The Doctor Is In --Dickeson
"How's business?" The usual response is, "Great! We've got a terrific estimating system." We have a tendency to equate job costs with the costs we "estimate." Often overlooked, perhaps, is the major value of a job costing system. System suppliers know and exploit this pricing weakness.
Dr. Quincy, the '70s TV pathologist, doesn't try to predict when a person will die. He reacts to what has already occurred. We can do a Quincy act with our cost accounting system.
For a cost accounting system we have two data sets:
A. Transaction job dollar costs (Transactors)
1) Paper and ink
3) Hourly work center "standard" rates
B. Actual job performance results (Actuals)
1) Materials consumed on the job
2) Production center hours applied
We give only passing attention to multiplying Actuals by Transactors, to produce the reactionary perceivers—the Quincy's. By neglect of actual job cost experience analysis we're missing statistical guidance for the long-term success of the company.
Production standards used for pricing/estimating, as predictors, are iffy at best. Production standards attempt to apply tables to specific job specifications in order to predict what will happen. We try to apply actuarial experience tables to tell us which jobs will live and which will die. That's a waste of time and money.
No doctor or actuary can look at any person and predict life span. Why do we constantly strive to do just that in our business? Chaos theory, where small variations in inputs cause major variations in output, frustrates application of job performance predictors. Scheduling, purchasing and materials management use their own variations of production standards based on their view of experience.
Cost estimating/pricing lives in a world of virtual reality, forcing decisions based on predictions from tables that are not intended for such use. Actuaries can only look at groups like white male smokers, construction workers, homemakers, etc., and provide averages and ranges of life expectancy. All we can do with our predictors is provide averages and ranges of job performance expectancy. Clearly, we can't use them to set our pricing.
Dr. Quincy was a reactionary. He looked at what has happened, not what is to be. Let's react to job costs. Let's do a Quincy and examine the job bodies after the production "crimes" have been committed to truly learn from experience. When we multiply standard transaction costs by actual results we are doing this. We forsake virtual reality for the real world. No predictors, just actual experience, converted to some common denominator of dollars.
With this usage we're prepared to do internal benchmarking. Our benchmarks are the results of all the other jobs we've done in the past. It's our own set of actuarial experience tables. But it only works in groups of similar jobs.
Group the actuarial experience of jobs. Compare account group X with account group Y. Constantly ask "Why did we make money on this group and lose on that one?" Where and what are the job differentiators? Think. Discuss. Then think and discuss some more. We're mining the database of experience for the gold that's in it.
The attitude shouldn't be to worry about the accuracy of the transaction costs. Freeze 'em, lock 'em into place. Call 'em standard costs and leave 'em alone. Forget budgeted hourly rates. We want all jobs and customers to be relative to each other, and to the past, so we hold those costs as constants while actual performance supplies the variables. Always multiply actual performance by the same transaction values to make groups of jobs and accounts directly comparable.
Now we can do some real internal benchmarking! We don't give a hoot about how close these "standard" costs come to the profit opinion of our general ledger system.
Is this group job pathology an academic exercise? No way. We're into pragmatic marketing analysis. We're looking at our own experience with work and customers. We have a steering wheel to drive our marketing machine. We have to find and fulfill needs at a real profit contribution, not some opinion of a gain. If we don't make a real contribution we don't survive.
In order to do that we must identify and optimize our core competence with the objectivity of solid data. What is it we do best and worst? Why is this? Equipment? Experience? Location?
Some jobs are dogs—trash jobs. With such jobs we don't need Jack Kevorkian to assist us to self-destruction. Some jobs are pussycats. If all our dogs were pussycats we'd build a house in Bill Gates' neighborhood.
Do we try to turn dogs into pussycats? We don't. We identify, cherish and foster our core competence knowing which is pussycat work—the market we serve best and that values us most. We gradually eliminate the trash, the dogs, the Kamikaze jobs. We steer our marketing machine like a Ferrari at a road rally until we finally emerge at the checkered flag.
Which Way to Go?
Without transaction costs applied to actual performance, we don't have a compass to point the path to our core competence. We've nothing but a packet of anecdotes—war stories that we tell from our selective memories around a hot stove in winter.
If we want to enter a new market, fulfill new or different needs, we first carefully define those needs and all of the nuances and peculiarities. Then we must ask what it takes to develop market competence. Next follows necessary research, development and testing.
Isn't this the secret of highly profitable printing companies listed in the ratio studies? "Profit" leaders find, develop and optimize core competencies using the statistical methods of actual job cost analysis.
Next time someone asks about your job cost system don't just respond with comment on your job cost estimating/pricing practices. Discuss the usages of your job cost analysis, benchmarks and resulting direction of your pragmatic marketing efforts.
—Roger V. Dickeson
About the Author
Roger Dickeson is a printing productivity consultant based in Sylmar, CA. He can be reached via e-mail: email@example.com.