once this has been done, those figures can be passed on to an administrative assistant who can apply the overhead mark-ups to materials and labor. One can also check the latest prices of the materials as well as the up-dated all-in man-hour rates. (See Appendix D for a schematic of all-in wage rates.)
Up to this point in the pricing process all that we have done is to calculate the actual all-in costs of both materials and labor and added on formulas to cover overhead costs–both administrative and plant. It is a necessary stage in the pricing process to plan in, and insist on, a profit margin. Although industry averages are less since averages include those suffering losses, successful woodworkers do attain a 15% sustainable net profit. Adding 15% to anticipated costs is not going to achieve a net 15% result (15 divided by 115 is only 13%). The best way is to divide total anticipated costs (after application of the two overhead factors) by .85.
To facilitate the costing/pricing, an Excel spreadsheet has been designed to incorporate the process including the two overhead factors as well as the 15% profit mark-up. Appendix E is a sample of the Costing/Pricing Work-up Sheet for a representative job. This spreadsheet also has a database capability. It allows the user to access statistics to facilitate material bulk purchasing, etc.
Note: appendices A – K have been omitted from this sample plan presentation.
5.2.3 Promotion Strategy
With the introduction of an in-house CAD capability that is especially designed for the mill shop industry, the best way to spread the word is to directly contact the architects and interior designers. Only one or two trophy homes in the targeted $3-$15 million range can keep a mill shop fully occupied for months. Advertising is not expected to become necessary. However, joining the ASID and the CSA as an “Industry Partner” is an excellent way to network with design professionals. Also it would be helpful to get listed in the Resource Directories of each of these organizations.
5.3 Strategic Alliances
It is planned that Comgate will establish strategic alliances with several mill shops who will mutually profit from an association. Exact drawings and cut lists can be given to other mill shops when subcontracting the more mundane items, leaving the more challenging work for Comgate. Even the data on disk to program CNC equipment at the subcontracting mill shop can accompany the exact drawings, allowing a fast and accurate set up. Profits from work performed through these alliances has not been considered in preparing this business plan, but when the plan is updated in 2001, there should be enough historical experience with these alliances to include this aspect in projections.
The table below outlines the strategic milestones for Comgate for the coming years.
|Milestone||Start Date||End Date||Budget||Manager||Department|
|Complete Administrative Control Changes||10/1/2000||11/30/2000||$500||A. Comins||Management|
|Complete Procedures Manual||10/1/2000||10/1/2001||$0||A. Comins||Management|
|Join ASID and CSA||11/1/2000||12/30/2000||$4,000||A. Comins||Management|
|Get Certification by AWI||11/1/2000||11/1/2001||$1,000||A. Comins||Management|
|Hire Production Manager||4/1/2001||5/1/2001||$60,000||A. Comins||Management|