Zero Defects

Published: 2021-07-07 05:00:05
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Industry: •A lot of small local and regional companies •Compete in residential & commercial construction market oResidential: custom cabinets & millwork for new & remodeled homes. $4. 8B market in US in 1996. Only 15% homebuilders contracted for custom cabinetry for high-end home oCommercial $5B in US in 1996 CMR: •Bought in June 1997 (founded 1975 as subcontractor providing custom cabinetry to homebuilders) •115 employees •$6. 8M annual sales (top 5% in industry), 80% is from commercial (2/3 of projects) Goals: •$70M in sales by 2007 (10 years) •Increase profits & cash flow Replicable franchised business model (footprint) generates $8 -15M sales, local sales & some local production •Having employee engagement Company-wide Problems: •A lot of debt: note to previous owners &cash invested from Walter •Cash flow in commercial is slow since projects take 6+ months and get paid at end project Residential – Good news first year growth: •Project cycles are 4 – 6 weeks: helps with cash flow Current organizational changes: •Invested in IT •Reconfigured the plant to improve productivity (how? ) •Hired VP Sales •Hired 1st Commercial Salesperson
Commercial Work Process: •Commercial Framework: 3 roles involved oOwner: ultimate customer and payer oArchitect or designer: responsible for drawings oGeneral contractor: turning plan into finished project by due date (could be by separate firms or by a single design-build firm) •CMR bids through FW Dodge & MSA (open markets) oGot 75 – 80% projects that it looked at oGot 50 projects/week •CMR goals: obuild relationship with contractors to improve odd of winning open markets, and ocreate opportunities for negotiating bids among limited # of acceptable bidders oObstacles for these goals: Contractor not used to having a salesperson contacting them. No other subcontractors have direct sales force ? Subcontractors come to Contractor’s “plan room” to get architectural info to bid •Project managers: oEach manages about 6 contractors oEach responsible for 18-20 active projects each worth avg $30-$80K (equivalent to $540K-$1. 6M) oVisit field for accurate measurements, check if there is any conflict with plans on plumbing, electr, delivery, etc. oCommunication with contractors mostly via phone, 1/wk, more as material was delivered oSuggest changes to reduce cost, if applicable oSpend lots of time on schedules. Disadvantages from current change: things take longer because now have to go through sales force oAdvantage: more info available on project performance Residential Work •Sells under Mike’s Cabinet name •Showroom open 9 hours/day, 10 visitors/week •New home allowance to homeowners (HO) by contractor: $6K kitchen & bathroom cabinets •Takes 6-8wks before the HO arrives at CMR, by then possible short funds to upgrade •Most people don’t know what to look for in construction quality •Salesperson spends about 1 hour with HO to know whether to earn the job •60 minutes to shop for plans & drawing (3-4 revision before final) •30 minutes for estimation 45-55% HO arrived at showroom ended up placing orders •“hand-off” is not as clean as in commercial – HO wants to work with 1 person from start to finish •30% of re-doing layout after conversation with HO onsite (waste 60 minutes above) •70 contractors locally. Mike’s had 12 in the last year. Had worked with most of them at some points. Little marketing, business by reputation •Goals: Building loyal relationship with contractors to get referrals for customers Developing InforCentral (workflow info) Project Manager is responsible for: •Liaison between CMR & contractor Makes sure internal departments are on track for jobs •Keeps InfoCentral accurate and up-to-date InforCentral issues: •Shared info across company to make to “footprint” concept work •Resistance to use from both VP Sales & Salespeople initially •Software replaces admin work •Rely on salespeople to use Shop Costing: •Had been using rule of thumb for years: $65/hour per shop hour revenue •Shop has 75 employee x $16/hour = $1200/hour •$2. 9M in 1998 for SG&A •Average material costs: commercial 34%, residential 26% Blackstone Why Blackstone came to CMR: •Previous subs: oLate deliveries oNot able to handle workload Time sensitive: Cabinet installation is a few prior to Closing – critical •Came to CMR based on its good reputation (CMR assigns exclusive PM for Blackstone) Opportunities from Blackstone: •Strategic fit •Biggest customer in the area •Immediate market share •Scalable volume that can support CMR’s goals to standardize processes and growth in residential market •Willing to pay full price •Build 40 homes in next 12 months •Build 70 homes in other next 12 months •Build little more thereafter •BS exclusively specifies CMR’s cabinets in model homes •Cabinet allowances rolled into home prices ?
HO pays Results from 1st year with Blackstone: •Great, grew 25% residential business •Ability to start with standard plan for model home and modify from there (this process fit at that time) •Satisfied with CMR’s extended service Concerns: •Last minute changes delay delivery and other projects •Change info not logged in database Results from 2nd year with Blackstone (fall 1998): •Blackstone asks for lower price •CMR has not obtained efficiency to lower its price oHO still come to CMR’s showroom, cost of attending salesperson oBoth sides not able to limit design changes from HO Agreed changes: oBS’s PM works with HO for design selections, then send to CMR’s PM oCMR cut price (believing the change would cut cost) oProblems persist: ?HO still comes to CMR’s showroom ?Any upgrades cost billed to BS ? increase home price to HO ? Project modification after standard design from all subs creates conflicts leading to reworks and payment issues (who will pay for the mistakes) – this happens when Contractor fails to coordinate all subs ? CMR goes to site to make detailed drawing to avoid conflicts Increasing Concerns Residential Team: 1 sales mgr, 2 PM, 1 operations mgr (shop coord) = $200K indirect cost •Unique needs of residential business not captured by software ? internal miscommunication •Revenue Contribution margin: 38% residential, 48 commercial •CMR raises 7% in residential price in mid-March, and price correction for items •BS kept same amount for allowance ? CMR possible loose HO to competitors •BS upset for price raising, accused of high price and late delivery Plans for Improvement •Projected $400k in BS revenue for 1999, becomes largest account •3 Opinions/advice: 1. Problems are typical.
Do nothing. It is BS’s internal crisis, CMR has no control. 2. Fixable problems. Put more focus to residential as CMR did with commercial. InfoCentral not meet residential needs. (Marcus questions: little info about BS logged in system, compared to others. BS team resist to use? ) 3. Terminate relationship, or significantly restructure the agreement with BS. It’s suggested: BS drained resources, got in the way of growth efforts. Drop residential business. a. Marcus dilemmas: i. Residential brings cash flow and reduces revenue swings of commercial ii. Impact on morale
What is the profitability of CMR’s commercial business relative to its residential business? What about the Blackstone account? (Hint: Cost of goods sold for this business is made up of material costs and direct labor costs, i. e. , shop hours. Subtract SG expenses, which are mainly due to indirect labor costs, from contribution margin to get earnings before taxes and other items. You will need to use case information and/or assumptions to allocate SG expenses to commercial versus residential business, and, in particular, to the Blackstone account).
The case traces the changes made at the company and how the relationship with this customer begins to deteriorate. At the end of the case, Sam Marcus must decide whether to fix or end the relationship. ; An integrative case on customer management; allows for discussion on selecting customer segments and customers, relationship management strategies, and measuring performance. Quantitative details on cost-to- serve are included. Emphasizes that marketing strategies are only as effective as front-line implementation.

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