7 - russ johnson_23 tocpa_usa_21-22 march 2016
TRANSCRIPT
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23rd International Conference of the
TOC Practitioners Alliance - TOCPAwww.tocpractice.com 21-22 March, 201, Tennessee, !"A
Transforming the CompetitiveBid Game:
A Sub-Contractors Mafia Offerto a General Contractor
Dr. Russ Johnson, Associate ProfessorEngineering and Technology ManagementWashington State UniversityUnites States
March, 2016
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Dr !ussell "ohnson
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-1980’s. 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 CertifiedAssociate 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.
Email:[email protected]
Phone: 970-581-0075
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Original Scenario
for the Mafia Offer:Well established and respected millwork (high
end woodworking) company• Annual sales of $15mm-$17mm• uffered $!"5mm loss
• #ank line of credit maed out $1"%mm• $1"&mm 1!'days past due accounts payable• $1mm owed to bonding company
• etention being held $1mm• *nder contractor with broker to sell
controlling interest (obtain outside in+estor)
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Challenges
• ,o cash
• ost suppliers who would supply were cash ./# or 0/
• ost work a+ailable to bid re2uired bonding
• 3ack of materials killed gains from #4 00 and full kit
• #$en if client won the %id with a &C, the &C still had to win
the o$erall %id for client to 'et (o%ositi+es
• 6ad one4 local contract that was big enough to co+er / for
at least & months ($&mm)• ome suppliers on another mafia offer tied to large
contract
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#ormat of toda$%s
presentation• resent the offer as it was presented to the
prospecti+e 8eneral 0ontractor
• lide animation has been remo+ed by replacingwith multiple slides
• upporting slides that had been linked from otherslides ha+e been placed into presentation body
• .ollowed by9
• iscussion of 80 reactions during and after thepresentation
• : and A including suggestions or changes neededto use in other en+ironments
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&
To build a thriving future
8eneral
0ontractor
)*+ &or'ing Together:
(everaging past success
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Our shared frustration
• /ur hit rate on competiti+e bids is much lessthan wanted
• ;ncrease bid staff decrease bid staff
• ;t
• #id more =obs witch to negotiated
contracts• on
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)uantif$ing the
value of a solution
ecalling battles lost
What was the approimate +alue of those lost
=obs?
What was the profit opportunity represented by
those lost =obs?
What would this ha+e represented to youpersonally?
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The problem
o we ha+e agreement on the problem we wantto sol+e?
e want to win more wor
O%stacle /roppin' or price % an additional1-2 wold win more %ids %t,
e ha$e fond no consistent wa to do this
other than frther trimmin' or mar'ins and,That is not accepta%le or we wold alread%een doin' it
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Brea'ing the barrier
What if we pro+ide the money?
AC Millwors offers a discont on or %ase%id sfficient to allow o to drop or total
%id, on selected pro(ects, % 1-2.
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*+pected impact
#enefits to @B9
• #ring $!''mm or more new business to yourcompany per year
• o this without endangering your margins onthose additional =obs
• inimal effort and little if any additional cost
6ow?
• Creat the symptoms by treating the disease
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Moving from s$mptoms
to a common cause
Diew A
Diew #
Cwo +iews of reality9E Diew FA<
E Diew F#
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Diew A
Diew #Cwo +iews of reality9
E Diew FA<
E Diew F#
EWhat if +iew FA< actually resides within +iew F#
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The bidding dilemma
ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
We ha+e no desirable and reliable
strategy to significantly increase our
GhitH rate
/ur eistingbidding staff is
pushed hard to
submit more bids
We need to double
the number of =obs
we win
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ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
We ha+e no desirable and reliable
strategy to significantly increase our
GhitH rate
/ur eisting biddingstaff is pushed
hard(er) to submit
more bids
/ur bidding capacity would
be 2uickly ehausted
Che number of =obs won
would go down significantly/ur bid hit rate would
actually go downI we
would be working
proportionately
harder for the work
we won
/ur bid 2uality goes down
The bidding dilemma
We need to double
the number of =obs
we win
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ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
We ha+e no desirable and reliable
strategy to significantly increase our
GhitH rate
We need toimpro+e the /; on
our bidding staff
Chere is pressure to
reduce our bidding staff
/ur eistingbidding staff is
pushed hard(er) to
submit more bids
/ur bidding capacity would
be 2uickly ehausted
Che number of =obs won
would go down significantly/ur bid hit rate would
actually go downI we
would be working
proportionately
harder for the work
we won
/ur bid 2uality goes down
The bidding dilemma
We need to double
the number of =obs
we win
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ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
We ha+e no desirable and reliable
strategy to significantly increase our
GhitH rate
/ur bidding capacity would
be 2uickly ehausted
Che number of =obs won
would go down significantlyAny cost
sa+ings from
=ob cuts
would beeclipsed by
reductions in
sales
/ur bid hit rate would
actually go downI we
would be working
proportionately
harder for the work
we won
/ur bid 2uality goes down
The bidding dilemma
We need toimpro+e the /; on
our bidding staff
We need to double
the number of =obs
we win
/ur eistingbidding staff is
pushed hard(er) to
submit more bids
Chere is (more and
more) pressure to
reduce our bidding staff
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ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
We ha+e no desirable and reliable
strategy to significantly increase our
GhitH rate
/ur bidding capacity would
be 2uickly ehausted
Che number of =obs won
would go down significantlyAny cost
sa+ings from
=ob cuts
would beeclipsed by
reductions in
sales
/ur bid hit rate would
actually go downI we
would be working
proportionately
harder for the work
we won
/ur bid 2uality goes down
The bidding dilemma
We need toimpro+e the /; on
our bidding staff
We need to double
the number of =obs
we win
/ur eistingbidding staff is
pushed hard(er) to
submit more bids
Chere is (more and
more) pressure to
reduce our bidding staff
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An in,ection into the
GC%s current realit$
We ha+e a desirable and reliable
strategy that doubles our GhitHrate without cutting our margin
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ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
e ha$e a desira%le and relia%le
strate' that do%les or 4hit5
rate withot cttin' or mar'in
Solving the bidding
dilemma
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ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
We would double
the number of =obs
we win
e ha$e a desira%le and relia%le
strate' that do%les or 4hit5
rate withot cttin' or mar'in
/ur current biddingstaff would win !@
more =obs
/ur bid 2uality goes up
/ur bidding capacity would
be 2uickly epanded
Che number of =obs won
would go up significantlyWe would be
working
proportionately
easier for thework we won
Solving the bidding
dilemma
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ignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
Chere is less (and less)pressure to reduce
our operations costs
e ha$e a desira%le and relia%le
strate' that do%les or 4hit5
rate withot cttin' or mar'in
/ur current biddingstaff would win
!@() more =obs
/ur /; for ourbidding staff (more
than) doubles
/ur bid 2uality goes up
/ur bidding capacity would
be 2uickly epanded
Che number of =obs won
would go up significantlyAny cost sa+ings
from =ob cuts would
be eclipsed byincreases in sales
We would be
working
proportionately
easier for thework we won
Solving the bidding
dilemma
We would (more than)
double the number of
=obs we win
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Agenda(for the offer meeting with the GC)
• 0ome to a common understanding of the
problem• Co determine the +alue of such a solution to
your organiJation
• Co present the details of the proposedsolution
• Co determine how we can Gwork togetherHto make the proposal a reality"
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Ma'ing the
missing lin'. a realit$
We ha+e a desirable and reliable strategy that
doubles our GhitH rate without cutting ourmargin
What does G/esira%leH ean?
What does G6elia%leH ean?6ow can we claim to Gdo%le or hit rate5?
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&hat does desirable.
mean/
Co make use of the strategy the 80 doesn
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&hat does reliable.
mean/
;n making use of the strategy4 the results are
redictable K we ha+e taken actions so weha+e a high le+el of confidence that the
results we want will be the results we get
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The outcomes of
several bids
Lob 1 @ @ @ * @ @ @
3ow ' 6igh
* M our companyNs bids @ M 0ompetitor
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Lob 1 @ @ @ * @ @ @Lob ! @ @ * @ @ @
3ow ' 6igh* M our companyNs bids @ M 0ompetitor
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Lob 1 @ @ @ * @ @ @Lob ! @ @ * @ @ @
Lob O @ * @ @ @ @
3ow ' 6igh
* M our companyNs bids @ M 0ompetitor
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Lob 1 @ @ @ * @ @ @Lob ! @ @ * @ @ @
Lob O @ * @ @ @ @
Lob % @ @ * @ @ @ @
3ow ' 6igh
* M our companyNs bids @ M 0ompetitor
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Lob 1 @ @ @ * @ @ @Lob ! @ @ * @ @ @
Lob O @ * @ @ @ @
Lob % @ @ * @ @ @ @Lob 5 @ @ @ @ * @ @
3ow ' 6igh
* M our companyNs bids @ M 0ompetitor
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Lob 1 @ @ @ * @ @ @
Lob ! @ @ * @ @ @
Lob O @ * @ @ @ @
Lob % @ @ * @ @ @ @Lob 5 @ @ @ @ * @ @
3ow ' 6igh
* M our companyNs bids @ M 0ompetitor
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Lob 1 @ @ @ * @ @ @
Lob ! @ @ * @ @ @
Lob O @ * @ @ @ @
Lob % @ @ * @ @ @ @Lob 5 @ @ @ @ * @ @
3ow ' 6igh
* M our companyNs bids @ M 0ompetitor
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The !ealit$ of the
bidding 0orld
"%mitted
id 6an'e
id too hi'h for consideration
id too low7 Owner is neas
idder wants to recall or
modif as the are concerned
somethin' was missed
)
))
)
)
)
)
The !ealit$ of the
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ids within ran'e of
consideration. 8 spread is
sall no more than2-9 at the &C le$el
)
))
)
)
)
)
The !ealit$ of the
bidding 0orld
"%mitted
id 6an'e
id too hi'h for consideration
id too low7 Owner is neas
idder wants to recall or
modif as the are concerned
somethin' was missed
The !ealit$ of the
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)
))
)
)
)
)
ids within ran'e of
consideration. 8 spreadis sall no more than
2-9 at the &C le$el
ids still too hi'h with little
chance of winnin' wor %ased on
%etter :alit, relationship, etc.
"%mitted
id 6an'e
The !ealit$ of the
bidding 0orld
The !ealit$ of the
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ids in serios contention for (o%."econd place has chance of winnin'
wor %ased on %etter :alit,
relationship, etc., %t will liel %e
pressred to match low %id price
)
))
)
)
)
)
ids within ran'e of
consideration. 8 spreadis sall no more than
2-9 at the &C le$el
ids still too hi'h with little
chance of winnin' wor %ased on
%etter :alit, relationship, etc.
"%mitted
id 6an'e
The !ealit$ of the
bidding 0orld
The impact a small
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The impact a small
change can ma'e
If %ids are within 2 of
each other, the a%ilit to
redce or total %id % (st 1 wold mo$e o
from
A to or C to /
ids in serios contention for (o%. "econd
place has chance of winnin' wor %ased on
%etter :alit, relationship, etc., %t will
liel %e pressred to match low %id price
ids still too hi'h with little chance of
winnin' wor %ased on %etter :alit,
relationship, etc.
)
))
)
)
)
)
A
C
/
"%mitted
id 6an'e
The impact a small
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"%mitted
id 6an'e
ids in serios contention for (o%. "econd place has
chance of winnin' wor %ased on %etter :alit,
relationship, etc., %t will liel %e pressred to
match low %id price
ids still too hi'h with little chance of winnin' wor
%ased on %etter :alit, relationship, etc.
)
))
)
)
)
)
ids within
ran'e of
consideration.
A
C
/
#
;
&
If %ids are within 2 of each other
the a%ilit to redce or total %id
% (st 1 wold mo$e o from
A to or C to /
The impact a small
change can ma'e
If %ids are within 9 of eachother the a%ilit to redce or
%id % (st 1 wold mo$e o
from # to ; or ; to &
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Doubling $our hit rate
;mpact of your resultsif you could ha+e lowered your bid by =ust 1>?
Lob 1 @ @ * * @ @ @Lob ! * @ * @ @ @
Lob O @ * * @ @ @ @Lob % @ * * @ @ @ @Lob 5 @ @ * @ * @ @
3ow ' 6igh* M our companyNs original bids @ M 0ompetitor
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;mpact of your resultsif you could ha+e lowered your bid by =ust 1>?
Lob 1 @ @ * * @ @ @Lob ! * @ * @ @ @Lob O @ * * @ @ @ @Lob % @ * * @ @ @ @Lob 5 @ @ * @ * @ @
3ow ' 6igh
* M our companyNs original bids @ M 0ompetitor
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;mpact of your results if you could ha+e lowered your bid by1>?
Lob 1 @ @ * * @ @ @Lob ! * @ * @ @ @Lob O @ * * @ @ @ @
Lob % @ * * @ @ @ @Lob 5 @ @ * @ * @ @
3ow ' 6igh
* M our companyNs original bids @ M 0ompetitor
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Criteria for a good solution
"ol$es a ma(or partner pro%lem while9
– aking them their cstomer?s preferred spplier
– aking it +ery difficlt for their competition tocop
;mpacts a lar'e eno'h maret
e can 4sell5 it in the target market
st not create 4real ris5
st not e@hast the or'aniation?s resorces
Ma'ing the missing lin'
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Ma'ing the missing lin'
a realit$
AC pro$ides the dollars needed to lower the total
%id % 1-2
Bow
A si'nificant price redction, p to 20, on the part
of our bid that is self performed#@cldes materials4 buyouts4 subcontracts4 shipping
and like elements that are pass through dollarsI
$ we collect for others
uts the 80
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An e+ample of the
impact of the offer
:ualifying portion iscount applied
of A#0 bid 1'> 15> !'>
$%4'''4''' $%''4''' $&''4''' $P''4'''#ase 80 bid ;mpact of discount on total 80 =ob bid
$!54'''4''' -1"&'> -!"%'> -O"!'>
$5'4'''4''' -'"P'> -1"!'> -1"&'>$754'''4''' -'"5O> -'"P'> -1"'7>
$1''4'''4''' -'"%'> -'"&'> -'"P'>
$15'4'''4''' -'"!7> -'"%'> -'"5O>Che larger our portion of the =ob4 the larger the ability
of our discount to reduce the total =ob price
Are 0e meeting our
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g
criteria.
• akes the 80 their cstomer?s preferredspplier
• 8ets your bid into the 4'reen one5
;s +ery difficlt for or competition to copQ
• 6ow much luck do you think your competitorswould ha+e con+incing a sub to drop their bid
by enough to lower the 80-!>?
QGifficult to copyH assumes an eclusi+e
arrangement with a partner 80
A bi h M ' t/
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A big enough Mar'et/
/ffer is best le+eraged on =obs with high millwork tototal =ob content ratios9 the higher the better
iscount Winning =ob bid A#0>Aaaa 6D 81E0,000 8 39mm -.9
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ABC program target
Add $1'-!'mm in e@tended hors self-performed wor
;f each =ob contains $!-%mm of self-performed millwork
then reaching our goal9• Would re2uire winning 5-1' =obs through the program
• ;f the program hit rate is &'-P'> then this would
re2uire bidding P-15 =obs (+ersus up to %5 =obs)
• ;f a+erage discountable millwork content was 1'> oftotal 80 =ob price this would e2uate to an additional
8100mm - 8200mmF to the &C?s annal %oo of%siness
0lick here for an eample of the financial opportunityS+alue of the offer
for the partner 80
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"elf-performed millwor as of total (o% 8Galifin' portion 2 9 10 19
of AC %id 2ui+alent 80 total =ob price (A#0 $ S > millwork of total =ob $)
8900,000 $!54'''4''' $1'4'''4''' $54'''4''' $O4OOO4OOO
80 net profit T !> $5''4''' $!''4''' $1''4''' $&&4&&7
80 net profit T 5> $14!5'4''' $5''4''' $!5'4''' $1&&4&&7
81,000,000 $5'4'''4''' $!'4'''4''' $1'4'''4''' $&4&&&4&&7
80 net profit T !> $14'''4''' $%''4''' $!''4''' $1OO4OOO
80 net profit T 5> $!45''4''' $14'''4''' $5''4''' $OOO4OOO
$1,900,000 $754'''4''' $O'4'''4''' $154'''4''' $1'4'''4'''
80 net profit T !> $145''4''' $&''4''' $O''4''' $!''4'''80 net profit T 5> $O475'4''' $145''4''' $75'4''' $5''4'''
$2,000,000 $1''4'''4''' $%'4'''4''' $!'4'''4''' $1O4OOO4OOO
80 net profit T !> $!4'''4''' $P''4''' $%''4''' $!&&4&&7
80 net profit T 5> $54'''4''' $!4'''4''' $14'''4''' $&&&4&&7
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"elf-performed millwor as of total (o% 8Galifin' portion 2 9 10 19
of AC %id 2ui+alent 80 total =ob price (A#0 $ S > millwork of total =ob $)
82,900,000 $1!54'''4''' $5'4'''4''' $!54'''4''' $1&4&&&4&&7
80 net profit T !> $!45''4''' $14'''4''' $5''4''' $OOO4OOO
80 net profit T 5> $&4!5'4''' $!45''4''' $14!5'4''' $POO4OOO
83,000,000 $15'4'''4''' $&'4'''4''' $O'4'''4''' $!'4'''4'''
80 net profit T !> $O4'''4''' $14!''4''' $&''4''' $%''4'''
80 net profit T 5> $745''4''' $O4'''4''' $145''4''' $14'''4'''
8 $%4'''4''' $14&''4''' $P''4''' $5OO4OOO80 net profit T 5> $1'4'''4''' $%4'''4''' $!4'''4''' $14OOO4OOO
89,000,000 $!5'4'''4''' $1''4'''4''' $5'4'''4''' $OO4OOO4OOO
80 net profit T !> $54'''4''' $!4'''4''' $14'''4''' $&&&4&&7
80 net profit T 5> $1!45''4''' $54'''4''' $!45''4''' $14&&&4&&7
Can 0e sell. it/
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Can 0e sell it/
Carget markets
• 6igh millwork $ to total =ob $ (6otelSresort remodels)
• ,egotiated contract prospects
*se the offer9
artner 80 in+ited to bid
• Che partner 80 prepares their best bid as normal• A#0 prepares our best bid as normal
• A#0 prepares a separate sheet identifying the discount
a+ailable to be taken and any limitationsSconditions• Che partner 80 deducts the desired amount of the
offered discount from their total bid price and submitstheir bid (What if A#0
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Thoughts so far
0ould work
8ood deal for the 80
till ha+e some 2uestions """
A#0 holds risk so9
Bow does it wor or mae sense for sH
What do we epect in return from the 80 making
use of the offer?
oes e+ery 80 ha+e access or is it eclusi+e to @B?
1o0 are 0e able to
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offer this discount/
/ur offer assumes that9
Chis work will be performed during etended
hours9Weekends andSor !ndSOrd shifts
Chis work does not ha+e to support the fied
components of our monthly operating epenses9rent4 insurance4 loan payments4 etc"
Chere
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discount
Con$ertin' fi@ed o$erhead to mar'inprofit ?s are conceptalD
1' 1' 1'
O' O' O'
O' O' O'
1' 1' 1'
15
5!'
1'
'
!'
%'
&'
P'
1''
1!' !'> discount on self
performed work
argin and profit
.ied o+erhead
roportional o+erhead
irect labor
aterials
ubsSbuyouts
#inancial source of the
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discount
Con$ertin' fi@ed o$erhead to mar'inprofit ?s are conceptalD
1' 1' 1'
O' O' O'
O' O' O'
1' 1' 1'
15
5!'
1'
'
!'
%'
&'
P'
1''
1!' !'> discount on self
performed work
argin and profit
.ied o+erhead
roportional o+erhead
irect labor
aterials
ubsSbuyouts
A#0
&C
#inancial source of the
di t
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1' 1' 1'
O' O' O'
O' O' O'
1' 1' 1'
15
5!'
1'
'
!'
%'
&'
P'
1''
1!' !'> discount on self
performed work
argin and profit
.ied o+erhead
roportional o+erhead
irect labor
aterials
ubsSbuyouts
discount
Con$ertin' fi@ed o$erhead to mar'inprofit ?s are conceptalD
A#0
&C
Minimi2ing real. ris'
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Minimi2ing real ris'
6ow much discount does A#0 offer?
6ow much discount does 80 use?
aimum discount must still be profitable
0ash flow risk still eists9
etention
O'-R' days or more in+oice-payment gap
e are willin' to e@chan'e mar'in for cash flow
Thoughts so far
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Thoughts so far
;t
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g
If the &C ses the discont to 'et the (o%, AC also'ets the (o%
AC will not %e ased to frther lower their pricenless it is tied to a chan'e in scope or similar isses
AC will not %e s%(ect to retention
All paments for AC related materials, s%contracts,and %ots will %e $ia 4Joint Chec5 or 4/irectPament5 % partner &C and will %e in fll, noretention
Pament for AC?s portion of in$oices will %e madewithin 19 das of s%mittal, all others within 30 das
Details needing
l ti
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resolution
laying games with pricing
Why partner 80 wants other millworkers to
pro+ide them with bids
Why partner 80 wants A#0 to submit bids to
other 80s bidding on the same =ob
3la$ing games 0ith the
pricing
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pricing
Why wouldn
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mill0or'ers to bid ,ob
ome other millwork company may submit a bid thatwould beat e+en A#0
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to other GCs on the same ,ob
A#0
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roposed solution9 A#0 submits its standard bid to all80s re2uesting a bid for a specific =ob and will submit thesame standard bid to our partner 80 if they are biddingthe same =ob" Che partner 80 will be the only 80 whohas the additional discount a+ailable" We do4 howe+er4recogniJe that our best odds of GwinningH the =ob will be
+ia our partner 80"Chis allows A#0 to stay in the running for the o+erall =ob
regardless of which general contractor wins the bid
educes the potential financial risk to A#0 which allowsus the ability to offer the deep discount on theetended hours work while maintaining someprofitability
to other GCs on the same ,ob
The bidding dilemma
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23rd International Conference of the TOC Practitioners Alliance - TOCPAwww.tocpractice.comignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
We ha+e no desirable and reliable
strategy to significantly increase our
GhitH rate
/ur bidding capacity would
be 2uickly ehausted
Che number of =obs won
would go down significantlyAny cost
sa+ings from
=ob cuts
would be
eclipsed byreductions in
sales
/ur bid hit rate would
actually go downI we
would be working
proportionately
harder for the workwe won
/ur bid 2uality goes down
We need toimpro+e the /; on
our bidding staff
We need to doublethe number of =obs
we win
/ur eisting
bidding staff is
pushed hard(er) to
submit more bids
Chere is (more andmore) pressure to
reduce our bidding staff
Solving the bidding
dilemma
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23rd International Conference of the TOC Practitioners Alliance - TOCPAwww.tocpractice.comignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
Chere is less (and less)pressure to reduce
our operations costs
e ha$e a desira%le and relia%le
strate' that do%les or 4hit5
rate withot cttin' or mar'in
/ur current bidding
staff would win
!@() more =obs
/ur /; for ourbidding staff (more
than) doubles
/ur bid 2uality goes up
/ur bidding capacity would
be 2uickly epanded
Che number of =obs wonwould go up significantly
Any cost sa+ings
from =ob cuts would
be eclipsed by
increases in sales
We would be
working
proportionately
easier for the
work we won
dilemma
We would (more than)double the number of
=obs we win
Offer summar$ so far
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ol+e ma=or problem
Che solution
6ow solution works
6ow A#0 can offer it
What is epected of the 80
:uestions you ha+e to this point
o+ing on to clusi+ity
*+clusivit$ issues
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easons why the 80 would want the offer to beeclusi+e to them
easons why A#0 wouldn
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e+clusivit$
/ffer has no +alue to any one 80 if any other 80has same deal
Cwo or more 80s with the same offer bidding
the same =ob =ust lowers the price bar for
e+eryone
&h$ ABC doesn%t 0ant
e+clusivit$
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e+clusivit$
Che more 80
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All 80s bidding a specific =ob get the offer
tend the offer to a Gelect .ewH 80sake the GofferH eclusi+e to one4 and only one4
partner 809
• 8i+es 80 what they want
What +alue can the 80 offer in echange?
• itigate some of A#0
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0ommon solution might be a commission4
'"!5 to '"5> of 80 total =ob bid price
for =obs won using the offer"
What would that look like?
*+ample commission
structure
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elf-performed millwork as > of total =ob $
A#0 !'> :ualifying portion !> 5> 1'> 15>
discount of A#0 bid Cotal =ob price (A#0 $ S > millwork of total =ob $)
$1''4''' $5''4''' $!54'''4''' $1'4'''4''' $54'''4''' $O4OOO4OOOA#0 0omm T'"5> $1!54''' $5'4''' $!54''' $1&4&&7
A#0 0omm T'"!5> $&!45'' $!54''' $1!45'' $P4OOO
$!''4''' $14'''4''' $5'4'''4''' $!'4'''4''' $1'4'''4''' $&4&&&4&&7
A#0 bonus T'"5> $!5'4''' $1''4''' $5'4''' $OO4OOOA#0 bonus T'"!5> $1!54''' $5'4''' $!54''' $1&4&&7
$O''4''' $145''4''' $754'''4''' $O'4'''4''' $154'''4''' $1'4'''4'''
A#0 bonus T'"5> $O754''' $15'4''' $754''' $5'4'''
A#0 bonus T'"!5> $1P745'' $754''' $O745'' $!54'''$%''4''' $!4'''4''' $1''4'''4''' $%'4'''4''' $!'4'''4''' $1O4OOO4OOO
A#0 bonus T'"5> $5''4''' $!''4''' $1''4''' $&&4&&7
A#0 bonus T'"!5> $!5'4''' $1''4''' $5'4''' $OO4OOO
*+ample commission
structure
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elf-performed millwork as > of total =ob $
A#0 !'> :ualifying portion !> 5> 1'> 15>
discount of A#0 bid Cotal =ob price (A#0 $ S > millwork of total =ob $)
$5''4''' $!45''4''' $1!54'''4''' $5'4'''4''' $!54'''4''' $1&4&&&4&&7A#0 bonus T'"5> $&!54''' $!5'4''' $1!54''' $PO4OOO
A#0 bonus T'"!5> $O1!45'' $1!54''' $&!45'' $%14&&7
$&''4''' $O4'''4''' $15'4'''4''' $&'4'''4''' $O'4'''4''' $!'4'''4'''
A#0 bonus T'"5> $75'4''' $O''4''' $15'4''' $1''4'''A#0 bonus T'"!5> $O754''' $15'4''' $754''' $5'4'''
$P''4''' $%4'''4''' $!''4'''4''' $P'4'''4''' $%'4'''4''' $!&4&&&4&&7
A#0 bonus T'"5> $14'''4''' $%''4''' $!''4''' $1OO4OOO
A#0 bonus T'"!5> $5''4''' $!''4''' $1''4''' $&&4&&7$14'''4''' $54'''4''' $!5'4'''4''' $1''4'''4''' $5'4'''4''' $OO4OOO4OOO
A#0 bonus T'"5> $14!5'4''' $5''4''' $!5'4''' $1&&4&&7
A#0 bonus T'"!5> $&!54''' $!5'4''' $1!54''' $PO4OOO
A problem and an
opportunit$
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pp $
A#0 has a significant obstacle that blocks us from
committing to the offer and no commission structure
alone would o+ercome this obstacle"
O"TACK# AC is profita%le L. 1st D %t de to
crrent de%t strctre, we are not %onda%le.
ust consolidate debt to be HbondableH"
e are willin' to trade or 4e@clsi$itcommission5 for remo$in' the o%stacle.
Balance sheet details
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/e%t load
"enior %an de%tN 8 1,3L0,000
#:ipment financin'N 8 330,000
ondin' sret ad$anceN 8 L90,000Acconts paa%le past deN 8 1,00,000
"hareholder related de%t 8
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ecuring funding through a traditional bank loan
is unlikely in our current financial condition
without outside financial support"
Without other financial support4 we will sell a
controlling interest in A#0 to an e2uitypartner"
• The pro%a%ilit is a new e:it partner will
prefer AC sees hi'h mar'in (o%s, and madiscora'e, and more liel i'nore, this offer.
3artner GC removes the
obstacle
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/ur partner 80 can Gshare the riskH and
gain eclusi+ity of the offer by either
pro+iding the needed financing directly or
supporting a bank loan in echange for a
significant commission reduction"
Che more fa+orable the loan terms4 thelower the commission"
(oan directl$ or support
a loan/
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We belie+e it is in the best interest of our partner
80 to pro+ide this loan directly as9
•Offer can?t %e %loced % third part
•#arns interest for their spport.
•Tie the e@clsi$it of the offer to the drationof the loan"
!educing ris' of loan
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•Che partner 80 would be in a senior position forcollateral assets offered by A#0"
•Che partner 80 can re:ire dal checs andSorthird party payment control on all AC (o%s4 not
=ust those with the partner 80
•Creates an incenti$e for %oth parties
•The &C?s re$ene from these (o%s woldeclipse the loan amont
89-10mm new profit per earD
Ma+imum financing
needed
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"enior %an de%tN 8 1,3L0,000
#:ipment financin'N 8 330,000
ondin' sret ad$anceN
8 L90,000Acconts paa%le past deN 8 1,00,000
Operatin' fndsNN 8 1,000,000
Other nonshareholder de%tNNN 8 290,000Total otstandin' de%ts 8 9,300,000
N ;rom /e%t side of %alance sheetNN 6eplaces line of credit for da-to-da operations
NNN l is contractal o%li'ation to finance %roer
Ma %e lowered thro'h ne'otiated paoffs
Solving the bidding
dilemma
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23rd International Conference of the TOC Practitioners Alliance - TOCPAwww.tocpractice.comignificantly impro+e our bottom line through the competiti+e bid process
/ur current competiti+e bid GhitH rate is
much less than desired9
We are winning !-% =obs for e+ery 1' bid
Chere is less (and less)
pressure to reduce
our operations costs
e ha$e a desira%le and relia%le
strate' that do%les or 4hit5
rate withot cttin' or mar'in
/ur current bidding
staff would win!@() more =obs
/ur /; for our
bidding staff (more
than) doubles
/ur bid 2uality goes up
/ur bidding capacity would
be 2uickly epanded
Che number of =obs wonwould go up significantly
Any cost sa+ings
from =ob cuts would
be eclipsed by
increases in sales
We would be
working
proportionately
easier for the
work we won
We would (more than)double the number of
=obs we win
&or'ing Together:
(everaging past success
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PO
To build a thriving future
)uestions(3ast slide of the offer presentation)
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Chank you for your time and attention"
Are there any 2uestions?
0omments?
Where do we go from here?
*vents during
presentation
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Che @B reps easily followed the concepts and agreed to
ha+ing a shared problem in terms of poor /; on bidding
process efforts4 confirmed they often lost =obs by small
percentage (1> or less)4 and that they were unwilling to
drop bid price any more resulting in hit rates of 1'>-!'>"
@B was intrigued by our super in=ection9 We would reduceour price enough (1'>-!'> ) to e2uate to 1>-!> of the
80
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Che @B reps were gi+en time to digest slide O1 G80 using
the offer must U and
aised the predicted reser+ations (,#
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Che @B reps9
Agreed they would want eclusi+e access to the offer andagreed that ha+ing that eclusi+ity re2uired some form of
+alue in echange for it"Agreed they were +ery interested4 understood and belie+ed thedetails of the offer"
Wanted to know if the offer could be applied to some =obs
currently being bid without resolution of the loan issue";dentified that they were not in an appro+alScommitment
capacity so needed and wanted to take concept up the ladderto the corporate management le+el that could appro+e and
would do so before week
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Che re2uested documentation was pro+ided the net day(Cuesday) with an offer to assist with presenting the concept upthe ladder if neededSwanted" @B felt confident in taking the
message on"Che @B reps called that .riday with an update" *ppermanagement was +ery interested but had four ma=or concerns9
1" Chey were unsure what the ramifications would be on theirability to pursue specific =obs4 especially go+ernment work4 ifthe loan created the reality4 or e+en perception4 of themha+ing an e2uity interest in A#0
!" Chey are employee owned and needed to be sure the loanwas good for the company and that they could con+ey thisto the employees"
*vents follo0ing
presentation 5continued6
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Che @B reps called that .riday with an update" *pper
management was +ery interested but had four ma=or
concerns9O" Chey didn
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While the remaining obstacles were being o+ercome with
@B4 A#0 recei+ed an offer to purchase through its broker
that was accepted"Che buyer was able to negotiate a combined pay down with
the bank and bonding company to $5''4'''"
A#0 officially ceased to eist lea+ing the other creditors4 meincluded4 with no options but to eat the outstanding debt"
Che new owners were deeply imbedded in traditional cost
accounting thinking and had their own plans for thecapacity they had purchased so they werenNt e+en made
aware of the offer"
)uestions from this
TOC3A group/
-
8/18/2019 7 - Russ Johnson_23 TOCPA_USA_21-22 March 2016
91/91
23rd International Conference of the TOC Practitioners Alliance - TOCPAwww.tocpractice.com
Chank you for your time and attention"
Are there any 2uestions?
0omments?
Choughts on how to change the offer for
other similar en+ironments