Years ago, I remember consulting to a small printing firm.
As is often the case in job shops (make-to-order manufacturers), estimation was the system constraint.
Obviously, this wasn’t a good thing. It meant that customers wanted to buy printing; that production had the capacity to fulfil their orders; but that estimating was limiting the flow of Throughput (money).
Increasing the flow of estimates would provide two benefits:
- It would release a bunch of work into production (where it could be converted into Throughput)
- It would increase the conversion rate (in a high-volume job shop like this, estimation lead-time is a driver of conversion rate)
The temptation was to add another estimator. But before we did this, we took some time to observe the estimation function in the context of the wider sales process.
Here’s what was happening:
- Customers would provide salespeople with a request for quote (RFQ)
- The RFQ would sit in a queue for days, and then the estimator would spend an disturbing amount of time costing the job (on a time-and-materials basis)
- Salespeople would provide the estimate to clients and then negotiate the price quoted down to market value!
We realised that it simply didn’t make sense to dedicate all that time to the generation of estimates. The firm had production capacity. Within reasonable limits, any work that would generate Throughput was good work!
For that reason, we changed the estimation priorities to:
- Cover raw-material costs
- Win the work
- Generate as much Throughput as possible
Then, to jump-start the process, we got the CEO to make a simple commitment. Each day, before leaving work, the CEO promised to check the estimator’s in-tray. If it contained any RFQ’s that had been received after 3:00pm, the CEO would *guess* the market value of the job and scribble it on the estimate! These guesses would be transcribed and dispatched first thing the next morning. (The CEO agreed that, with his experience, the guesses would be ‘good enough’.)
The result was that estimates were turned-around in hours, instead of days. The conversion rate increased. Production became busy. And the firm developed a reputation for speed (which, in that industry, is a valuable reputation to have).
Obviously, this approach conflicts with estimators’ cost-plus view of the universe. But the reality is that prices are not determined by estimators; they are determined by the market. It’s better in most cases, to design a quick-and-dirty estimation process and then have your salespeople negotiate the final price.
In a job-shop environment, we tend to encourage clients to quote a number of prices, each with different lead times. That way clients can pick their own price (more often than not they’ll elect to pay a premium for a shorter lead-times).
So, how do you calculate the price?
I recently compared notes with Mark Woeppel (a TOC production expert and a subscriber to this list). Mark explained that he has a current job-shop client with the same problem. He has them estimating by taking raw-material costs and multiplying them by 4!
The result, he assures me, are ‘good enough’.
Sounds good to me!