Outsourcing in the New Economy
We have been a custom cabinet maker for about 15 years now. What I have been noticing in the industry, post recession, is the need to outsource for most small shops.
I have committed my business to automating as much as possible, and making standardized systems for everything we do. In doing this, we found our company was changing into a niche component manufacturer rather than a custom job shop.
This transformation has had a profound effect on how I look at our industry and the way we cabinet companies generally approach it.
too many hats
If we step out of the collective bubble that most shops live in, then we would probably find that most guys do it similarly to the other in most aspects. By this I mean that the owner does multiple tasks in trying to grow their business and take care of customers.
So, what if the modern cabinet maker was more of a business person than a carpenter at heart? What would that look like? I believe it would look like a more normal business!
Think about it! Look at all the "hats" you wear in your everyday business life. Now look at other businesses around you and you will mostly see businesses that specialize in a small number of things. They have laser focus on the things that make the business grow, and most importantly turn a profit.
outsourcing in action
I have a great example for you to hopefully get your wheels spinning.
About a year ago we were milling custom cabinet packages for a new shop in our area. The owner of the shop, we will call him Jim, had a great following of customers but did not have a lot of manufacturing experience. So, he hired us to make his job packages.
We supplied him with a ready to build package that consisted of face frames, doors, drawer packages, box parts (with all operations including locators for rear mount brackets!) and moldings. Jim bought his own functional hardware and specialty items (i.e. rev-a-shelf or decorative wood items).
During this year of working with Jim we would go over how the numbers were working in his business. To give a little more background, Jim only did unfinished raw cabinets so for the following example there will be no considerations for finishing, it will just be for raw cabinets.
Jim revealed to me that by the time he paid for his package he had spent about 45% of his job budget. From previous experience, functional hardware generally is about 5% of the project total. I will not count specialties and decorative wood because I would assume that most shops put an add line on the quote for these items. We will just keep it at the base set of cabinets for this exercise.
So, if you have all your parts and hardware at 50% of the total you still have half the money to finish it up.
With our packages, everything is dado construction including the boxes into the frame. They are quick to assemble. Usually an experienced carpenter can assemble a 60-70 linear foot job in a day that would include a laborer to outfit the cabinets as he built. With some fluff let's say that eats up another 5% of the job. If those same 2 guys load and deliver it that will eat up another 2.5%.
Tallying all that up we are at about 58% of the job total and we are built and delivered.
Now, add a 25% net profit to that and you are at 83% leaving 17% for overhead. I would assume that once your shop is deleveraged from equipment leases and machinery breakdowns that your overhead could easily be less than 17%.
Final question, what does this do to your business?
Ultimately, it releases you, the business owner, to properly take care of your customers and simultaneously grow your top and bottom line.
By fixing 95% of your costs you can accurately quote jobs knowing how much money you will end up with at the end of the day.
a profitable and fulfilling business
To summarize, I believe that outsourcing is not a trend, but rather that it will become the standard way to do business in the not too distant future.
I firmly believe outsourcing is critical to making it in the cabinet industry. It truly has the potential to revolutionize our standard business model and make cabinet making a profitable, fulfilling business like it should be!
I would love to hear your feedback about my example or any other dealings you may have had in outsourcing.