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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-1980s. 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:
russ.johnson@wsu.edu
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)

www.tocpractice.com

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

www.tocpractice.com

23rd International Conference of the TOC Practitioners Alliance - TOCPA

Format of todays
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

Our shared frustration


Our hit rate on competitive bids is much less
than wanted
Increase bid staff
decrease bid staff
Its 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
Dont 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%.

www.tocpractice.com

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


GCs 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 doesnt
have to:
further erode their margins to get a job
do much, if any, additional work
Incur additional costs

www.tocpractice.com

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

www.tocpractice.com

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The outcomes of
several bids

Job 1

XYXX

Low
0
High
Y = Your company's bids
X = Competitors bids

www.tocpractice.com

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The outcomes of
several bids

Job 1
Job 2

XYXX
X X YX X

Low

Y = Your company's bids


www.tocpractice.com

X
X

High
X = Competitors bids

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The outcomes of
several bids

Job 1
Job 2
Job 3

XYXX
X X YX X
Y X X X X

X
X

Low

Y = Your company's bids

www.tocpractice.com

X
X

High
X = Competitors bids

23rd International Conference of the TOC Practitioners Alliance - TOCPA

The outcomes of
several bids

Job 1
Job 2
Job 3
Job 4

XYXX
X
X X YX X
X
Y X X X X
X
XYXXX
X
X

Low
0
High
Y = Your company's bids
X = Competitors 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 = Competitors bids

Job 1
Job 2
Job 3
Job 4
Job 5

www.tocpractice.com

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 = Competitors 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 = Competitors 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

www.tocpractice.com

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

www.tocpractice.com

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

www.tocpractice.com

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

www.tocpractice.com

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

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

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

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 = Competitors 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

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 = Competitors 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

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 = Competitors 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 customers 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 organizations 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 GCs 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 customers 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 GCs 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 GCs 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 ABCs 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.
Theres 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
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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
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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
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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
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23rd International Conference of the TOC Practitioners Alliance - TOCPA

Thoughts so far
Its 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?
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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 ABCs portion of invoices will be made
within 15 days of submittal, all others within 30 days
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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 wouldnt 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
GCs bidding the job

Why wouldnt 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
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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 ABCs discounted base bid
To judge if ABCs 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 ABCs discount offer in the background of the
bidding process
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23rd International Conference of the TOC Practitioners Alliance - TOCPA

Why ABC should submit bids


to other GCs on the same job

ABCs 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

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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
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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
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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
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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
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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 wouldnt want the offer to be


exclusive

What value can the GC provide in exchange for


exclusive use of the offer?
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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 doesnt want


exclusivity
The more GCs 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
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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 ABCs remaining risk concerns
Some type of commission, backend rebate?
Help us overcome an obstacle blocking the offer
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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%

www.tocpractice.com

$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 ) 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.
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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.
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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.
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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 cant be blocked by third party
Earns interest for their support.
Tie the exclusivity of the offer to the duration
of the loan.
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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 GCs revenue from these jobs would
eclipse the loan amount
($5-10mm new profit per year)
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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?
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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
GCs 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.
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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 (NBRs) regarding paying
ABCs suppliers directly within 30 days, no retention, and
paying ABC within 15 days
The reservations were operational, not with the ideas
themselves
XYZs personnel came up with the injections to trim all
No retention is not a problem as retentions 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
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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 weeks end.
Requested an executive summary and supporting
documentation to assist in presenting to higher powers
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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.
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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 didnt 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 didnt want to set a precedent that would lead to
other vendors wanting XYZ to become creditors with
them.

www.tocpractice.com

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

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