People are always preaching that you need to sell value rather than price, and it's hard to see how anyone could disagree with that philosophy. Implementing value-based pricing in the dog-eat-dog real world is a lot trickier than philosophizing about it, however.
A fascinating attempt to do exactly that has been made under the auspices of the Mechanical Contracting Education & Research Foundation (MCERF), the educational arm of the Mechanical Contractors Association of America (MCAA). Last year, MCERF published a study titled “The Value Chain: Adding Value to the Supply Chain.” Although it is aimed at MCAA members, it holds equal value for distributors.
The value-vs.-price debate resonates loudly to MCAA members, because they are almost exclusively unionized mechanical contractors. Union plumbers and pipefitters generally cost upwards of $50 an hour in wages and benefits - in some markets, double that. Union mechanicals frequently bid jobs against cheaper nonunion labor, so they've long had to exhaust themselves trying to convince construction owners to dispense with a strict low-bid mentality and take the long view by evaluating total project life cycle costs and quality, i.e., value.
MCAA's ranks include many of the nation's largest and most prosperous mechanical contractors, so they haven't done a bad job of it. Yet, in trying to remain competitive in the bid markets, these contractors often succumb to the same bad habits as everyone else in the supply chain. They go prowling with blinders on for the lowest material bids, and end up getting seduced by suppliers who have nothing except that to offer.
“True Cost”
“The Value Chain” study offers guidance to contractors on how to evaluate suppliers in accordance with a concept of “Measured Cost by Activity,” defined as “unit price” + “true cost.”“The true cost of dealing with a supplier is invoice cost plus the transactional costs of doing business,” the MCERF study explains. “Many of these costs are buried in overhead, and the activities associated with these costs affect your productivity and profitability.”
Dozens of factors are identified to measure supplier reliability and performance, spanning the ordering process, inventory management, logistics management and sales and marketing support. How many phone calls does it take to get product information? What's a supplier's on-time delivery record? What's their fill rate? How accurate are the orders? Slip-ups in any of these areas add hidden costs to material acquisition.
Past studies done for MCAA have found that around 40% of field labor gets taken up in non-value-added movement of materials in the field. Contractors can reduce that percentage by dealing with reliable suppliers able to manage just-in-time shipments to avoid double handling and staging. The “Value Chain” study follows a workbook format that encourages contractors to compare supplier performance and assign values to the different factors. This attempt to quantify the elusive concept of value in itself is a form of value that's worth more than exhortations by marketing consultants. (The “Value Chain” study can be obtained for $15 by contacting MCAA at 301-990-2200, or download the MCAA publications list at www.mcaa.org/store.)
The study was put together by Dr. Iris Tommelein, professor and vice chair of instruction, Civil and Environmental Engineering Department at the University of California at Berkeley. The theoretical side was supplemented with considerable input from a star-studded Value Chain Advisory Task Force. Participants included mechanical contractors Andrew Kruse (L.J. Kruse Co, Berkeley, CA) and Michael Krueger (J.F. Ahern Co., Fond du Lac, WI), vendors Tom Mikulina (Trane), Robert Vick (NIBCO), Mark Wagner (Estimation) and Steve Weissenberger (York), along with Ferguson Enterprises' Corporate National Accounts Manager Peter Placko.
Some members of the Task Force and other MCREF patrons introduced the study to members in a program last Feb. 28 at this year's MCAA Convention in Phoenix. They hammed it up in a humorous skit surrounding bid-day activities with vendors and suppliers quoting to “Bi-Lo Mechanical” versus “Best Value Contracting.” Despite the lighthearted approach, many attendees felt the skit accurately reflected the absurdity of some real-world bid situations.
I can't think of a better program to put together for this year's joint ASA-PHCC Conventions in Orlando, Sept. 7-10. If the organizers can pull it off, they will benefit their members with a value-filled treat. <<
