23rd International Conference of the TOC Practitioners Alliance - TOCPA www.tocpractice.com
21-22 March, 2016, Tennessee, USA
Transforming the Competitive Bid Game: A Sub-Contractors Mafia Offer to a General Contractor Dr. Russ Johnson, Associate Professor Engineering and Technology Management Washington State University Unites States March, 2016
Dr. Russell Johnson Russ Johnson has been teaching and implementing Theory of Constraints, Lean and Six-Sigma/Quality Management tools and concepts in business and at the university level since the mid-1980’s. His roles as a business owner, university professor and consultant have allowed him to blend common sense approaches that bridge the gap between theory and application. He became a Certified Associate of the Avraham Y. Goldratt Institute in 1991. He served as an instructor with the Goldratt Schools and as a TOC Application Expert and Project Leader on some of the first Viable Vision Projects in the US from 2004-2008. He holds numerous TOCICO certifications and currently serves on their board of Directors. He is the proud Grandpa of 5, under 5, grandchildren. www.tocpractice.com
Email:
[email protected] Phone: 970-581-0075
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Original Scenario for the Mafia Offer:
Well established and respected millwork (high end woodworking) company • • • • • • •
Annual sales of $15mm-$17mm Suffered $2.5mm loss Bank line of credit maxed out $1.4mm $1.6mm 120+days past due accounts payable $1mm+ owed to bonding company Retention being held $1mm+ Under contractor with broker to sell controlling interest (obtain outside investor)
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Challenges No cash Most suppliers who would supply were cash FOB or COD Most work available to bid required bonding Lack of materials killed gains from DBR, CCPM and full kit Even if client won the bid with a GC, the GC still had to win the overall bid for client to get job Positives • Had one, local contract that was big enough to cover OE for at least 6 months ($6mm+) • Some suppliers on another mafia offer tied to large contract • • • • •
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Format of today’s presentation • Present the offer as it was presented to the prospective General Contractor • Slide animation has been removed by replacing with multiple slides • Supporting slides that had been linked from other slides have been placed into presentation body
• Followed by: • Discussion of GC reactions during and after the presentation • Q and A including suggestions or changes needed to use in other environments www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
XYZ General Contractor
Working Together: Leveraging past success
To build a thriving future
6
Our shared frustration • Our hit rate on competitive bids is much less than wanted • Increase bid staff decrease bid staff • It’s a hell of a lot of work to lose a job especially if we lose by less than 2% • Bid more jobs Switch to negotiated contracts • Don’t even talk to me about reliable financial and operational plans www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Quantifying the value of a solution Recalling battles lost What was the approximate value of those lost jobs? What was the profit opportunity represented by those lost jobs? What would this have represented to you personally? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The problem Do we have agreement on the problem we want to solve? We want to win more work Obstacle: Dropping our price by an additional 1-2% would win more bids but, We have found no consistent way to do this other than further trimming our margins and, That is not acceptable or we would already been doing it www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Breaking the barrier
What if we provide the money? ABC Millworks offers a discount on our base bid sufficient to allow you to drop your total bid, on selected projects, by 1-2%.
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Expected impact Benefits to XYZ: • Bring $200mm or more new business to your company per year • Do this without endangering your margins on those additional jobs • Minimal effort and little if any additional cost How? • Treat the symptoms by treating the disease www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Moving from symptoms to a common cause
View A
View B Two views of reality: • View ‘A’ • View ‘B www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Moving from symptoms to a common cause
View A
Two views of reality:
View B
• View ‘A’ • View ‘B •What if view ‘A’ actually resides within view ‘B’? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The bidding dilemma
Our existing bidding staff is pushed hard to submit more bids We need to double the number of jobs we win
We have no desirable and reliable strategy to significantly increase our “hit” rate Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The bidding dilemma Our bid hit rate would actually go down; we would be working proportionately harder for the work we won
The number of jobs won would go down significantly Our bid quality goes down
Our bidding capacity would be quickly exhausted Our existing bidding staff is pushed hard(er) to submit more bids We need to double the number of jobs we win
We have no desirable and reliable strategy to significantly increase our “hit” rate Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The bidding dilemma Our bid hit rate would actually go down; we would be working proportionately harder for the work we won
The number of jobs won would go down significantly Our bid quality goes down
Our bidding capacity would be quickly exhausted Our existing bidding staff is pushed hard(er) to submit more bids We need to double the number of jobs we win
We have no desirable and reliable strategy to significantly increase our “hit” rate Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
There is pressure to reduce our bidding staff We need to improve the ROI on our bidding staff
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The bidding dilemma Our bid hit rate would actually go down; we would be working proportionately harder for the work we won
The number of jobs won would go down significantly Our bid quality goes down
Our bidding capacity would be quickly exhausted Our existing bidding staff is pushed hard(er) to submit more bids We need to double the number of jobs we win
We have no desirable and reliable strategy to significantly increase our “hit” rate Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Any cost savings from job cuts would be eclipsed by reductions in sales
There is (more and more) pressure to reduce our bidding staff We need to improve the ROI on our bidding staff
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The bidding dilemma Our bid hit rate would actually go down; we would be working proportionately harder for the work we won
The number of jobs won would go down significantly Our bid quality goes down
Our bidding capacity would be quickly exhausted Our existing bidding staff is pushed hard(er) to submit more bids We need to double the number of jobs we win
We have no desirable and reliable strategy to significantly increase our “hit” rate Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Any cost savings from job cuts would be eclipsed by reductions in sales
There is (more and more) pressure to reduce our bidding staff We need to improve the ROI on our bidding staff
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
An injection into the GC’s current reality
We have a desirable and reliable strategy that doubles our “hit” rate without cutting our margin
www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Solving the bidding dilemma
We have a desirable and reliable strategy that doubles our “hit” rate without cutting our margin Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Solving the bidding dilemma We would be working proportionately easier for the work we won
The number of jobs won would go up significantly Our bid quality goes up
Our bidding capacity would be quickly expanded Our current bidding staff would win 2X more jobs
We would double the number of jobs we win
We have a desirable and reliable strategy that doubles our “hit” rate without cutting our margin Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Solving the bidding dilemma We would be working proportionately easier for the work we won
The number of jobs won would go up significantly Our bid quality goes up
Any cost savings from job cuts would be eclipsed by increases in sales
Our bidding capacity would be quickly expanded Our current bidding staff would win 2X(+) more jobs
We would (more than) double the number of jobs we win
We have a desirable and reliable strategy that doubles our “hit” rate without cutting our margin Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Our ROI for our bidding staff (more than) doubles There is less (and less) pressure to reduce our operations costs
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Agenda (for the offer meeting with the GC)
• Come to a common understanding of the problem • To determine the value of such a solution to your organization • To present the details of the proposed solution • To determine how we can “work together” to make the proposal a reality. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Making the “missing link” a reality We have a desirable and reliable strategy that doubles our “hit” rate without cutting our margin
What does “Desirable” Mean? What does “Reliable” Mean? How can we claim to “double your hit rate”? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
What does “desirable” mean? To make use of the strategy the GC doesn’t have to: further erode their margins to get a job do much, if any, additional work Incur additional costs
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
What does “reliable” mean? In making use of the strategy, the results are Predictable – we have taken actions so we have a high level of confidence that the results we want will be the results we get
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
The outcomes of several bids
Job 1
X
X
XYXX
X
Low 0 High Y = Your company's bids X = Competitor’s bids
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
The outcomes of several bids
Job 1 Job 2
X
X
XYXX X X YX X
Low
0
Y = Your company's bids www.tocpractice.com
X X
High X = Competitor’s bids
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The outcomes of several bids
Job 1 Job 2 Job 3
X
XYXX X X YX X Y X X X X
X X
Low
0
Y = Your company's bids
www.tocpractice.com
X X
High X = Competitor’s bids
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The outcomes of several bids
Job 1 Job 2 Job 3 Job 4
X
XYXX X X X YX X X Y X X X X X XYXXX X X
X
Low 0 High Y = Your company's bids X = Competitor’s bids
www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The outcomes of several bids
XYXX X X X YX X X X Y X X X X X XYXXX X X X X X Y X X Low 0 High Y = Your company's bids X = Competitor’s bids
Job 1 Job 2 Job 3 Job 4 Job 5
www.tocpractice.com
X
X
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The outcomes of several bids Job 1 Job 2 Job 3 Job 4 Job 5
X X X Low
XYXX X X X YX X X Y X X X X X XYXXX X X X X X Y X 0 High X
Y = Your company's bids Winning bids www.tocpractice.com
X = Competitor’s bids
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The outcomes of several bids Job 1 Job 2 Job 3 Job 4 Job 5
X X X Low
XYXX X X X YX X X Y X X X X X XYXXX X X X X Y X X 0 High X
Y = Your company's bids X = Competitor’s bids Winning bids Your hit rate 1:5 = 20% www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The Reality of the bidding world Bid too high for consideration X
Submitted Bid Range
X X X X X
X
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Bid too low; Owner is uneasy Bidder wants to recall or modify as they are concerned something was missed 23rd International Conference of the TOC Practitioners Alliance - TOCPA
The Reality of the bidding world Bid too high for consideration X
Submitted Bid Range
X X X X X
X
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Bids within range of consideration. $ spread is usually no more than 2-5% at the GC level
Bid too low; Owner is uneasy Bidder wants to recall or modify as they are concerned something was missed 23rd International Conference of the TOC Practitioners Alliance - TOCPA
The Reality of the bidding world Bids still too high with little chance of winning work based on better quality, relationship, etc. X
Submitted Bid Range
X X X X X
Bids within range of consideration. $ spread is usually no more than 2-5% at the GC level
X
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
The Reality of the bidding world Bids still too high with little chance of winning work based on better quality, relationship, etc. X
Submitted Bid Range
X X X X X
X
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Bids within range of consideration. $ spread is usually no more than 2-5% at the GC level Bids in serious contention for job. Second place has chance of winning work based on better quality, relationship, etc., but will likely be pressured to match low bid price 23rd International Conference of the TOC Practitioners Alliance - TOCPA
The impact a small change can make Bids still too high with little chance of winning work based on better quality, relationship, etc. X
Submitted Bid Range
X X X X X
X
www.tocpractice.com
A C B D
If bids are within 2% of each other, the ability to reduce your total bid by just 1% would move you from A to B or C to D Bids in serious contention for job. Second place has chance of winning work based on better quality, relationship, etc., but will likely be pressured to match low bid price
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The impact a small change can make Bids still too high with little chance of winning work based on better quality, relationship, etc. If bids are within 2% of each other the ability to reduce your total bid by just 1% would move you from A to B or C to D
X Submitted Bid Range
Bids within range of consideration.
X X X X X
X
www.tocpractice.com
A C B D
E F G
If bids are within 5% of each other the ability to reduce your bid by just 1% would move you from E to F or F to G
Bids in serious contention for job. Second place has chance of winning work based on better quality, relationship, etc., but will likely be pressured to match low bid price 23rd International Conference of the TOC Practitioners Alliance - TOCPA
Doubling your hit rate Impact of your results if you could have lowered your bid by just 1%? Job 1 Job 2 Job 3 Job 4 Job 5
X
X
YY XX Y XYXX
X X
X Y Y X X X X X YYXXX X X X Y X Y X X Low 0 High Y = Your company's original bids X = Competitor’s bids Y = Your company's adjusted bids www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Doubling your hit rate Impact of your results if you could have lowered your bid by just 1%? Job 1 Job 2 Job 3 Job 4 Job 5
X
X
YY XX Y XYXX
X X
X Y Y X X X X X YYXXX X X X X Y X Y X Low 0 High Y = Your company's original bids X = Competitor’s bids Y = Your company's adjusted bids Originally winning bids www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Doubling your hit rate Impact of your results if you could have lowered your bid by 1%? Job 1 Job 2 Job 3 Job 4 Job 5
X
X
YYXX Y XYXX
X X
X Y Y X X X X X YYXXX X X X Y X Y X X Low 0 High Y = Your company's original bids X = Competitor’s bids Y = Your company's adjusted bids Original Winning bids New winning bids 20% hit rate Your improved hit rate 2-4:5 = 40%-80% www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Criteria for a good solution
Solves a major partner problem while: – Making them their customer’s preferred supplier – Making it very difficult for their competition to copy
Impacts a large enough market We can “sell” it in the target market Must not create “real risk” Must not exhaust the organization’s resources www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Making the missing link a reality ABC provides the dollars needed to lower the total bid by 1%-2% How: A significant price reduction, up to 20%, on the part of our bid that is self performed Excludes materials, buyouts, subcontracts, shipping and like elements that are pass through dollars; $ we collect for others Puts the GC’s bid in the “green range” www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
An example of the impact of the offer Qualifying portion Discount applied of ABC bid 10% 15% 20% $4,000,000 $400,000 $600,000 $800,000 Base GC bid Impact of discount on total GC job bid $25,000,000 -1.60% -2.40% -3.20% $50,000,000 -0.80% -1.20% -1.60% $75,000,000 -0.53% -0.80% -1.07% $100,000,000 -0.40% -0.60% -0.80% $150,000,000 -0.27% -0.40% -0.53% The larger our portion of the job, the larger the ability of our discount to reduce the total job price www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Are we meeting our “criteria” • Makes the GC their customer’s preferred supplier • Gets your bid into the “green zone”
Is very difficult for your competition to copy* • How much luck do you think your competitors would have convincing a sub to drop their bid by enough to lower the GC’s job bid by 1%-2%?
*“Difficult to copy” assumes an exclusive arrangement with a partner GC www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
A big enough Market? Offer is best leveraged on jobs with high millwork to total job content ratios: the higher the better Discount Winning job bid ABC% Aaaa Bbbb Cccc Dddd
(R) (R) (N) (N)
$190,000 $320,000 $660,000 $385,000
$ 35mm $ 35mm $ 180mm $ 90mm
-.54% -.91% -.37% -.43%
• Hotel and resort owners – remodel over new? • Small number of additional jobs = large amount of additional work/dollars/profits www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
ABC program target Add $10-20mm in extended hours self-performed work If each job contains $2-4mm of self-performed millwork then reaching our goal: • Would require winning 5-10 jobs through the program • If the program hit rate is 60-80% then this would require bidding 8-15 jobs (versus up to 45 jobs) • If average discountable millwork content was 10% of total GC job price this would equate to an additional $100mm - $200mm+ to the GC’s annual book of business Click here for an example of the financial opportunity/value of the offer for the partner GC www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Self-performed millwork as % of total job $ Qualifying portion of ABC bid $500,000
2%
5%
10%
15%
Equivalent GC total job price (ABC $ / % millwork of total job $) $25,000,000
$10,000,000
$5,000,000
$3,333,333
GC net profit @ 2%
$500,000
$200,000
$100,000
$66,667
GC net profit @ 5%
$1,250,000
$500,000
$250,000
$166,667
$1,000,000
$50,000,000
$20,000,000
$10,000,000
$6,666,667
GC net profit @ 2%
$1,000,000
$400,000
$200,000
$133,333
GC net profit @ 5%
$2,500,000
$1,000,000
$500,000
$333,333
$1,500,000
$75,000,000
$30,000,000
$15,000,000
$10,000,000
GC net profit @ 2%
$1,500,000
$600,000
$300,000
$200,000
GC net profit @ 5%
$3,750,000
$1,500,000
$750,000
$500,000
$2,000,000
$100,000,000
$40,000,000
$20,000,000
$13,333,333
GC net profit @ 2%
$2,000,000
$800,000
$400,000
$266,667
GC net profit @ 5%
$5,000,000
$2,000,000
$1,000,000
$666,667
Self-performed millwork as % of total job $ Qualifying portion of ABC bid $2,500,000
2%
5%
10%
15%
Equivalent GC total job price (ABC $ / % millwork of total job $) $125,000,000
$50,000,000
$25,000,000
$16,666,667
GC net profit @ 2%
$2,500,000
$1,000,000
$500,000
$333,333
GC net profit @ 5%
$6,250,000
$2,500,000
$1,250,000
$833,333
$3,000,000
$150,000,000
$60,000,000
$30,000,000
$20,000,000
GC net profit @ 2%
$3,000,000
$1,200,000
$600,000
$400,000
GC net profit @ 5%
$7,500,000
$3,000,000
$1,500,000
$1,000,000
$4,000,000
$200,000,000
$80,000,000
$40,000,000
$26,666,667
GC net profit @ 2%
$4,000,000
$1,600,000
$800,000
$533,333
GC net profit @ 5%
$10,000,000
$4,000,000
$2,000,000
$1,333,333
$5,000,000
$250,000,000
$100,000,000
$50,000,000
$33,333,333
GC net profit @ 2%
$5,000,000
$2,000,000
$1,000,000
$666,667
GC net profit @ 5%
$12,500,000
$5,000,000
$2,500,000
$1,666,667
Can we “sell” it? Target markets • High millwork $ to total job $ (Hotel/resort remodels) • Negotiated contract prospects
Use the offer: Partner GC invited to bid • The partner GC prepares their best bid as normal • ABC prepares our best bid as normal • ABC prepares a separate sheet identifying the discount available to be taken and any limitations/conditions • The partner GC deducts the desired amount of the offered discount from their total bid price and submits their bid (What if ABC’s bid is not the low bid?) www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Thoughts so far Could work Good deal for the GC Still have some questions ... ABC holds risk so: How does it work or make sense for us? What do we expect in return from the GC making use of the offer? Does every GC have access or is it exclusive to XYZ? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
How are we able to offer this discount? Our offer assumes that: This work will be performed during extended hours: Weekends and/or 2nd/3rd shifts This work does not have to support the fixed components of our monthly operating expenses: rent, insurance, loan payments, etc. There’s enough volume to support added shift(s) It is additional work relative to our historical annual sales. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Financial source of the discount Converting fixed overhead to margin/profit (%’s are conceptual) 20% discount on self performed work Margin and profit
120 100 80 60
5 15 10
20 10
10 10
30
30
30
30
30
30
Direct labor
10
10
10
Materials
Fixed overhead Proportional overhead
40 20 0
Subs/buyouts www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Financial source of the discount Converting fixed overhead to margin/profit (%’s are conceptual) 20% discount on self performed work Margin and profit
120 100 80 60
5 15 10
20 10
10GC 10ABC
30
30
30
30
30
30
Direct labor
10
10
10
Materials
Fixed overhead Proportional overhead
40 20 0
Subs/buyouts www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Financial source of the discount Converting fixed overhead to margin/profit (%’s are conceptual) 120 100 80 60
20% discount on self performed work Margin and profit
5 15 10
20 10
10
30
30
30
30
30
30
Direct labor
10
10
10
Materials
GC ABC 10
Fixed overhead Proportional overhead
40 20 0
Subs/buyouts www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Minimizing “real” risk How much discount does ABC offer? How much discount does GC use? Maximum discount must still be profitable Cash flow risk still exists: Retention 30-90 days or more invoice-payment gap We are willing to exchange margin for cash flow www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Thoughts so far It’s clearer but you still have questions. As it stands right now the risk all seems to sit with ABC so: How does it work or make sense for us?
and
What do we expect in return from the GC making use of the offer? Does every GC have access to the offer or is it exclusive? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
GC using the offer must If the GC uses the discount to get the job, ABC also gets the job ABC will not be asked to further lower their price unless it is tied to a change in scope or similar issues ABC will not be subject to retention All payments for ABC related materials, subcontracts, and buyouts will be via “Joint Check” or “Direct Payment” by partner GC and will be in full, no retention Payment for ABC’s portion of invoices will be made within 15 days of submittal, all others within 30 days www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Details needing resolution Playing games with pricing Why partner GC wants other millworkers to provide them with bids Why partner GC wants ABC to submit bids to other GCs bidding on the same job
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Playing games with the pricing Why wouldn’t ABC just raise our price and then discount it? This would negate the purpose of the offer It would make our base bid non-competitive with the other GC’s bidding the job
Why wouldn’t the partner GC keep their original bid and just use the discount from ABC to increase their margin? This also would negate the purpose of the offer Neither of these actions would benefit the GC or ABC www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Why you want other millworkers to bid job Some other millwork company may submit a bid that would beat even ABC’s discounted base bid To judge if ABC’s base bids are staying competitive To maintain relationships with other millworkers In case a job owner has a preferred millwork company other than ABC To keep ABC’s discount offer in the background of the bidding process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Why ABC should submit bids to other GCs on the same job
ABC’s desire is to significantly increase its volume of sales Submitting the same base bid to multiple GCs for a specific job leverages our bidding capacity; one bid, multiple submissions Securing some work in this way provides volume at a non-discounted, full margin price that fills our standard day shift capacity allowing us to cover fixed overhead and other costs
www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Why ABC should submit bids to other GCs on the same job
Proposed solution: ABC submits its standard bid to all GCs requesting a bid for a specific job and will submit the same standard bid to our partner GC if they are bidding the same job. The partner GC will be the only GC who has the additional discount available. We do, however, recognize that our best odds of “winning” the job will be via our partner GC. This allows ABC to stay in the running for the overall job regardless of which general contractor wins the bid Reduces the potential financial risk to ABC which allows us the ability to offer the deep discount on the extended hours work while maintaining some profitability www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
The bidding dilemma Our bid hit rate would actually go down; we would be working proportionately harder for the work we won
The number of jobs won would go down significantly Our bid quality goes down
Our bidding capacity would be quickly exhausted Our existing bidding staff is pushed hard(er) to submit more bids We need to double the number of jobs we win
We have no desirable and reliable strategy to significantly increase our “hit” rate Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Any cost savings from job cuts would be eclipsed by reductions in sales
There is (more and more) pressure to reduce our bidding staff We need to improve the ROI on our bidding staff
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Solving the bidding dilemma We would be working proportionately easier for the work we won
The number of jobs won would go up significantly Our bid quality goes up
Any cost savings from job cuts would be eclipsed by increases in sales
Our bidding capacity would be quickly expanded Our current bidding staff would win 2X(+) more jobs
We would (more than) double the number of jobs we win
We have a desirable and reliable strategy that doubles our “hit” rate without cutting our margin Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Our ROI for our bidding staff (more than) doubles There is less (and less) pressure to reduce our operations costs
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Offer summary so far Solve major problem The solution How solution works How ABC can offer it What is expected of the GC Questions you have to this point Moving on to Exclusivity www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Exclusivity issues Reasons why the GC would want the offer to be exclusive to them
Reasons why ABC wouldn’t want the offer to be exclusive
What value can the GC provide in exchange for exclusive use of the offer? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Why the GC wants exclusivity
Offer has no value to any one GC if any other GC has same deal Two or more GCs with the same offer bidding the same job just lowers the price bar for everyone
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Why ABC doesn’t want exclusivity The more GC’s that have the offer the greater the odds ABC gets the job In the current structure of the offer, the majority of the risk still lies with ABC Market opportunity is lost if not used enough or on the right targets Second market strategy is dependent upon operational improvements that must be built and sustained before the offer can go to market www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Potential solutions: All GCs bidding a specific job get the offer Extend the offer to a “Select Few” GCs Make the “offer” exclusive to one, and only one, partner GC: • Gives GC what they want
What value can the GC offer in exchange? • Mitigate some of ABC’s remaining risk concerns • Some type of commission, backend rebate? • Help us overcome an obstacle blocking the offer www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
A value proposition Common solution might be a commission, 0.25 to 0.5% of GC total job bid price for jobs won using the offer. What would that look like?
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Example commission structure Self-performed millwork as % of total job $ ABC 20%
Qualifying portion
discount
of ABC bid
$100,000
$500,000 ABC Comm @0.5% ABC Comm @0.25%
$200,000
$1,000,000 ABC bonus @0.5% ABC bonus @0.25%
$300,000
$1,500,000 ABC bonus @0.5% ABC bonus @0.25%
$400,000
$2,000,000 ABC bonus @0.5% ABC bonus @0.25%
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2%
5%
10%
15%
Total job price (ABC $ / % millwork of total job $) $25,000,000 $10,000,000 $5,000,000 $3,333,333 $125,000 $50,000 $25,000 $16,667 $62,500
$25,000
$12,500
$8,333
$50,000,000 $20,000,000 $10,000,000 $6,666,667 $250,000 $100,000 $50,000 $33,333 $125,000
$50,000
$25,000
$16,667
$75,000,000 $30,000,000 $15,000,000 $10,000,000 $375,000 $150,000 $75,000 $50,000 $187,500
$75,000
$37,500
$25,000
$100,000,000 $40,000,000 $20,000,000 $13,333,333 $500,000 $200,000 $100,000 $66,667 $250,000
$100,000
$50,000
$33,333
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Example commission structure Self-performed millwork as % of total job $ ABC 20%
Qualifying portion
discount
of ABC bid
$500,000
$2,500,000
5%
10%
15%
Total job price (ABC $ / % millwork of total job $) $125,000,000 $50,000,000
$25,000,000
$16,666,667
ABC bonus @0.5%
$625,000
$250,000
$125,000
$83,333
ABC bonus @0.25%
$312,500
$125,000
$62,500
$41,667
$600,000
$3,000,000
$150,000,000 $60,000,000
$30,000,000
$20,000,000
ABC bonus @0.5%
$750,000
$300,000
$150,000
$100,000
ABC bonus @0.25%
$375,000
$150,000
$75,000
$50,000
$800,000
$4,000,000 ABC bonus @0.5% ABC bonus @0.25%
$1,000,000
2%
$5,000,000 ABC bonus @0.5% ABC bonus @0.25%
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$200,000,000 $80,000,000
$40,000,000
$26,666,667
$1,000,000
$400,000
$200,000
$133,333
$500,000
$200,000
$100,000
$66,667
$250,000,000 $100,000,000 $50,000,000 $33,333,333 $1,250,000 $500,000 $250,000 $166,667 $625,000
$250,000
$125,000
$83,333
23rd International Conference of the TOC Practitioners Alliance - TOCPA
A problem and an opportunity ABC has a significant obstacle that blocks us from committing to the offer and no commission structure alone would overcome this obstacle. OBSTACLE: ABC is profitable (7.6% 1st ¼) but due to current debt structure, we are not bondable.
Must consolidate debt to be ”bondable”. We are willing to trade our “exclusivity commission” for removing the obstacle. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Balance sheet details Debt load Senior bank debt* Equipment financing* Bonding surety advance* Accounts payable past due* Shareholder related debt Total outstanding debts
$ 1,370,000 $ 330,000 $ 750,000 $ 1,600,000 $ 450,000 $ 4,500,000
Collateralized assets Accounts receivable Retention and unbilled costs Equipment (net book value) Total
$ $ $ $
*Contribute to funding needed
2,250,000 1,050,000 1,850,000 5,150,000
Loan or equity partner Securing funding through a traditional bank loan is unlikely in our current financial condition without outside financial support. Without other financial support, we will sell a controlling interest in ABC to an equity partner. • The probability is a new equity partner will prefer ABC seeks high margin jobs, and may discourage, and more likely ignore, this offer. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Partner GC removes the obstacle
Our partner GC can “share the risk” and gain exclusivity of the offer by either providing the needed financing directly or supporting a bank loan in exchange for a significant commission reduction. The more favorable the loan terms, the lower the commission. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Loan directly or support a loan? We believe it is in the best interest of our partner GC to provide this loan directly as: •Offer can’t be blocked by third party •Earns interest for their support. •Tie the exclusivity of the offer to the duration of the loan. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Reducing risk of loan •The partner GC would be in a senior position for collateral assets offered by ABC. •The partner GC can require dual checks and/or third party payment control on all ABC jobs, not just those with the partner GC •Creates an incentive for both parties •The GC’s revenue from these jobs would eclipse the loan amount ($5-10mm new profit per year) www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Maximum financing needed Senior bank debt*# Equipment financing*# Bonding surety advance*# Accounts payable past due*# Operating funds** Other nonshareholder debt*** Total outstanding debts#
$ $ $ $ $ $ $
1,370,000 330,000 750,000 1,600,000 1,000,000 250,000 5,300,000
* From Debt side of balance sheet ** Replaces line of credit for day-to-day operations *** Bulk is contractual obligation to finance broker # May be lowered through negotiated payoffs
Solving the bidding dilemma We would be working proportionately easier for the work we won
The number of jobs won would go up significantly Our bid quality goes up
Any cost savings from job cuts would be eclipsed by increases in sales
Our bidding capacity would be quickly expanded Our current bidding staff would win 2X(+) more jobs
We would (more than) double the number of jobs we win
We have a desirable and reliable strategy that doubles our “hit” rate without cutting our margin Our current competitive bid “hit” rate is much less than desired: We are winning 2-4 jobs for every 10 bid
Our ROI for our bidding staff (more than) doubles There is less (and less) pressure to reduce our operations costs
Significantly improve our bottom line through the competitive bid process www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Working Together: Leveraging past success
To build a thriving future
83
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Questions (Last slide of the offer presentation)
Thank you for your time and attention. Are there any questions? Comments? Where do we go from here? www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Events during presentation The XYZ reps easily followed the concepts and agreed to having a shared problem in terms of poor ROI on bidding process efforts, confirmed they often lost jobs by small percentage (1% or less), and that they were unwilling to drop bid price any more resulting in hit rates of 10%-20%. XYZ was intrigued by our super injection: We would reduce our price enough (10%-20% ) to equate to 1%-2% of the GC’s total bid price. XYZ agreed with the bidding conflict and resulting UDEs as well as the FRT and its predicted results based on the “doubling bid hit rate injection”. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Events during presentation The XYZ reps were given time to digest slide 31 “GC using the offer must … and Raised the predicted reservations (NBR’s) regarding paying ABC’s suppliers directly within 30 days, no retention, and paying ABC within 15 days The reservations were operational, not with the ideas themselves XYZ’s personnel came up with the injections to trim all – No retention is not a problem as retention’s purpose is to insure suppliers are paid and work is being performed and to expectations. They felt the proposal addressed both. – Impact of more frequent and faster payments was agreed to need more specifics on their side but was not a deal blocker or breaker www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Events during presentation The XYZ reps: Agreed they would want exclusive access to the offer and agreed that having that exclusivity required some form of value in exchange for it. Agreed they were very interested, understood and believed the details of the offer. Wanted to know if the offer could be applied to some jobs currently being bid without resolution of the loan issue. Identified that they were not in an approval/commitment capacity so needed and wanted to take concept up the ladder to the corporate management level that could approve and would do so before week’s end. Requested an executive summary and supporting documentation to assist in presenting to higher powers www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Events following presentation The requested documentation was provided the next day (Tuesday) with an offer to assist with presenting the concept up the ladder if needed/wanted. XYZ felt confident in taking the message on. The XYZ reps called that Friday with an update. Upper management was very interested but had four major concerns: 1. They were unsure what the ramifications would be on their ability to pursue specific jobs, especially government work, if the loan created the reality, or even perception, of them having an equity interest in ABC 2. They are employee owned and needed to be sure the loan was good for the company and that they could convey this to the employees. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Events following presentation (continued) The XYZ reps called that Friday with an update. Upper management was very interested but had four major concerns: 3. They didn’t want to tie up company funds at a particular interest rate and then have rates go up and not be able to take advantage of the improved rates. 4. They didn’t want to set a precedent that would lead to other vendors wanting XYZ to become creditors with them.
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23rd International Conference of the TOC Practitioners Alliance - TOCPA
Final outcome While the remaining obstacles were being overcome with XYZ, ABC received an offer to purchase through its broker that was accepted. The buyer was able to negotiate a combined pay down with the bank and bonding company to $500,000. ABC officially ceased to exist leaving the other creditors, me included, with no options but to eat the outstanding debt. The new owners were deeply imbedded in traditional cost accounting thinking and had their own plans for the capacity they had purchased so they weren't even made aware of the offer. www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA
Questions from this TOCPA group? Thank you for your time and attention. Are there any questions? Comments? Thoughts on how to change the offer for other similar environments www.tocpractice.com
23rd International Conference of the TOC Practitioners Alliance - TOCPA