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Roger and His Fabrication Shop
Chapter II: The Labor Cap
“Yes, commissioner Phelps! Under league rules I must keep my team’s labor cost under $116K per month to maintain my minimum Net Profit of $40K,” Roger responded with a big grin.
“We refer to it as the Labor Cap, but the same logic follows for increasing $OE -OTHER when you buy a new machine or Install truck, in which case your Labor Cap will go down. As the business grows, you will be refer- ring to this section of the PCP often, ensuring you stay profit- able along the whole journey,” Instructed Coach Rick.
“Certainly makes sense,” Roger responded.
“I think that’s enough for you to chew on this next week. Why don’t you summarize your goals to achieve before our session next week?”
Roger referred to his notes, then said, “First, I am going to read the first four chapter of my business library’s newest book! Then I am going to see if I can explain it to Bob, my accoun- tant. When successful, I will review with my leadership team. They need to understand how the Labor Cap works and help priori- tize what we invest in as the busi- ness grows.”
“Excellent! Remember, reach out if you have any questions, by email or text. What was the value of coaching today, Roger, and your biggest takeaway?”
“I will give you another 10! I think my biggest takeaway, apart from the obvious – the Labor Cap – is that I am understanding my business in ways I never dreamed
of. No more beating myself up for never going to college!”
With that, the Zoom call ended.
Contact Synchronous Solutions for more information about how our Synchronous Flow Operating System can transform your busi- ness, and to learn more about our Executive Business Coaching offerings.
Contact Ed Hill at (704) 560-1536, or email EdHill@ SynchronousSolutions.com , or Rick Phelps at (216) 533-1387, RickPhelps@SynchronousSolu- tions.com.
Synchronous Solutions, LLC has developed programs specifically for the stone process- ing industry.
For more information, visit their website at www.Synchronous Solutions.com .
Rick Phelps has been apply- ing the concepts of Synchronous Flow to difficult industrial prob- lems at dozens of businesses and organizations around the world, since the early 1980s.
In 2009, as Cleveland Cliffs’ Director of Continuous Improvement, Rick took on a failing Lean Six Sigma organi- zation, refocused their improve- ment work using Synchronous Flow, and created a shop floor, engagement driven, continuous improvement process that Cliffs credits with creating a sustained $100M per year reduction in pro- duction costs.
Now, back working with Ed Hill at Synchronous Solutions, Rick is once again applying Synchronous Flow in the coun- tertop industry, and having a blast! Nick lives with his family in the Cleveland, OH area.
Continued from page 8
“And yet, so many companies like yours do exactly that. When you have more labor than you can afford, you damage the prof- itability of the business, and thus damage its ability to grow and respond to changes in the mar- ket,” Rick continued, “which is why I am so glad you brought this up. Most of the time, talking about a business’s Labor Cap is about their need to ‘grow into’ their current Labor cost or trim down to the meet the Cap. Both are painful. Having to signifi- cantly grow a business without adding ANY people is stressful. But when a business is in trou- ble, having to cut back to re-es- tablish profitability, that is stress on another whole level!”
“Right, that is why I have been feeling anxious about adding to the office team! This is really interesting! How do we deter- mine my Labor Cap?” asked Roger.
“I'll explain, but before we con- tinue, open up Amazon,” was Rick’s response.
“So, I am buying another book, eh?” Roger asked.
“Of course! Search for Simple Numbers, Straight Talk, Big Profits by Greg Crabtree, and add it to your library. Then read the first four chapters. Greg is one of those CPAs who actu- ally get Throughput Accounting, although he does not refer to
it by that name. He does a great job of explaining the concept of Labor Caps that we are walking through now. You can loan it to Bob after you have read those four chapters!”
“Ordered,” announced Roger. “You said I would be reading a lot in this program, and you weren’t kidding! What an education this has been! Please continue.”
“Crabtree explains in one of those early chapters why 10 per- cent is the minimum Net Profit we want to achieve, so we are just going to go with that. Right now, your business is running about $400K in revenue per month. That means we don’t want the $NP before taxes to drop below $40K.”
“That makes sense,” Roger interjected.
“Good. You have gotten your $T Ratio up to 64 percent,” stated Rick as he examined the PCP Actual section. “Well done! 64 percent of $400K is $T at $256K, which means you have $T at $256K to cover $OE and $NP, since $NP = $T – $OE. Still with me?”
“Yup, although it still blows my mind how you make all this so simple!” was Roger’s response.
“We now can subtract your tar- get $NP, $40K from the pro- jected $T of $T at $256K and get the maximum $OE-TOTAL for a month of $216K. Your $OE – OTHER is running right at $100K per month. This means your Labor Cap is $216K - $100K or $116K. Got that, Roger?”
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