Job shop estimating: Moving from cost to price

This edition of Precision Matters continues our detailed examination of estimating as a business process. The previous edition discussed the estimator’s review of production history to verify the current cost estimate.

At this point the estimator has a documented commitment to schedule and costs. The estimate has been verified in as many ways as is practical.

We now turn our attention to the translation of costs into price quotations. Pricing is different from costing only in that profit is involved. Profit is a vital thing. Success requires a team effort. Our estimator is an element of a team that includes accountants, business strategists, and specialists in customer service.

For the sake of discussion, we’ve dissected the estimator’s job into a dozen tasks. In reality, these tasks may overlap or evolve in different sequences. As a review, here is a brief outline of how we’ve dissected an estimator’s job:

1. Process identification
2. History retrieval
3. Compatibility check
4. Work order prep
5. Time study
6. Material planning
7. Fixtures/special handling
8. Costing
9. Pricing
10. Presentation
11. Review
12. Optimization

My work experience in estimating started from day one with quoting prices directly to customers. In other words, I was both the salesman and the estimator—and the buyer and production engineer. As the scale of the operation grew, the efficiency of my multitasking became an expensive bottleneck. The need for speed and accuracy in customer service compelled me to add to the staff and separate the areas of responsibility. It is only with considerable hindsight that I report to you that it is perilous to allow customer service to set the costs.

Allow me to digress to explain my fondness for substituting customer service for salesman. It puts the emphasis on the mission: Help the customer succeed. The better you and your customer are at success, the more joy in the shop.

That returns us to the topic of separation between sales and estimating. Naturally, the customer will assure you that the best way to help them succeed is with lower prices. The natural trend in customer service is to lower prices. The metal fabricator can’t possibly lower the margin, so the fudge factor goes to imaginary improvements in efficiency. The estimator is in a supporting role to prevent the prices from going so low as to harm your company.

How can an estimator help the marketing effort? The goal is for the customer to understand that their expectations will be met. If they expect parts on time, properly packaged with inspection records, they should realize that costs are associated with that performance. The estimator can provide reports that show the costs associated with elements of the customer’s specification. Those reports will be the foundation of the contract negotiation with the customer. While the estimator is not the one doing the negotiating, the estimator is able to bring attention to oddities and forewarn the team.

A Sharp Story

To illustrate, I shall regale you with a tale from long ago. During prototyping and early production releases of a product line, my customer developed a requirement for an exotic burr removal process that was unique to our shop. A few years passed with a blissful business relationship as we produced batch after batch of beautifully deburred parts.

Then the customer hired a new buyer. The new buyer found a source that quoted the parts at a lower price. That price omitted the expensive burr removal process.

When our customer service team got the news that the purchase order went to the low bidder, we pretty much figured that the sharp edge was the problem. We found a way to let the buyer know that we too could omit the operation and lower the quoted price, but that would be contrary to the original drawing specification. The point of the story is to be prepared to explain the value of your service.

Help Me to Help You

While most oddities in the price quotation have their roots in the customer’s product specification, the customer’s request for quotation may specify an awkward quantity, as well. For example, the raw material blank might economically yield seven parts. The customer requests a quote for eight. It would be to their advantage to order 14 instead. That is an example of an “economic order quantity” (EOQ). Some customers may not care much about EOQs, but most learn to appreciate their long-term value.

Some projects have variable yield rates as well as variable production schedules. If the customer’s production requirements will allow some tolerance in batch sizes received, that could be mutually beneficial to the efficiency of the fabrication.

“Take it or leave it” is not conducive to long-term business relationships. This works both ways. Inflexible quantities, schedules, and seemingly arbitrary prices are chafing no matter the source.

Disclaimer: This Is Just a Suggestion

While the estimator may not be the one delivering the message—that is to say the price quotation—to the customer, the estimate supports every element of the price quotation and allows all parties to understand the terms and expectations. What actually appears on the price quotation is a matter of company policy. We plan to discuss presentation ideas in the next edition of this article.

In an extreme situation, the estimator should be prepared to report any level of detail. In practice, the customer will let customer service know what they want to see in the price quotation. Customer service will let the estimator know what level of detail to provide. It reinforces the confidence of customer service to know that, if needed, more or less detail can be provided.

Know What Worked

Potentially valuable information can be gleaned from competitive bidding. Open communication with the customer is important. That is communication as in both parties sharing information. If the customer will divulge what price won the contract, then the estimator might be able to reverse-engineer a quote to spot what made the difference. Your competitor’s price can reveal a weakness in its strategy as well as an advantage in efficiency. One should learn from every bidding war.

In addition to learning what prevailed when a bid is lost, it is important to understand what won the contract. The customer is betting its money that your firm will satisfy its manufacturing needs. The higher the customer’s confidence, the easier the customer service job is.

To close the loop in the customer service realm, a fabricator needs to verify that all expectations were met. That information is useful for training the estimator as well as for improving the production engineering for future builds.

Customer service can compare expectation to performance in categories such as dimensional precision, shipping precision, and cosmetic inspection. It is glorious when the customer participates in the check-off of such performance categories. They might be pleased to help refine your feedback system. These are the days of the Internet.

Do You Shrug or Hug?

The important result of a satisfaction survey is not to know that a mistake was made, but what action was taken to improve. If bad parts were shipped, what did it take to replace them with good parts?

How does this involve the estimator? As part of recordkeeping and subsequent analysis, the estimator compares the predicted labor and material expense to the actual expense for completed projects. In addition, the estimator considers the customer feedback as a way to refine the processing and costs for future production.

If the customer places low value on expensive processes, the estimator might report that information to customer service for a discussion about changing the customer’s specification for future contracts. Beware the difference between what the customer wants and what the customer asks for.

Price Wars

Guess what? Your prices are too high.

At least, that’s what one of your competitors told your customer. So how might an estimator respond to the news? Some rejected bids might be discounted because of excessive price markup or inept competition, but in the majority of cases, the estimator is going up against another competent professional. What did that other set of eyes see that was missed?

Guess what? Their prices are stupid.

Take heart. Be confident in your own arithmetic and reasoning. Do not be lulled into a damaging situation by numbers alone. The damaging situation I’m referring to is loss of profit. If this customer can’t afford your service, you now have capacity to serve another. A lost bid is worthy of some attention, but not to the point of distraction.

The Estimator as Pathologist

When trying to make sense of a rejected estimate, the estimator is looking at predicted inventory, labor, subcontracted services, and schedule. It is usually pretty easy to get the customer to tell you if the schedule was the problem. They might let you know who won the deal. It would take some industrial espionage to discover the competitor’s planned work order and sources for inventory. Rather than bother with that, we’ll presume that the competitor’s costs are similar to our own. We’ll be happy just to know what price they quoted. That might not be shared information.

When all that is known is that some competitor prevailed, then keep track of that lonesome factoid. If nuisance competitors become a trend, make the effort to examine the parts produced by those creeps.

Did the competitor actually satisfy the customer’s written specification? Some customers are happy with getting what they want instead of what they ask for. (This is brought to you by the Department of Redundancy Department.)

Now comes some deep soul-searching that may lead to some estimator’s angst: Perhaps the estimator’s work plan for production is not as good as the competitor’s. As an example, the competitor stamps countersunk holes whereas the estimator planned on machining them manually at a drill press.

Not all work is perfectly suited to your production line. Some price quotes are properly rejected. To that extent, the rejected price quotation provides feedback to the marketing effort. Some projects are not worth soliciting. Focus on this other kind of opportunity instead.

Estimator, Know Thy Limits

No, the estimator is not a salesman. Nor is the estimator a business strategist. However, the estimator is adept at recordkeeping and data analysis. As such, the estimator is a supporting actor in many areas of the business.

To help the customer succeed, the estimator pays attention to the technology in the shop. A better way may already be sitting idle! The better way may require an upgrade to tooling or machinery. Perhaps a change in supplier of raw material or subcontracted service would better serve the customer.

In most of these areas, the estimator can only make recommendations. However, the price war is waged on many fronts. The estimator is providing the ammo to win.

Gerald would love to have you send him your comments and questions. You are not alone, and the problems you face often are shared by others. Share the grief, and perhaps we will all share in the joy of finding answers. Please send your questions and comments to dand@thefabricator.com.