2014
JK2 Holmes Constructors,
LLC. Scenic Division
2014
JK2 Holmes Constructors, LLC.
Scenic Division
CONSULTING REPORT
CONSULTING REPORT
Taylor Ashley
Mary Hannah Hardcastle
Destin Wells
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Table of Contents
Executive Summary ............................................................................................................. 1
Situational Analysis ............................................................................................................. 3
NAICS Code..................................................................................................................... 3
Industry Overview ........................................................................................................... 4
Industry Structure ............................................................................................................ 5
Key Success Factors ........................................................................................................ 7
Industry Cost Structure.................................................................................................... 8
Financial Analysis ........................................................................................................... 9
SWOT Analysis .............................................................................................................. 13
Porter’s 5-Forces .......................................................................................................... 17
Problem/Opportunity Statement........................................................................................ 21
Marketing Plan.................................................................................................................. 27
Marketing Objectives..................................................................................................... 27
Company History ........................................................................................................... 27
Competitive Advantage .................................................................................................. 28
Environmental Analysis ................................................................................................. 29
The Marketing Environment ...................................................................................... 29
SWOT Analysis .............................................................................................................. 32
STP Analysis .................................................................................................................. 37
Segmentation .............................................................................................................. 37
Targeting .................................................................................................................... 37
Positioning ................................................................................................................. 38
Marketing Mix ............................................................................................................... 39
Services Offered ......................................................................................................... 39
Pricing ....................................................................................................................... 39
Distribution ................................................................................................................ 40
Promotion .................................................................................................................. 40
Digital Marketing Strategy: ....................................................................................... 42
Implementation Plan ..................................................................................................... 44
Marketing Organization ................................................................................................ 44
Project Plan ................................................................................................................... 45
Metrics ........................................................................................................................... 46
Marketing Budget: ......................................................................................................... 49
Growth Plan ...................................................................................................................... 50
Strategic Sourcing ............................................................................................................. 53
Methodology .................................................................................................................. 55
Category Analysis .......................................................................................................... 56
Summary .................................................................................................................... 61
Kraljic Model................................................................................................................. 62
Sourcing Strategies .................................................................................................... 63
Recommendations .......................................................................................................... 63
Project Plan ................................................................................................................... 63
Strategic Sourcing...................................................................................................... 63
Inventory .................................................................................................................... 64
Metrics ........................................................................................................................... 64
Pricing / Cost Strategy ...................................................................................................... 66
Summary ............................................................................................................................ 70
Recommendations .......................................................................................................... 70
Project Plan ................................................................................................................... 71
Metrics ........................................................................................................................... 72
Conclusion ..................................................................................................................... 74
Appendix ............................................................................................................................ 76
Executive Summary
JK2 Holmes Constructors is a general contracting business located in Apopka,
Florida. Having been in business for 27 years, JK2 has established a positive reputation
for itself as a reliable and professional firm serving the central Florida area. For many
years the company was primarily focused on commercial construction, however with the
recession taking such a hard toll on the construction sector, JK2 saw the need to adapt
and evolve in order to survive. In 2009 JK2 added a Scenic Division to the company,
with the primary focus on the construction and manufacturing of unique products and the
design of creative environments. The division started out modestly, but is experiencing
rapid growth, with the first 3 months of 2014 already outpacing the total for 2013.
This report was approached from two different perspectives, that of the client and
that of the consulting team. JK2 requested a focus in marketing, with a full marketing
plan the objective. The consulting team decided to make the marketing plan one of the
primary components of the report, but with some minor additions. JK2 has been
operating at capacity, turning down potential work due to constraints. Therefore it was
decided that any marketing plan would need to be accompanied by a growth plan, as a
stand-alone marketing plan could attract new business that JK2 would not be capable of
handling. The marketing plan was compiled through research on the industry,
competitors and online analytics. The growth plan is based in the Theory of Constraints,
as is described by Dr. Eli Goldratt.
The consultant identified issue is the discrepancy between JK2 and the industry’s
gross margin. JK2 has a gross margin of 14.1%, while the industry operates at 19.5%.
This is both a problem and an opportunity for JK2, as getting this margin in alignment
with the industry would result in an additional $246,000 in contribution. A gross margin
issue it is typically related to one of two variables; low pricing or high sourcing costs. In
order to address both of these the team researched sourcing strategy as well as price/cost
analysis. The strategic sourcing section of the report is based upon the aggregation of
2013 invoices as well as the utilization of a factor-weighting system to evaluate current
suppliers. The supplier evaluation was then compared to sourcing behavior to identify
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the areas where changes are necessary, as well as where suppliers can be consolidated in
an effort to lever up spend an achieve economies of scale, reducing costs.
The strategic sourcing section is accompanied by a price/cost analysis which
weighs the benefits of increasing the markup factor used by JK2, as well as introducing a
variance report in order to measure the accuracy of estimated bids.
Recommendations are made to directly address both the marketing needs of JK2
as well as the gross margin issue. These recommendations include a revamp of the
website, utilization of SEO, the establishment of updated collateral, levering up spends
with strategic suppliers, increasing markup by 5%, and using the variance report to
identify problem areas. These are aimed at increasing the gross margin to the industry
average of 19.5%. By increasing price and decreasing input costs, it is estimated that JK2
will be able to realize an additional $473,000 in contribution.
Some of these recommendations can be implemented immediately, such as the
increase in markup and the use of the variance reports. Others require time to fully
develop the strategy and create change within the organization. The project plan portion
of the report will address the time requirements in the implementation of each
component.
This report is aimed to increase the competitiveness and the profitability of JK2
through the use of inexpensive yet powerful business analytics. It is through the
thorough understanding of the competitive landscape and the formation of strategic
direction that JK2 will be able to not only compete but thrive in this highly competitive
industry.
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Situational Analysis
NAICS Code
The primary North American Industry Classification System (or NAICS) code under
which JK2 operates is 236220, Commercial and Institutional Construction. This is
defined as:
“Establishments primarily responsible for the construction (including new work,
additions, alterations, maintenance, and repairs) of commercial and institutional
buildings and related structures, such as stadiums, grain elevators, and indoor
swimming pools. This industry includes establishments responsible for the on-site
assembly of modular or prefabricated commercial and institutional buildings.
Included in this industry are commercial and institutional building general
contractors, commercial and institutional building operative builders, commercial and
institutional building design-build firms, and commercial and institutional building
project construction management firms.”
Further research indicated that JK2 Scenic Division can be classified under subsector
238, Specialty Trade Contractors:
“The special trade contractors, not elsewhere classified, industry is comprised of
firms that provide a broad range of miscellaneous construction services. Examples
of industry activities include bathtub refinishing, gasoline pump installation,
grave excavation, swimming pool construction, post hole digging, wallpaper
stripping, mobile home setup, house moving, fire escape installation, bowling
alley construction, artificial turf installation, and sandblasting.”
The following research was compiled using these 2 codes, through
and
.
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Industry Overview
Construction is commonly considered to be a bellwether for the overall economy.
Typically this makes the industry fairly stable with modest growth rates, however recent
history has deviated from this general rule. From the 1990s until 2008 rising levels of
disposable income and laxed borrowing standards was leading to years of abnormally
high growth, at times topping 20% growth over the previous year. There was also much
speculation and investment in properties which was boosting the industry up. With an
excess of business, this period also saw the introduction of many competing firms
looking to join in on what was considered a industry with infinite demand. In 2008, the
recession hit the entire construction sector particularly hard. While the overall economy
dipped, the housing bubble that had built up over the last couple decades burst,
devastating any sector in which construction was a primary activity. In order to stay
competitive firms cut prices, driving down margins, and ultimately resulting in many
companies closing.
In both 2009 and 2010 the industry saw revenues fall over 30% from the previous
year. It was not until 2012 that economic stimulus policy and overall economic recovery
gained traction in construction industry, driving revenues up by 30%, largely due to pentup demand. Revenue has stabilized over the last 2 years, and analysts forecast growth of
3-5% in the next 5 years.
In 2013, the industry generated $131.3 billion in revenue, of which $2.6 billion
was profit; a 1.98% net profit margin. This margin shrunk considerably during the
competitiveness of the recession, but has normalized and is starting to see some small
upward movement. Within this NAICS code, there are 31,429 businesses operating
within the United States.
Breaking the commercial construction industry down further into the specialty
trade contractors (STCs) allows a closer comparison for JK2 scenic division. STCs
generated $41 billion in revenue, or 31.23% of the total industry revenue. This is a very
highly segmented industry, with 458,200 businesses under its classification. However,
this includes many categories, which is broken down in Figure 1. JK2 scenic can be
placed into the Specialty Trade, NEC category, which generates $5.33 billion in revenue,
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or 4.06% of the industry total. This segment is projected to outperform the overall
commercial construction industry with a growth rate from 2008-2018 of 18%.
Figure 1 – Specialty Trade Contractors Breakdown
Estimated Revenue Estimated Number of Firms
Specialty Trades, NEC
$5,330,000,000
169,534
Swimming Pool Construction
$3,690,000,000
36,656
Waterproofing
$2,050,000,000
13,746
Kitchen and Bathroom Remodeling
$820,000,000
13,746
Fence Construction
$4,100,000,000
50,402
Welding on Site
$1,640,000,000
27,492
All Other
$23,370,000,000
146,624
Total Industry
$41,000,000,000
458,200
Figure 2 – Industry Revenue Breakdown
Industry Structure
The commercial construction industry is considered to be in a mature life-cycle
stage. This means that the industry grows roughly at the rate of economy, with complete
market acceptance, with very low technological change. While there are new fabrication
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methods available through technology, these methods do little to have an effect on overall
demand.
There is relatively high revenue volatility within this industry. As seen in the last
10 years, going from boom to bust can happen fairly rapidly, with a longer period of time
needed to recover than was necessary to completely reverse previous gains. Again,
construction and the overall economy are closely linked, although typically there is a
period of time of decline for the overall economy before it is reflected up within the
construction industry. This is due to the long-term nature of projects and that capital
becomes more restricted in difficult economic times. It is important for businesses to
keep a backlog of projects that can help buffer the effects of downturns.
Capital intensity is fairly low relative to other industries. There is not a large
requirement for start-up and maintenance costs. This was seen during the boom when
many people were entering into the industry looking to capitalize on the housing bubble.
While this allows many players in the industry, the concentration level is still considered
low. No one company has a large market share; rather the industry is made up of many
small-to-medium sized firms.
Regulation is common practice in any construction related industry. There are
many steps of permitting and inspection throughout the process, intended to ensure the
safety and reliability of new projects. This can threaten projects in that firms can be
delayed in their work while waiting for these steps to be completed. It is essential for
companies to thoroughly understand and have best practices to navigate the regulatory
requirements in order to increase overall efficiency.
While there is not a high level of capital intensity needed to enter into this
industry, there are certain barriers to entry that increase difficulty for new firms. In
construction loyalty and reputation are very important aspects. Certain organizations will
utilize the same contractors time and time again once they know that company does
quality work at reasonable prices. It can be very hard to new firms to compete in areas
that have established, well known players. This leads to a very high competition level.
There is little differentiation of construction firms, with the final product essentially
being the same regardless of the firm completing the work. Many times clients evaluate
their contractors based on quality, timeliness, technical capacity and efficiency.
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Competition does vary dependent on geographic area. Many players in this industry are
local or regional players, with few national companies. Firms are more concentrated in
areas that have recently experienced high growth, such as Florida and Nevada.
Key Success Factors
There are a number of conditions that promote a healthy and profitable. These
key success factors can be the difference between the firm that has longevity and the firm
that will close its doors in the next period of economic difficulty. There are 4 basic
factors to be discussed; A highly skilled workforce, ability to successfully negotiate with
regulators, ability to compete on tender, and access to high-quality inputs.
•
Highly Skilled Workforce – There is currently high supply of available labor in
the market, but firms compete for those workers with specialized skills. It is
important the businesses understand their core competencies and hire accordingly,
while subcontracting to building trade specialists when necessary. This is twofold, having skilled workers and strong relationships with subcontractors.
Typically it is important to build redundancies within the subcontracting network
to avoid work stoppages if one is not available.
•
Ability to Successfully Negotiate with Regulators – Firms must have
comprehensive knowledge of building statutes and regulations. It is necessary to
deal with multiple government administrations and regulatory authorities
throughout the steps of the project. These relationships can be fostered to help
expedite certain aspects of permitting and inspection to increase the efficiency of
the business.
•
Ability to Compete on Tender – Many projects are bid out in order to allow
contractors to compete on price. It is important to understand related costs of
projects when competing in the bidding process, as undervaluing a project can
lead to diminished margins, or even losses, and overvaluing a project will result in
lost opportunity and work.
•
Access to High-Quality Inputs – There is an emphasis in this industry on having a
strong and reliable supply chain. The materials and fixtures that contractors
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utilize are a direct reflection on the quality of the final product. Successful firms
make sure to establish strong relationships with their suppliers not only to ensure
that inputs are readily available, but to negotiate prices that can help increase
margins. The ability to identify and take advantage of supply opportunity can
greatly affect the success of a company.
Industry Cost Structure
It is important to understand how industry players are allocating resources and
maximizing the utility of costs. The following is a brief breakdown on average costs by
firms operating in the industry:
•
Wages – 45.2% of sales; Wages are consuming larger portions of sales as price
competition has driven margins down while the labor requirement has remained
the same. In-house design in also gaining in popularity, with those skilled
positions commanding a higher wage
•
Procurement – 35.3% of sales; The past 5 years has seen great increases in input
prices, with the trend expected to continue at a 1.2% annualized rate. As certain
commodity prices increase the cost of materials will rise. This is particularly the
case for gasoline, which will increase transport costs, and thus final price to the
purchaser.
•
Other Costs – Rent and Utilities account for 2.6% of revenue, Marketing expenses
are estimated at 1.7% of sales, and Insurance and Administrative costs are
estimated at 12%.
•
Profit – 2% of sales; Profit margins have been decreasing with increased
competition, however are expected to increase by 4.0% by 2019 due to pent up
demand.
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Figure 3 – Sector vs. Industry Costs
JK2’s cost structure is as follows:
•
Wages – 3.8%; far below the industry average. This is indicative of a lean
operation that may need to increase labor constraints.
•
Procurement – 85.9%; The largest category of spend, JK2 needs to emphasize
strategic sourcing in order to lower the cost of inputs and increase profitability.
•
Other Costs – Rent is 1.3% of sales, Marketing expenses are .01% of sales,
indicating the opportunity to increase marketing, SGA costs are 7.3% of sales
Financial Analysis
The financial analysis of JK2 will be broken down into 3 components:
Profitability, Liquidity, and Asset Management. The first of these components to be
examined is profitability.
All ratios were derived from the income statements and balance sheets provided
by JK2. Selected financial information from these can be found in Appendices A-F..
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Figure 4 shows total yearly revenue from 2006-2012.
Total Sales By Year
$30,000,000
$28,424,563
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$9,843,736
$4,598,161
$4,537,783
$5,000,000
$1,667,428
$4,446,656
$0
2006
2007
2008
2009
2010
$2,048,867
2011
2012
JK2 saw revenues increase dramatically during the boom years of the early 2000s.
2007 was the best year on record for the company, posting over $28 million in revenue.
The recession saw a steep drop-off, as revenues fell 84% in the course of one year from
2007-2008. JK2 hit the bottom of the recession in 2010, when $1.7 million in revenue
recorded. Since that time, JK2 has seen a steady increase in revenues, up 23% in 2011
and 121.5% in 2012. While financial data from 2013 and to-date 2014 are not available,
this trend is expected to increase at higher rates than that of 2011-2012. Currently, the
company has met its revenue total from 2013 in the first 3 months of 2014.
Figure 5 – Profitability Ratios – JK2 2011-2012 v. Industry Average
Profitability Ratios
Gross Margin
2011
0.149
2012
0.141
Industry Average
0.195
0.059
0.067
0.035
0.090
0.320
0.800
Gross Profit / Sales
Profit Margin
Net Income / Sales
Return On Assets
Net Income / Total Assets
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When comparing the profitability ratios of JK2 to that of the industry, a number
of trends and issues are notable. The gross margin for JK2 fell from .149 in 2011 to .141
in 2012, which indicates that inputs either increased in price from the prior year, or that
price competition is driving down bid costs. This is an area of opportunity for JK2 as the
industry average is nearly 5 ½ points higher at .195. Given the year 2012 revenue, a 1%
increase in gross margin over the 14.1% represents $45,380 in lost additional contribution
margin. It is important for JK2 to look into the sourcing strategy and pricing mechanisms
in order to increase the gross margin to be in line with the industry.
While the gross margin demonstrates an area of potential improvement, the net
profit margin is outperforming the industry, nearly double the average. Typically gross
margin and net profit margin tell similar stories, but in this case the net profit margin is
increasing from 2011-2012. This can be attributed to lower than average operating costs,
as seen in low labor cost and rent.
The return on assets ratio suggests that assets could be utilized in a more effective
manner to generate revenue. The industry makes $.80 profit for every dollar of assets,
while JK2 made 40% of that with $.32 dollars of profit per dollar of assets. This could be
due to periods of time between projects when assets are not being put to use. It is
important to note that ROA has increased from .09 to .32 from 2011 to 2012, a 255%
increase that shows a company undergoing growth and a resurgence of work in the postrecession times.
Figure 6 – Liquidity Ratios – JK2 2011-2012 v. Industry Average
Liquidity Ratios
Current Ratio
2011
1.21
2012
1.81
Industry Average
1.98
0.64
0.70
1.55
4.59
1.48
2.10
Current Assets / Current Liabilities
Quick Ratio
(Current Assets ‐ Inventory) / Current Liabilities
Debt‐to‐Worth
Total Liabilities / Net Income
The liquidity ratios show the ability of a company to pay off its short-term debts.
There are some positive trends in that JK2 has increasing current and quick ratios, and a
declining debt-to-worth ratio, all of which tell of a company improving from its prior
position. The current ratio is typically benchmarked against 1, which would mean that a
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company has just enough current (under-one year to liquidate) assets to cover current
(collectable within one-year) liabilities. JK2 is slightly below the industry average of
1.98, with a current ratio of 1.81. The quick ratio does raise a red flag. Having a quick
ratio of .7 is well below the industry average of 1.55, and means that it is possible that
JK2 could experience difficulty in paying its debts. However, JK2 has a safety net for
their cash flow in the $250,000 line of credit that is readily available to them.
The debt-to-worth has greatly improved from 2011, where there was $4.59 of debt
for every $1 profit. This ratio fell by 67% to 1.48 in 2012, which bests the industry
average of 2.10. JK2 is able to earn more profit while taking on less debt than
competitors. This also represents an opportunity to lever up profits through debt
financing, although caution should be heeded until the quick ratio rises to a level above 1.
Figure 7 – Asset Management Ratios – JK2 2011-2012 v. Industry Average
Asset Management Ratios
Receivables Turnover
2011
15.100
2012
13.100
Industry Average
8.000
23.800
27.400
45.000
7.900
28.100
11.100
45.800
12.800
32.500
1.560
4.690
n/a
Sales / Accounts Receivables
Average Collection Period
365 / Receivables Turnover
Payables Turnover
Cost of Goods Sold / Accouts Payable
Average Payment Period
365 / Accounts Payable Turnover
Total Asset Turnover
Sales / Total Assets
Asset management ratios tell how efficient a company is utilizing its assets to
generate sales. JK2 is very effective when collecting debts owed, with receivables
turning over 13.1 times a year compared to an industry average of 8. This means that
JK2 is collecting on an average of 27.4 days compared to the industry 45. This is a
positive indicator that will help cash flow. JK2 is also very quick to pay off its debts,
turning over payables 28.1 times a year versus 11.1 for the industry average. The average
payment period is 12.8 days, while industry players average 32.5 days. This is an area of
opportunity for JK2 as they can delay accounts payable in order to free up cash flow in
the short term. The total asset turnover ratio shows a company that is generating $4.69 of
sales for every $1 in assets. This 200% increase from 2011 suggests increases in sales
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while maintaining or decreasing the amount of assets needed to meet the demands that
sales place upon the company.
In summary, JK2 is recovering nicely from economic recession. Their gross
margin implies opportunity to either increase price or be more aggressive in sourcing.
The net profit margin tells that where JK2 may be behind in gross margin, they make up
for with a lean operation that does not require the same labor costs that other companies
incur. Profitability is increasing, with opportunity to improve upon the margins. The
liquidity ratios show that JK2 should strategize how to increase positive cash flow,
although the upward trends indicate that this may be done through overall economic
growth. Finally, JK2 is prompt and quick with both paying and collecting is debts, with
the opportunity to slow outgoing payments in order to increase cash flow. When these
are taken in aggregate, JK2 is a fiscally sound company that has the potential to further
increase the bottom line.
SWOT Analysis
Strengths
•
JK2 has been in the industry for 27 years, and with that has established a strong
reputation as a reliable contractor. This reputation is a valuable asset that helps
the company’s competitiveness in the bidding process.
•
JK2 benefits from having an experienced and skilled management team. Paul
Holmes, Julie Holmes, and Tim Bartell work as a cohesive unit in order to
accomplish goals. Paul started the company in 1986, and his years building the
business means he understands underlying issues and complications that may
arise over the course of a project, with best practices being utilized to meet those
challenges. Julie is newer to the management team, and brings a wealth of
knowledge to the team as she heads the scenic division. Tim is the creative driver
of the scenic division, and his design capabilities give JK2 a distinct advantage.
•
The company is experiencing rapid growth in the scenic division, growing
roughly 60% from 2012-2013, and already surpassing 2013 total revenue in the
first 4 months of 2014.
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•
There is room and resources for the company to grow in response to the increased
demand from consumers. This includes the financial and physical resources to
grow the operation to increase capacity. JK2 has a $250,000 line of credit
available at any time that could help fund any expansion.
•
Being in business for 27+ years, JK2 has well established relationships with
clients, suppliers and subcontractors. These relationships are essential to both
earn future contracts and maintain a profitable position.
•
Every project that JK2 undertakes has the attached benefit of management
working directly with the project. There is little power distance between the top
of the company, the workers performing job tasks, and the client. This direct
connection leads to increased communication between JK2 and clients that
ultimately leads to better final products.
•
JK2 is very efficient in both the collection of debts as well as the paying of debts.
The Accounts Receivables Turnover of 13.1 times is well over the industry
average of 8, while the Accounts Payable Turnover is 28.1 times, while industry
average is 11.1 times. This quick response to invoices helps maintain positive
relationships with suppliers, while quick collections help to increase positive cash
flow.
•
The net margin of 6.7% is nearly double the industry average of 3.5%. While
underperforming in the gross margin, this net margin indicates better profitability
due to low labor, rent, and overhead costs.
•
The industry is shifting to include the need for in-house design, which JK2
provides. This helps to consolidate the needs of clients and brings the entire
process under one roof. By eliminating a link in the chain to final product there is
higher reliability and little room for misinterpretation of designs.
Weaknesses
•
Risk-adverse management typically results in hesitation to invest in the company.
With the scenic division experiencing rapid growth, it is necessary for capital
investment to meet the increasing demand. When risk-adverse individuals are
provided with an opportunity that includes unknown results there can be
underinvestment or avoidance of the opportunity as a whole.
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•
The work portfolio of JK2 scenic division is heavily consolidated under one
client. While this strong relationship is beneficial in the short-term, it does
indicate a higher risk long-term.
•
JK2 has reached production capacity, which has resulted in the need to turn down
potential business. The economic ramifications of this cannot be easily
quantified, as some jobs can lead to more work down the line. There constraints
are found in both the facility as well as labor pool.
•
JK2 has two distinct focuses, general contracting and scenic construction. While
the two divisions work in tandem on many projects, there are also separate
projects that require different skills and labor needs. The cost structure between
the two divisions can be quite different. This means that the company needs to
keep two different accounting books for the divisions in order to help identify
inefficiencies and areas of improvement. JK2 keeps one set of books for both
divisions, limiting the quality of information available for either of the two
divisions.
•
There are few mechanisms that promote cost control. Once a project has been bid
and won, there is little accounting for accuracy of projected costs made in the
initial bid. This results in lost profitability. There is no ad hoc analysis of bids
for cost variance, which could be a powerful tool to help identify where the
company could improve margins.
•
Gross margin is14.1% compared to an industry average of 19.5%. This is likely
due to either pricing strategy or input sourcing. Every 1% under the industry
average represents lost potential contribution of $45,379.
Opportunities
•
The tourism industry in the area has grown an average of 4.4% over the last 4
years and is projected to continue growing at an annualized rate of 2.5% for the
next 5 years. As more tourists are visiting, the demand for expansion and
renovation will rise, leading to more potential projects.
•
There is a trend within the construction industry to subcontract specialty
construction. JK2 is uniquely positioned having the ability to act as both a
general contractor and/or the specialty construction contractor. This allows for
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increased potential of accepting subcontracted work from larger general
contracting players. These strategic alliances could greatly increase the scope of
work that is currently available for JK2.
•
JK2 is not an active member of any industry associations. There is potential for
making relationships with other players within the industry through participation
in such groups. The ability to engage and cultivate these relationships can lead to
work opportunities, best practice strategy, and many other positive benefits
related to a deeper understanding of the competitive landscape.
•
Across industry, but more notably in the retail and hospitality industries, there is a
trend toward custom construction. Stores and restaurants are looking to create an
immersive environment for their customers as a form of competitive advantage.
These industries are investing more into the décor and unique aspects of their
businesses, which will increase overall demand for specialty construction.
•
The low cost of capital that is currently available is a great opportunity for JK2 to
realize growth and expansion. Interest rates are near historical lows, and as the
company is currently operating at capacity, this is a favorable atmosphere in
which to invest in growing. JK2’s debt-to-worth ratio is only 1.48 while the
industry average is 2.1. This represents the chance for JK2 to lever up their
profits through relatively cheap debt financing.
•
JK2 has a line of credit of $250,000 readily available to cover any short-term
needs. These resources can be utilized in order to increase capacity and allow
JK2 to accept more contracts.
•
As the company has not invested in marketing, some cost effective, yet targeted,
marketing techniques can yield significant return.
Threats
•
Finding, recruiting, and retaining skilled labor has become increasingly difficult
within the industry. There is increasing competitiveness for human capital, and
with that increased labor costs, which can consume significant portions of
revenue.
•
Large-scale custom design shops have a competitive advantage through the
utilization of economies of scale and the ability to have total project management
16
under one roof. While smaller firms, such as JK2, must rely on subcontracting for
those jobs that are outside their core competencies, the larger firms have all
aspects of the projects available in-house. These larger companies can also
bundle multiple projects together to achieve economies of scale, allowing them to
bid a lower price than competitors.
•
The construction industry is considered a bellwether of the overall economy. As
was seen in the recent recession, an economic downturn will directly and greatly
affect construction companies.
•
The geographic reach of firms has grown exponentially over the last decade.
Custom construction has traditionally been restricted in its reach to those areas
within travel distance. However, by utilizing online presence many companies
are now able to bid, produce, and ship product to any part of the world. This has
increased competition beyond the local level to include many firms that
previously were not direct competitors.
Porter’s 5‐Forces
Figure 8 – Porter’s 5-Forces
17
Threat of New Entrants
The threat of new entrants is considered to be medium. In many areas there are
already established players, with the reputation and client contacts that may restrict the
amount of available business for new entrants. The industry was oversaturated during the
boom period of the early 2000s, and has contracted considerably after the recession that
began in 2008. This contraction has provided for some room for new entrants, but the
viability of the new players may be limited by other competitive forces. In the favor of
new entrants is that inputs are fairly universal and considered easy to access. However,
ease of access only represents the potential to buy, not the bargaining power held by
established firms.
There is a proprietary learning curve that is associated with the construction
industry. Through experience certain knowledge is gained that can help increase margins
and increase efficiencies. This includes dealing with the fairly high level of government
regulation within the industry. Companies must deal with permitting, zoning restrictions,
and inspections. Those players that have been around have established relationships with
these individuals and offices that help streamline certain processes, increasing efficiency
and margins. Established relationships with suppliers and subcontractors also represent
an advantage for the established companies. Cost effective and reliable contacts are a
valuable asset, and one that new entrants will lack.
Power of Buyers
The power of buyers in this industry is high. A small number of clients represent
a large portion of industry revenue. This is particularly true in the Central Florida area,
where the theme parks are the largest clients in the specialty construction sector.
Combine few buyers with many sellers and the power is on the side of buyer. There are
many contractors in the industry, with the buyers having great variety of choice. This
increases price competition, driving down profit.
There is little switching cost for buyers, as they can easily change contractors
between projects without incurring financial loss. There is also the threat of backward
18
integration from buyers, as large theme park companies can establish their own
construction division to fill their needs.
Taking all these factors into account, contractors are highly influenced by their
buyers, many times needed to compete on price in order to win business.
Power of Suppliers
The power of suppliers is low. Inputs are standardized and available through
many different channels. While inputs do have a significant impact on the profitability of
a firm, the fact that supplies can be purchased from many places reduces the suppliers
leverage over the buyer. There are more suppliers of inputs to the industry than there are
industry players, limiting their power.
While the overall power of suppliers is low, there are certain circumstances in
which specific suppliers will have greater leverage. This results when companies lack
redundancy in their supply chain, often as a result of specialty supplies. The limited
availability of some specialty supplies will increase those suppliers power.
There is no threat of forward integration, as the construction supply industry has a
low likelihood of expanding into fabrication.
Threat of Substitutes
The threat of substitutes is low. Custom construction contains an artistic aspect
that cannot be easily replicated. The proprietary nature of this artistic expression
combined with construction expertise limits available substitutes. Substitutes can be
present in the deconstruction of the industry, with buyers contracting with many
individuals or firms to complete a project, but the cost effectiveness of combining the
artistic with construction precludes this from being a viable option.
Competitive Rivalry
Competitive rivalry is medium. This has changed as a result of the recession.
Before the recession competition was incredibly high as there were many players
competing for jobs. As many companies were forced to close their doors during the
19
recession, the supply of construction companies has moved into a closer equilibrium of
demand for projects.
Competitors compete on quality, timeliness, and price. Price competition has
driven profit margins down to sub-4% levels. The nature of the business with the bidding
process contributes to price competition. There is also a wider geographic reach of
companies that is increasing rivalry from local or regional to national levels.
Porter’s 5-Forces Conclusion
The overall profitability of this industry has been trending downward due to price
competition and increased labor costs. This trend is leveling off and profits are projected
to increase over the next 5 years, as the reduction in competitors during the recession has
reset the supply of contractors to the demand of projects. One of the drivers of
profitability is the ability of a company to create and implement cost controls, primarily
through sourcing strategy. This can be achieved by firms due to the low power that
suppliers exercise. Successfully negotiating with suppliers on price by taking advantage
of economies of scale companies can increase margins and be a source of competitive
advantage.
The industry is meeting demand, leaving little room for entrants. Those players
that survived the recession are in a position to see profits increase as demand is on the
rise. As demand rises, new entrants may be enticed to enter the industry, but must do so
mindful of the disadvantages they will begin operating under.
Companies must be alert of the power that buyers exert, as they are much more
concentrated than the construction industry. Many contractors are heavily tied to only a
few clients, representing the majority of their portfolio. This leads to a reliance on those
clients which gives leverage to the buyer as prices will be reduced in order to retain work.
Overall this is a fairly competitive industry that has power looking backward in
the value chain while lacking power moving forward in the chain. The low threat of new
entrants and substitutes suggests stability for current players, while overall profitability is
modest and slowly growing.
20
Problem/Opportunity Statement
At this point the report will be divided into two focuses. The first of these focuses
is based on the client’s request for a marketing plan, as was stated in the original
solicitation by JK2 to the SBDC. Accompanying the marketing plan will be information
regarding strategy for growing the company to meet the increasing demand. The second
focus is the consultant identified issues relating to the low gross margin of JK2, with
strategies that are aimed to both reduce the cost of goods sold, as well as raise revenue.
JK2 relies upon word-of-mouth advertising and its positive reputation as the main
drivers of obtaining new projects. While this strategy has worked well, there are some
misconceptions to the outsider that can be addressed through the use of cost effective
marketing. When reviewing JK2’s webpage, it can be difficult to understand the scope
and scale of work that JK2 can achieve. This can lead to situations where potential
clients overlook JK2, believing that they are not capable of the type of work needed. By
aligning the quality and quantity of work the company does with the outward expressions
of marketing this gap can be reduced.
In 2012, JK2 spent $608 on advertising and marketing. This represents only .01%
of revenue, while the industry is spending an average of .73%. If JK2 were in line with
industry norms the amount of spend on marketing would increase from $608 to $33,125,
a 5,348% increase.
Given the current circumstances with JK2 operating at full capacity, additional
marketing could put further pressure on the constraints. The intent of any marketing is to
increase sales, and if JK2 is already fully booked then marketing will not return any value
to the company if growth is not simultaneously addressed. In fact it can negatively affect
a company when potential business is turned down due to lack a capacity for taking on
the same projects the marketing is aimed at earning. This brings to question the best
practices for a growing company, and how to achieve this in the most efficient way that
will create the most value.
When reviewing the financial information of the company, the gross margin is an
area of significant concern. JK2 is operating with a 14.1% gross margin, 5.4 points lower
than the industry average of 19.5%. When gross margin is abnormally low, it is usually
21
indicative that either pricing that is too low, or that materials are being purchased at a
high price. In order to further understand the issue, a fishbone diagram was created, as
seen in Figure 9.
Figure 9 – Fishbone Diagram – JK2
Cost Controls
Pricing Strategy
Currently charging 30% flat
markup
No post-hoc analysis of costs
Cannot identify
underperforming areas
Gross Margin is 5%
lower than industry
average
Decreased
efficiency
Inputs purchased over-thecounter
Limits on work
potential
Capacity
Constraints
Overhead is not itemized
No economies of scale to take
advantage of
Sourcing
Strategy
The underlying issue of the low gross margin can be divided into 4 different
factors, that when taken in aggregate can explain why the difference exists. The first of
these reasons is the pricing strategy that JK2 utilizes. Bids are put together based on
estimated costs of materials and labor. A 30% flat markup is then applied, which would
result in a 30% gross margin if all inputs were accurate and accounted for. However,
there are numerous costs that are not being built in, such as design and overhead costs.
There are few cost controls being utilized, such as a post-hoc analysis of projects that
could be used to identify where variances exist, as well as identifying underperforming
areas that could then receive focus to improve upon. Prices that are estimated and not
compared for actual costs can be a sieve through which profitability leaks.
Another contributing factor to the low gross margin can be found in the current
sourcing strategy. Many of the materials for projects are purchased in over-the-counter
markets. This limits the purchasing power of JK2, which prevents them from taking
advantage of certain economies of scale that may exist. This represents an opportunity
for JK2 to take advantage of in order to lower costs while building in redundancy in the
supply chain, increasing reliability. At the current time JK2 is sourcing certain categories
22
of spend from one supplier, which creates risk of supply interruption and prevents the
company from benefiting through the price competition of multiple suppliers of the same
input.
JK2 has recently needed to turn down potential work due to the current work load.
These capacity constraints limit the work potential of the company, while at the same
time decreasing efficiencies. Throughout the production process there are bottlenecks
that can be eliminated through process design. In fixing one bottleneck other aspects of
the process flow will be able to operate at a higher level, increasing efficiencies and
ultimately the amount of work that JK2 can perform.
These components represent an opportunity for JK2, as they can utilize relatively
inexpensive strategy that can increase margins. By reevaluating the pricing strategy,
developing sourcing strategy, increasing capacity, and implementing cost controls the
company can align itself with industry norms.
Another analytical tool that was used is the 5-why analysis. This helps to
deconstruct a problem in order to identify the root causes, which when addressed will
alleviate the issues further up the 5-why chain. This process is illustrated in Figure 10.
Figure 10 – 5-Why Analysis
Situation
Initial Proposal
Gross Margin is
Utilize sourcing strategy, increase markup, use
underperforming by
variance analysis to identify problem areas
5%
Problem: JK2s gross profit margin 5 points under the industry average
Why 1
Why 2
Why 3
Why 4
Why 5
Root Cause
Over‐the‐
counter input
purchases
No inventory is
held
The unique nature
of custom
construction
Demand for
“different”
product
No
standardized
inputs across
projects
No sourcing
strategy
Limited time to
explore
supplier
options
Cost of
Goods Sold
is too high
Dramatic increase
in amount of work
Industry and
Lack of
demand are
opportunity
growing while
to explore
JK2 has not
options
expanded
23
Counter‐Measures
Effect
Supplier study with sourcing
strategy
Inputs will be supplied on a more
reliable and cost effective manner
Post‐hoc analysis of costs
Problem areas will be identified for
improvement
The issue that was addressed in the 5-why analysis was the 5% difference in gross
margin between JK2 and the industry average. The first reason for this is a high cost of
goods sold. This is likely due to the amount of over-the-counter purchases that JK2
engages in to procure their materials for fabrication. In 2012, JK2 spent nearly $40,000
between Home Depot and Lowes, neither of which could be considered a strategic
partner. The company needed to make these purchases because there is no inventory held
at JK2. As of the end of 2012 there was $0 in inventory. One of the reasons that there is
limited ability to hold inventory is that each project that JK2 undertakes is unique by
nature. There are no two projects that match completely, and each of these projects
requires different inputs that preclude the company from establishing stockpiles of
standard materials. There has been an uptick in the demand for unique, themed
construction, which is both beneficial to JK2 in that it provides for more work
opportunities, but also carries the disadvantage of requiring a large number of different
inputs that restrict the ability to lower costs through economies of scale.
Another train of thought to explain the issue is to examine that reasoning behind
that lack of strategic sourcing strategy. Due to the current workload that the company is
under there is not opportunity to explore where sourcing could be used to increase
profitability. This has happened over the last few years as industry demand is growing
while JK2 has not expanded.
Figure 11 – Cost of Goods Sold Analysis
Cost of Goods Sold Analysis
Sales
COGS
Gross Profit
Gross Margin
Additional Unrealized Contribution
Actual Performance
2011
2012
$2,048,867
$4,537,782
$1,744,532
$3,899,431
$304,335
$638,351
14.85%
14.0675%
n/a
n/a
Under Industry Average
2011
2012
$2,048,867
$4,537,782
$1,649,338
$3,652,915
$399,529
$884,867
19.50%
19.50%
$95,194
$246,516
24
Gross margin can be examined through two different avenues, cost of goods sold
and price. In order to fully understand that monetary costs associated with the current
conditions a number of spreadsheets were generated. Figure 11 demonstrates the overall
effect that the gap between actual gross margin and industry gross margin has on JK2’s
bottom line. If the gross margin from 2012 was able to be increased to the industry
average, JK2 would have realized an additional $246,516 in contribution. While this
would not be the exact amount of addition to net profit, as tax effects would be present, it
does demonstrate how much money is being left on the table due to the gross margin
issue.
Figure 12 – Pricing Analysis
Pricing Analysis
Sales
COGS
Gross Profit
Additional Unrealized Contribution
Markup Rate ‐ Current 30%
30%
35%
40%
$4,537,782
$4,764,671
$4,991,560
$3,899,431
$3,899,431
$3,899,431
$638,351
$865,240
$1,092,129
n/a
$226,889
$453,778
Figure 12 addresses the gross margin from the pricing side. Currently JK2
utilizes a markup rate of 30%, which has been described by numerous individuals are
quite low. If this rate was increased by 5%, to a 35% markup, JK2 would stand to gain
$226, 889 in contribution. This can be accomplished without changing the cost of goods
sold at all. A 10% increase would result in over $450,000 in additional contribution. As
gross margin is out of line, pricing could be increased in order to narrow the gap. JK2
has established itself within the industry and has earned a positive reputation. This
allows the company to go beyond price competition as the driver of demand and begin to
increase their markup.
Figure 13 – COGS and Pricing Combination
Markup and Gross Margin Adjustments
Markup
Gross Margin
Sales
COGS
Gross Profit
Additional Unrealized Contribution
30%
14.01%
$4,537,782
$3,899,431
$638,351
n/a
19.50%
$4,537,782
$3,652,915
$884,867
$246,516
35%
14.01%
$4,764,671
$3,899,431
$865,240
$226,889
19.50%
$4,764,671
$3,652,915
$1,111,757
$473,406
40%
14.01%
$4,991,560
$3,899,431
$1,092,129
$453,778
19.50%
$4,991,560
$3,652,915
$1,338,646
$700,295
25
Figure 13 combines the previous two into one spreadsheet. Each pricing markup
is examined in combination with cost of goods sold. While each of these strategies are
viable options, the 35% markup rate operating under the industry average gross margin
of 19.5% has been identified as the goal of the implementation of this report. This would
increase the contribution margin from $638,351 to $1,111,757, a 74% increase from the
current conditions, or additional contribution of $473,406. This is an opportunity for the
company to increase its profitability without having to venture outside of their core
competencies or putting their competitive positioning at risk.
26
Marketing Plan
Marketing Objectives
The three areas of concern that will be the primary focus for this Marketing Plan are
brand awareness, digital advertising, and customer acquisition. The goals of this plan are
to:
•
Create a marketing strategy focused on increasing brand awareness in the Central
Florida area and expanding client base
•
Establish a plan for increasing online presence through website development,
search engine and hyper-local optimization and content strategy.
•
Determine the best avenues to increase customer acquisition and expand cliental
within the specialty trade construction industry
Company History
The parent company of JK2 Scenic Division is JK2 Holmes Constructors, a
General Construction company, establish in 1986, specializing in commercial
construction. JK2 has excelled for 25+ years in the areas of preconstruction,
development, design build delivery, construction management as well as typical general
contracting. Under the JK2 Holmes Constructors, their portfolio includes business in the
restaurant, retail entertainment, hospitality, and industrial market segments. This
extensive background in the construction industry, and ability to build on a large scale
separates JK2 Scenic from their competition whose capabilities are often limited to
theming, and smaller scale builds.
In 2009, JK2 Holmes Constructors expanded its services with a new business
known as JK2 Scenic Division. The Scenic Division is headed by Tim Bartell, who was
a Project Manager at JK2 for the four years leading up to the new divisions inception, and
has 20 years of professional experience managing technical and artistic staff in theater,
television, live entertainment, and convention services. His extensive resume includes
27
scenery and stunt construction for Nickelodeon Studios, art department management,
coordination of technical staff for Cirque Du Solei La Nuba, museums, many theme park
installations and consulting for local theaters and Universities.
The goal of JK2 Scenic Division is to provide their client with “Turn-Key Artistic
Fabrication from Concept to Project Delivery”. The company does this by offering an
abundance of services including themed environments, TV & video production scenery,
woodworking, faux rock work, 3D signage, fiberglass work, prototype engineering, faux
painting, mold making, and retail theming. The company fulfills these services within
their 5,000 square foot fabrication shop, that doubles as their warehouse and
manufacturing space, located in Apopka, FL. This addition allows JK2 Holmes
Constructors to further assist their clients by creating artistic themed environments, from
beginning concept states to final design and execution.
Competitive Advantage
JK2 has been in the industry for over 25 years, allowing them to develop their
name into a standard of excellence in the construction industry. This established
reputation provides JK2’s scenic division an opportunity to differentiate themselves from
their competitors. Their experience in the industry has provided them the ability to grow
a vast network of contacts in the industry allowing previous clients the opportunity to
take advantage of newly established in-house artistic fabrication.
JK2 has promoted employees from within guaranteeing their staff has a wealth of
experience in the industry. The head of the Scenic Division, Tim Bartell, boasts 20 years
of professional experience in the management of artistic divisions of a variety of
entertainment companies. The knowledge that he has accrued in his career so far provides
clients of JK2’s Scenic Division full confidence that their needs will be fulfilled well
above their expectations. The experience held within the Scenic Division allows JK2 to
not only manage the design and construction aspects of a project, but also efficiently
manage, budget and schedule the process to guarantee quality and cost control of the
finished product.
The physical restrictions on design and construction that many companies face are
those that JK2 have successfully overcome. Most companies have to outsource at least
28
one portion of the project, whether it be artistic, design, fabrication or construction. JK2’s
facilities include a 5,000 square foot fabrication shop that provides a venue for every step
of the project to be completed. Clients can be assured that their project will be completed
from start to finish at one location by the same project professionals, providing an
incredible level of continuity in service.
Environmental Analysis
Founded as a general contracting commercial company, JK2, has expanded its
services to include high-quality, custom-built specialty projects under the JK2 Scenic
Division. In the late 1980s Paul Holmes built from the ground up, the JK2 brand to what
it is today. Daughter, Julie Holmes, recently joined her father and will be taking over the
Scenic Division in the near future, as Paul plans to scale back his involvement.
The Marketing Environment
Competitive Forces
The competition surrounding the specialty construction and fabrication industry is
strong on a local scale and is becoming increasingly strong on a larger scale as custom
builder’s geographic reach increases. The buying power within this sector of the
construction industry lies with the buyer rather than the seller. The limited, yet large scale
of the clients means that their business is necessary for local construction companies,
making the bidding process far more competitive. The industry has seen an increase in
contractors focusing on specific niche areas, which have allowed them to expand and
become more competitive. This being said, rivalry among the competing firms is eased
somewhat due to the diversified offerings that each company has, and with the scale and
cost of many construction projects rising, contracts and subcontracts are more likely to be
awarded to companies with expertise in a particular specialty (Industry Intelligence from
First Research, 2014).
Economic Forces
29
The economic downturn of 2008 affected the construction industry, as a whole,
quite strongly but it began to see reasonable growth again in 2012. By the year 2017, the
United States construction industry is forecasted to reach a value of $703.1 billion
dollars, and increase of 22.8% since 2012. With the specialty construction industry
increasing at a similar rate, demand for more workers will continue and companies within
this sector will be forced to increase wages to compete for qualified workers. The Central
Florida area is booming, and expanding tourism and theme park industry will continue to
drive this trend.
The establishment of both the SunRail and All Aboard Florida, will increase
infrastructure in Central Florida creating the potential for large scale growth of the
tourism industry within the Orlando area.
Political Forces
Currently there are limited political trends influencing the construction market.
Legal and Regulatory Forces
Regulation is a common practice in the construction industry. There are many
steps of permitting and inspection throughout the process, intended to ensure the safety
and reliability of new projects. One of the latest regulations, implemented on March 24,
2014, requires construction contractors to track disability status using the OFCCP’s
mandated form.
Advertising is important to Florida contractors and can make the difference
between a great business year and just making ends meet. Florida contractors have many
new ways of promoting their businesses with the increased use of internet websites and
the advent of social media technologies. As advertising evolves, it is important for
Florida contractors to remember that their license number must be included in all offers
of service, bids, business proposals, contracts or advertisements, regardless of the
medium. Pursuant to Rule 61G4-12.011, F.A.C., advertisements include any electronic
media including Internet sites. So please remember to include your license number on
30
your websites, social media pages and other advertisements. (Florida Department of
Business Professional Regulation, 2014)
Technological Forces
Technological advances are constantly changing in the construction industry. 3-D
printing is on the forefront of technology and has the potential to revolutionize the
construction and custom fabrication industry. Recent advances in 3-D technology may
allow custom fabrication companies to produce and replicate incredibly detailed works
time and time again to their customer’s exact specifications. Usage of 3-D printing can
make the construction process more efficient, streamlined, and cost-effective.
Pre-fabrication is an increasing trend in the industry that can reduce waste,
increase productivity and increase production. This trend may be imposed on the industry
because if competition begins to offer cheaper alternatives to JK2’s custom fabrications
the company may face a decrease in demand. Embracing pre-fabrication in parts of their
design and building may be necessary to keep up with the competition.
Sociocultural Forces
The number of Women Owned construction firms is on the rise. The U.S.
Census Bureau reported that there were 152,871 women-owned construction firms in
1997. By 2007 this number rose to 269,809, and increase of 76%. Since 1978, federal
contractors are required to employ women for 6.9% of the total work hours on any
federal project, which is a benefit that many women-owned businesses are profiting from.
The flow of information in today’s society is driven through the Internet.
Consumers are more frequently relying on search engines and online reviews to gain
information about a product or company. Similarly, clients make contact and purchases
through the internet as well. This increase should influence JK2 to invest in and increase
their web-based presence.
Competition
31
In the United States there are 169,530 firms operating under the Specialty Trades,
NEC sector of the construction industry and within Orlando alone there are 597
businesses working under this segment. To differentiate JK2 from the competitors it is
necessary to first examine the competitive landscape.
•
Local Competitors: Nassal Company, Model Werks, Inc, Phoenix Rising
•
Other Competitors: Chisel 3d, Theme Works, Pacific Studios, Adirondac
Studios, Lexington
The Nassal Company, is JK2’s largest local competitor. The annual sales average 27
million and the plant size that they operate in is 32,000 square feet. The company has 85
employees and operates primarily within the theme park, zoo & aquarium, museum and
specialty project sectors. They have a very well organized website, that has a page
authority of 39, with a total of 166 links routing back to their website. Although a
competitor, Nassal can be used a model of what JK2’s online presence should look like
after completing the implementation process of this marketing plan.
The competitive landscape of this industry is driven by new nonresidential
construction activity, as well as corporate profits and local government budgets. The
profitability of individual companies depends on accurate project bids and efficient
operations. Large companies, such as Nassal, have the advantage in being able to offer a
variety of services over a geographically diverse market at competitive prices. Small
companies, such as JK2, can compete effectively by offering niche services or by
building relationships with customers in individual markets. This industry is highly
competitive, and a single project may attract bids from many contractors. (Hoovers,
2014)
SWOT Analysis
Strengths:
•
Reputation: As stated in the Company Overview, Section 2, the JK2 name has
been in the construction industry for 27 years, giving their name the credibility as
32
one of the leading construction companies in the Central Florida region. This
reputation gives them a distinct advantage over their competitors.
•
JK2 benefits from having an experienced and skilled management team. Paul
Holmes, Julie Holmes, and Tim Bartell work as a cohesive unit in order to
accomplish goals. Paul started the company in 1986, and his years building the
business means he understands underlying issues and complications that may
arise over the course of a project, with best practices being utilized to meet those
challenges. Julie is newer to the management team, and brings a wealth of
knowledge to the team as she heads the scenic division. Tim is the creative driver
of the scenic division, and his design capabilities give JK2 a distinct advantage.
•
The company is experiencing rapid growth in the scenic division, growing
roughly 60% from 2012-2013, and already surpassing 2013 total revenue in the
first 4 months of 2014.
•
JK2 has a large capacity for growth due to their financial fluidity, available space
for facilities expansion and budget space for marketing campaigns.
•
Being in business for 27+ years, JK2 has well-established relationships with
clients, suppliers and subcontractors. These relationships are essential to both
earn future contracts and maintain a profitable position.
•
Every project that JK2 undertakes has the attached benefit of management
working directly with the project. There is little power distance between the top
of the company, the workers performing job tasks, and the client. This direct
connection leads to increased communication between JK2 and clients that
ultimately leads to better final products.
•
The net margin of 6.7% is nearly double the industry average of 3.5%. While
underperforming in the gross margin, this net margin indicates better profitability
due to low labor, rent, and overhead costs.
•
The industry is shifting to include the need for in-house design, which JK2
provides. This helps to consolidate the needs of clients and brings the entire
process under one roof. By eliminating a link in the chain to final product there is
higher reliability and little room for misinterpretation of designs.
33
Weaknesses:
•
Risk-adverse management typically results in hesitation to adopt new practices
and marketing strategies. With the scenic division experiencing rapid growth, it is
necessary for capital investment to meet the increasing demand. When riskadverse individuals are provided with an opportunity that includes unknown
results there can be underinvestment or avoidance of the opportunity as a whole.
•
Two divisions of JK2 (scenic division and construction) have similar tasks,
however their markets are very different. It is important for JK2 to differentiate
the focus between the two when it comes to marketing plans and strategy. This
involves creating two separate and distinct business identities.
•
JK2 lacks a defined target market for their scenic division, which results in a lack
of focus and efficiency when reaching out and attempting to grow their client
base.
•
JK2 has reached production capacity, which has resulted in the need to turn down
potential business. The economic ramifications of this cannot be easily
quantified, as some jobs can lead to more work down the line. There constraints
are found in both the facility as well as labor pool. Prior to implementing a new
marketing strategy, the company must first address it’s capacity limitations.
•
JK2 has two distinct focuses, general contracting and scenic construction. While
the two divisions work in tandem on many projects, there are also separate
projects that require different skills and labor needs. The cost structure between
the two divisions can be quite different. This means that the company needs to
keep two different accounting books for the divisions in order to help identify
inefficiencies and areas of improvement. JK2 keeps one set of books for both
divisions, limiting the quality of information available for either of the two
divisions.
•
Online presence does not accurately represent their capability or brands reputation
and experience.
•
Brand perception does accurately portray the company’s capabilities
•
Lack of strategic marketing plan
34
•
Do not belong to any industry specific professional organizations
•
Reliance on one industry/client(Universal Studios)
Opportunities:
•
The tourism industry in the area has grown an average of 4.4% over the last 4
years and is projected to continue growing at an annualized rate of 2.5% for the
next 5 years. As more tourists are visiting, the demand for expansion and
renovation will rise, leading to more potential projects.
•
There is a trend within the construction industry to subcontract specialty
construction. JK2 is uniquely positioned having the ability to act as both a
general contractor and/or the specialty construction contractor. This allows for
increased potential of accepting subcontracted work from larger general
contracting players. These strategic alliances could greatly increase the scope of
work that is currently available for JK2.
•
JK2 is not an active member of any industry associations. There is potential for
making relationships with other players within the industry through participation
in such groups. The ability to engage and cultivate these relationships can lead to
work opportunities, best practice strategy, and many other positive benefits
related to a deeper understanding of the competitive landscape.
•
Potential benefits of minority-owned business due to the prospect of a female
owner
•
The increased desirability of custom construction work across the construction
and artistic fabrication industry potentially allows JK2 scenic division to expand
their network of clients.
•
The low cost of capital that is currently available is a great opportunity for JK2 to
realize growth and expansion. Interest rates are near historical lows, and as the
company is currently operating at capacity, this is a favorable atmosphere in
which to invest in growing. JK2’s debt-to-worth ratio is only 1.48 while the
industry average is 2.1. This represents the chance for JK2 to lever up their
profits through relatively cheap debt financing.
35
•
JK2 has a line of credit of $250,000 readily available to cover any short-term
needs. These resources can be utilized in order to increase capacity and allow
JK2 to accept more contracts.
•
Cost effective marketing techniques can yield significant return due to the lack of
current marketing in general.
Threats:
•
Finding, recruiting, and retaining skilled labor has become increasingly difficult
within the industry. There is increasing competitiveness for human capital, and
with that increased labor costs, which can consume significant portions of
revenue.
•
Large-scale custom design shops have a competitive advantage through the
utilization of economies of scale and the ability to have total project management
under one roof. While smaller firms, such as JK2, must rely on subcontracting for
those jobs that are outside their core competencies, the larger firms have all
aspects of the projects available in-house. These larger companies can also
bundle multiple projects together to achieve economies of scale, allowing them to
bid a lower price than competitors.
•
Trends in the economy are seen mirrored in the construction industry and tied
closely to overall company performance
•
The geographic reach of firms has grown exponentially over the last decade.
Custom construction has traditionally been restricted in its reach to those areas
within travel distance. However, by utilizing online presence many companies
are now able to bid, produce, and ship product to any part of the world. This has
increased competition beyond the local level to include many firms that
previously were not direct competitors.
•
There has been an increase in trends of outsourcing.
36
STP Analysis
Segmentation
Potential clients for the Scenic Division will be located within the Central Florida
geographic scope. JK2 scenic division’s primary focus will be on marketing to major
establishments in the Central Florida area that can utilize themed artistic fabrication. This
can range from large scale establishments in the hospitality and tourism industry like
amusement parks to television and entertainment studios, all the way to the retail and
restaurant market. The market that will be focused on are client’s who’s needs comprise
of medium to large scale custom design and cannot be met by smaller general contractors
with less specialty fabrication expertise.
Targeting
The four areas that JK2 Scenic will focus on are Theme Parks, Retail, Hospitality,
and Specialty Projects. The theme park industry is growing at a 4% annual growth rate
and is expected to grow at 1.8% annually between 2014 and 2019. This industry also
provides long term and large scale builds as well as consistent and returning clients. JK2
also has extensive experience working within this market, which gives them a
competitive advantage over other bidders. In terms of physical size, revenue and
employment, the largest theme parks are located in the Southeast (Florida) and in the
West (California) and overwhelm all other operators in other areas. Orlando is home to
seven of the largest amusement parks in the United States. They are open year-round
thanks to the favorable weather conditions and prevent and significant problems in
regards to seasonality of this segment.
JK2’s largest client is Universal Studios, holds 15% market share of the entire
amusement park industry and saw a 5.2% growth in 2013. As Universal expands, it will
be crucial to JK2’s success to maintain a strong and lasting relationship with Universal.
Other Theme Parks in this region that JK2 should look to partner with include SeaWorld,
Disney, and Legoland. With this tourism industry increasing with the Sunrail it is
expected that the local amusements will expand to accommodate larger crowds.
37
The hospitality industry has experienced 2.5% annual growth over the past 5
years and is expected to see a jump to 3.0% annual increase from 2014-2019. Growth is
expected to be particularly strong in the extended stay hotels, boutique hotels, space and
health retreats and the resort segments. 6.2% of all domestic hotel businesses are located
in Florida and Florida has been ranked as one of the top ten states for attracting domestic
and international travelers. There is expected to be a 2.1% increase in the number of
visitors that Orlando has in 2014 compared to 2014. New projects including the Sunrail,
The Creative Village, the Dr. Phillips Center for the Performing Arts, the Citrus Bowl
refurbishment, and the proposed Sports and Entertainment District complex are all
expected to help drive traffic and tourism to the Orlando area and boost lodging demands
for the hotel industry. One great resource for finding new builds in the area is a website
called Build Central, which may be of help when looking for projects within this
industry.
Orlando’s retail industry continues to benefit from the area’s thriving tourism
industry. As there is an increase in tourism, this sector will also see an increase.
Consumer spending is back on the rise and if JK2 is able to network properly within this
sector there will be many opportunities for refurbishment, modernization, and new builds
in the upcoming years.
The specialty project segment will include all the unique projects and specialty
design pieces that JK2 does that does not necessarily fall into the sectors above. It is also
important for JK2 to recognize that within each of the segments above, the company will
see the greatest number of projects when exploring both general contracting opportunities
and subcontracted opportunities.
Positioning
JK2 will position themselves as experts in the fabrication, and specialty
construction industry to the Central Florida area. Client’s seeking custom fabrication will
view JK2 Scenic Division as the frontier for exceptional client service provided through a
streamlined and efficient collaborative approach. JK2 Scenic will offer innovation when
designing and fabricating the highest quality in scenic construction products. It will be
important to network and brand the company within both the general contracting and
38
subcontracting sectors of the industry to see the greatest potential for the two distinct
divisions.
Marketing Mix
Services Offered
JK2 is uniquely positioned having the ability to act as both a general contractor
and/or the specialty construction contractor. As a specialty construction contractor, JK2
offers an extensive line of services that has allowed the company to broaden their
potential client base and increase their scope of work. Some of the services JK2 scenic
offers are:
•
Themed environments
•
Retail theming.
•
TV and video production scenery
•
Fine woodworking
•
Faux rock work
•
3D signage
•
Custom fabrication for the industry
•
fiberglass
•
Prototype engineering
•
Faux painting
•
Mold making
•
CAD services.
Pricing
Within the current market that JK2 is competing in contracts are not won based
solely on project pricing but through a combination of quality of work, costs, timing, and
expertise, within the bidding process. This bidding process is the most critical part of
contract acquisition. Most projects within the construction industry are bid out to allow
contractors to compete on price. The JK2 bidding process will be standardized to
emphasize quality, streamlined project management and low cost in order to outbid
39
competitors. This combination of factors should make acquiring contracts in the future
more efficient.
Distribution
The marketing of the scenic division will be geared towards direct sales primarily
but also include word of mouth and online based marketing. Direct sales will include the
direct contact with past clients and those identified to be potential clients. Potential
clients will be offered and educated on the services available through the scenic division.
The scenic division will increase the priority in gaining new clients through marketing,
research and direct sales tactics. Over the past 25 years JK2 has received most of their
business through word of mouth, which has helped them build their reputation to what it
is today. This tactic will continue to be used as a large portion of marketing distribution.
Participation in construction specific organizations as well as industry specific
conferences will help create a wider network of contacts and leads on prospective clients.
Promotion
Branding
JK2 has been doing business in the Central Florida region for 25+ years, and
should capitalize on this through the company’s new branding strategy. JK2 Construction
and JK2 Scenic should be branded as two distinct units within the same JK2 Company.
The construction side of the company was established as a general contracting company
and should continue to be branded as such, however on the scenic side of the company
the greatest growth will be realized when pursuing jobs in both the general contracting
and subcontracting sectors of the industry. The company should keep the JK2 name at
the front of both divisions, due to the history and reputation that is associated with it in
the Central Florida area. It is interesting to note that in the United States there are only 16
companies by the name of Scenic Construction, only one of which is in Florida and none
40
of which are in the Specialty Construction industry. Once a new logo and trademark are
chosen JK2 will need to register both, and create identity standards across both brands.
Networking
Word-of-mouth has, and will continue to be one of the greatest revenues
generators for small to medium sized construction companies. Small companies can
compete effectively by building relationships with customers in individual markets. In
order to increase JK2’s network of potential clients and professional relationships the
company will join industry specific professional organizations such as the Themed
Entertainment Association. This network may also serve to further increase the reputation
within the community for JK2. Benefits offered by these organizations are as follows;
networking, exclusive events, job listings, increased visibility, international exposure,
continued education, industry contracts, and access to conferences. The ability to engage
and cultivate these relationships can lead to work opportunities, best practice strategy,
and many other positive benefits related to a deeper understanding of the competitive
landscape.
Publicity
JK2 will leverage their large scale builds and unique projects as publicity by
making content more easily accessible to those who are viewed as experts. An example
of this is when there is mention of the Universal Studios archway in the media, JK2 will
work to consistently be listed as the company who completed the build. To provide a
more consistent form of publicity, future contracts over a certain amount of money may
include a stipulation that JK2 will be given credit in the media or small signage may be
included discretely on the build.
JK2 will find local writers and industry bloggers in the Central Florida area that
have a substantial following and readership, and make them aware of the new branding,
and build participation. For example, JK2 has been providing commercial construction to
the Central Florida area for 25 plus years and has recently branched out into the artistic
fabrication industry. Although JK2 cannot specifically asked to be mentioned, this story
41
should be shared with local newspapers, magazines and industry bloggers to create
awareness of the JK2 company, work experiences, and service mission.
Collateral
Collateral comes in the form of business cards, letterhead, envelopes, mailing
labels, brochures, and hard copy portfolios, along with other marketing materials that
boast the company name and logo.. Once a logo is chosen for the scenic division, new
business cards, letterhead, envelopes, ad mailing labels should be made boasting the new
logo and name, and used accordingly for projects under the scenic division to
differentiate in the client’s mind there are two distinct brands, JK2 construction and JK2
scenic. The scenic division will create a concise portfolio with physical examples of
previous work, past customer testimonials, overview and mission statement of the
company. This is a similar to the portfolio for JK2 construction and can be used to give to
prospective clients and in future meetings. A condensed version of the portfolio will be
created to showcase the top tier of past builds in the form of a brochure to be distributed
to potential clients.
Digital Marketing Strategy:
Over the year’s JK2’s primary marketing strategy has been focused around wordof-mouth and a referral-type strategy. By implementing a strategic and focused digital
marketing strategy the company will be able to cost-effectively create brand awareness,
build a digital footprint that accurately represents the company’s capabilities, and
generate new leads for business through an increasingly used form of media.
Website
A survey conducted by Dimensional Research showed an overwhelming 90% of
buying decisions today are influenced by online reviews. Given this statistic a positive
online presence is pertinent to increasing business, and maintaining a positive reputation.
The current website was built in 1999 and needs to be transferred over to a new content
42
management system that will allow for easier internal updates. JK2 will invest in a new
website that accurately represents their capabilities. The website will be optimized for
long-tail keywords that are focused around the construction industry in the central Florida
region. The new website will be used primarily for static content that will be updated on a
bi-quarterly basis. The static content includes information on the company, services
offered, a portfolio of work, news and press releases pertaining to the company, and
contact information. (To see the full web design template, view the Appendix.)
60% of search queries happening today happen on a mobile device. In order to
create a streamlined contact point for their customers, JK2 will establish a mobile site
with a click to call option and an option to view their full site. This will create a way for
those searching for JK2 from a mobile device to make contact with ease.
Google Places, Bing Local, Yahoo Local
In order to hyper-local optimize the scenic division JK2 will utilize the three
major search engines extensive focus on serving up relevant local results. Having a
consistent presence across Google Places, Bing Local and Yahoo Local will ensure that
JK2 Scenic will be found by the right people at the right time. The marketing involved in
local optimization is an ongoing process that is of the utmost importance to small
businesses.
Coupled with the static content the JK2 will utilize social media for their more
dynamic content. The types of social media that JK2 will be involved in are as follows:
Google+
Having an active and robust Google+ profile allows businesses to take advantage
of Google’s homegrown social site, which carries with it a heavier weight within the
Google, in effect helping to boost search rankings, increase trustworthiness, and build
authorship.
Facebook, Twitter
43
This will allow the scenic division to update their consumers more frequently and
maintain contact with potential customers. Not only will it allow constant updates, but it
will represent a more personable side of JK2, allowing customers to feel engaged and
involved in the company. The social media content will include updates on current
projects, potential projects, and daily activity in the office as well as any potential nonprofit or volunteer type events that the JK2 may be involved in. The involvement that
can be instilled by social media content produces a stronger level of loyalty from their
customers. In a centralized location small businesses benefit from social media
campaigns because it provides an additional avenue for them to reach the community in
which the companies work.
LinkedIn
The final form of social media content that the scenic division will be utilizing is
LinkedIn. This is a professional networking platform that will allow the scenic division
to connect with future clients, experienced professionals and potential staff. LinkedIn will
allow the company to build a page that will allow current and past employees to identify
JK2 as their employer and past and current clients to make recommendations and reviews
of services. LinkedIn is one of the leading and most credible sources for employee
recruitment; this will allow the JK2 to expand their staff with ease relative to increased
demand.
Implementation Plan
JK2 Scenic’s primary goal of the new marketing plan is to build brand awareness
and obtain new clients; this will be done by the company’s presence at professional
events, online searches, membership in professional associations, networking and
strategic alliances.
Marketing Organization
The types of services that the scenic division provides for each project overlaps
regardless of industry. For this reason the marketing organization will not be broken up
44
by industry but by function. The website, content, and hyper-local optimized pages will
be set up and managed by a third party marketing agency to keep costs low for JK2 in the
initial stages of implementation. Jk2 will assign the duty of social media to a marketing
intern, which will be hired and trained once the marketing strategy is in place. The intern
should have knowledge of both the marketing and construction industry and will be in
charge of documenting day to day activities, engaging industry professional and
prospective clients on social media, checking for inconsistencies between platforms, and
doing minor updates to the website, via Wordpress, when necessary. In the early stages of
this transition Julie, Paul and Tim will have decision-making responsibilities and as the
department grows decision-making capabilities will be expanded to include the key
personnel in the marketing department. These changes are beneficial to the company
because it provides focus towards distinct marketing efforts.
Project Plan
Once beginning the implementation process, all activities should be completed
within the first year. Prior to implementation a marketing manager should be established
to handle all correspondences between JK2 and the marketing agency chosen. After this
position is established responsibilities regarding the marketing plan should be their
responsibility, with the help of the marketing intern once hired. Contract a graphic
designer for logo development
•
Appoint a marketing manager
•
Take professional photos of past projects and appoint per-project photographer on
all future endeavors. There should be photos taken at each stage of the build
process.
•
Hire a marketing agency to build a new website; the agency should be able to
complete the following tasks
o Develop new website using Wordpress
o Create content for new website
o Fundamental SEO
45
o Local SEO
o Assist in the Hyper-local optimization
•
Establish a schedule for updating the website and reporting on analytics
•
Establish social media strategy; prior to hiring marketing intern
o Establish a response plan; for social media and reviews
•
Reformat collateral using updated photos and content that is congruent with the
content on the new website
•
Hire a marketing intern; they will answer to the appointed marketing manager and
will be responsible for the following:
o Documenting day to day activities
o Social media content
o Responding to all reviews
o Reporting on analytics
o Researching new builds in the industry
o Minor updates to the website via Wordpress
•
Join professional organizations
o Make calendar of events
o Go to the networking events to build professional network
•

Follow up with leads

Reach out to new potential clients
Report on the metrics for the implemented strategy to use as a benchmark for
future strategies
•
Reestablish the objectives of the marketing team for next fiscal year
Metrics
To analyze the success of the company’s marketing campaign, JK2 will need to
quantify their success. The internet is an infinitely measurable place, and thus, by
narrowing down the measurements that are most relevant to the previously stated
46
marketing tactics, and tracking them, JK2 will be able to quantify the inbound ROI of
their digital media campaign.
By utilizing analytic mechanisms provided by Google, tracking URLs, social
media insights, and other commonly used tools JK2 will be able to track real-time stats of
their online efforts.
KSF 1: Website Metrics
Google Analytics will need to be installed into the new JK2 website. Google
Analytics helps in assisting companies to better understand the visitor traffic, and helps to
paint a better picture of who the audience is, their needs, and what influences them. With
real-time reporting, in-page analytics, traffic sources, audience and data reporting, along
with multiple other features, Google Analytics is an all-encompassing website analytics
software that will allow JK2 to maximize their ROI and enhance the user experience. To
best understand long-term trends on the new website, JK2 will report on these statistics:
•
Overall Site Traffic
•
Unique Visitors
•
Time Spent on Site (converted to HH:MM:SS time)
•
Click-Through Paths
KSF 2 - Customer Acquisition:
It is important to know not only how many people are visiting the site but also
where the traffic is being driven from. By reporting on customer acquisition JK2 will be
able to see how the customers are finding the new website, find what sources are driving
the most traffic, and be able to draw conclusions to make alterations the future marketing
plan accordingly. JK2 will want to report on the following:
•
Customers originating from social media
o Specifically what accounts?
•
Customers originating from organic content
•
Keywords that were most impactful
•
Best performing content
47
KSF 3 - Social Media Metrics:
Social Media is growing in importance in search engine algorithm and it will be
important to monitor the platforms that are used and other pertinent social numbers from
the previous months to see how the social accounts are contributing to traffic, leads, and
brand awareness. One of simplest ways to see if the number of posts per social account is
affecting the audience size will be to calculate the audience change rate and the change
rate of posts. Once this number is figured, it will be simple to tell if an increase in the
number of posts had a positive or adverse effect on the audience size. Although JK2
could report on the number of posts/likes the best form of engagement metrics will be
found by the conversion rate for each of the posts. This can be found by dividing the
number of interactions by the audience reach for each of the posts. To accurately report
on the number of conversions to the new website that are linked to the social media
accounts JK2 will need to track the inbound links on Google Analytics. To get the most
accurate metrics and insights for the company’s SEO efforts JK2 will report on the
following:
•
Audience size
•
Audience change rate
•
Posting change rate
•
Number of Social Network Visitors to the new website
•
Conversion rate
KSF 4 - Hyper-local Optimization:
When looking to quantify optimization techniques the company will need to note
which pages were optimized, the keywords that are being targeted on each page, and
traffic from previous months for comparison. JK2 will report on each month, the level of
traffic increase, which keywords performed the best, how JK2’s rankings have improved.
48
To best answer the effects that hyper-local optimization is having on the company, JK2
will report on the following:
•
How much did organic traffic increase?
•
Have the rankings improved?
•
Which websites are driving the most traffic?
•
How did the optimization affect leads and customers?
Marketing Budget:
The marketing spend for JK2 in 2012 was $608, a mere .01% of their sales for the
year. The industry average advertising to sales ratio is .73, and if followed would bring
JK2’s new spend up to $33,126. With a $10,000 budget originally allocated to the
funding of a new website, JK2 will be able to reallocate that money across multiple
marketing mediums to realize a greater impact. JK2 will reallocate the $10,000 towards a
newly developed website, investing in search engine optimization as well as a content
strategy that will be managed by a third party agency. Proposals are located in the
marketing pamphlet.
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Growth Plan
JK2 has hit the ceiling of their production abilities, resulting in the need to turn
down potential work. As the company has reached this point without significant
marketing, it is a concern that any increases in marketing could place greater pressure on
the current constraints and lead to a negative reputation of a firm that denies potential
work. This could have the effect of not only missing out on one project, but future
projects as well. Therefore it is difficult to quantify the costs associated with turning
projects down, as one seemingly stand-alone project can lead to fruitful relationships
down the line. In order to avoid this it is recommended that JK2 become familiar with
the Theory of Constraints, and apply it as the methodology behind identifying the areas
where growth is necessary to increase the overall throughput of the production flow.
In 1984 Dr. Eliyahu Goldratt published the book The Goal. This book details the
Theory of Constraints, which is the idea that in order to increase the amount of
production it is not necessary to change the entire system. Rather it focuses on
identifying the steps within the process flow that is limiting overall productivity. These
areas are the ones to be addressed, increasing their capacity with investment or
restructuring of use.
The following is terminology utilized in this theory:
•
Throughput – The rate at which a system achieves its goals. In the case of JK2,
this is a finished product that goes from all the steps of production from design to
cutting, painting, and delivery.
•
Constraint – The step in the process that is limiting or restricting the overall
number of throughput. Also known as a bottleneck. Constraints can come in the
form of equipment, people, or policy. Equipment is limited to the time of
utilization and the capacity to produce within that time. People can be a
constraint when there is a lack of skilled people to achieve the goal. Policy can be
a constraint if resources are not being allocated in the most effective ways.
•
Operational Expense – The money the system spends turning inventory into
throughput.
50
•
Inventory – Any material used in the creation of throughput.
•
Capacity – How much throughput each step in the process can create.
The basic idea behind the Theory of Constraints (TOC) is that a production
process is only as good as its weakest link. For example, if JK2 is able to build 100
chairs in a day with its carpenters, but paint only 50 chairs a day, then the painting
department is the weakest link, or constraint, limiting overall production for the day at the
50 painted chairs. Therefore the focus would be on increasing the painting department,
either through the investment in more equipment for painting, hiring more painters, or
increasing the hours that painting is performed in a given time. This would increase the
capacity of the painting department and thus increase overall productivity.
Dr. Goldratt details a logical process to help identify the bottlenecks and to
exploit them to increase throughput. The first of these steps is to understand the capacity
of each step in the production process. This can be done through the study of how many
items are entering and exiting each part of production in a given time frame. It is
important to ensure that there is ample product in front of each station when measuring
throughput abilities. If one department is waiting for product currently being worked on
in another step then their true potential is not being identified. By establishing these
benchmarks the identification of bottlenecks if possible. The bottlenecks are simply the
steps in the process which have the lowest capacity. The following is a simplified 5-step
process to adhere to the TOC.
1. Identify the system's constraints (that which prevents the organization from
obtaining more of the goal in a unit of time)
2. Decide how to exploit the system's constraints (how to get the most out of the
constraint)
3. Subordinate everything else to the above decision (align the whole system or
organization to support the decision made above)
4. Elevate the system's constraints (make other major changes needed to increase the
constraint's capacity)
5. Warning! If in the previous steps a constraint has been broken, go back to step 1,
but do not allow inertia to cause a system's constraint.
51
Step 1 has already been addressed. Once the bottleneck is identified, it is
important to decide how to get more out of the constraint. This can include increased
labor, working hours, or increased capital dedicated to that production step. The focus
should be exclusively on increasing the constraint’s capacity. However, this can result in
a ripple effect that can create new bottlenecks in the system. Therefore, this system is
constantly being repeated to improve productivity. If all of the production steps are
operating without capacity, then marketing has become the bottleneck and the company
can focus on gaining more work.
In the case of JK2, the constraints are currently located in the painting
department. During discussion it was said that 4 of the next 5 hires would be carpenters.
In the same conversation it was learned that many times products that had been shaped
and constructed by the carpenters would be backed up in front of the painting department.
Whenever inventory is stacking up in front of a step it is a sign of a bottleneck.
Therefore, the first area of investment in growth for JK2 would be the painting
department, according to the TOC.
As JK2 is at overall capacity and denying work the importance of growth cannot be
understated. By following the TOC, JK2 can grow in an effective manner, without
wasteful investment.
Figure 14 – The Theory of Constraints
52
Strategic Sourcing
JK2’s gross margin of 14.1% for 2012 fell short of the industry average by 5.4%.
As previously mentioned in the problem statement, there are four contributing factors
affecting JK2’s low gross margin which include: pricing strategy, sourcing strategy, cost
controls and capacity constraints. In order for JK2 to compete competitively in the
custom fabrication environment, attention must be placed on their sourcing strategy.
Implementing a strategic sourcing strategy will drive down the cost of goods sold while
simultaneously improving the reliability and quality of the materials being purchased.
Strategic sourcing is a strategy whose purpose and goal is to improve the quality,
potential and efficiency of the supply base. The focus extends further than the sales price
of materials. Strategic sourcing considers the total cost of ownership. The benefits
include improved quality, reliability, price, variety and flexibility. Alternatively, when
implemented correctly reduces the overall risk of operating. It is important to remember
that for a strategic sourcing strategy to be sustainable and effective, continuous attention
and action is required.
While a large percentage of the materials JK2 purchases are standard inputs, the
specialty materials are not. As a result, JK2 is forced to pay premiums for these products.
The reality is that the more suppliers one has for each category, the more options they are
left with. Having more options allows JK2 to select on the basis of quality and price.
Purchasing materials in bulk allows for time and cost savings, which is the opposite of
purchasing on the spot market. Finally, an effective sourcing strategy results in strategic
supplier relationships, which largely benefit the purchasing firm.
53
Figure 15 – Spend by Category 2013 and Ranking by Spend
Category Spend ‐ 2013
Miscellaneous
6%
Solid Surface
3%
Cabinet/
Hardware
21%
Fasteners
0%
Fiberglass
1%
Plas6cs
2%
20.68%
3 Subcontractors
19.01%
5 Resin
8.47%
6 Miscellaneous
5.71%
7 Solid Surface
2.98%
8 Metals
1.89%
9 Plastics
1.63%
10 Fiberglass
0.81%
11 Sign
0.55%
12 Fasteners
0.25%
Sign
0%
Paint
9%
2 Cabinet/Hardware
9.30%
Subcontractors
19%
Metals
2%
28.72%
4 Paint
Lumber
29%
Resin
8%
1 Lumber
Figure 16 – Categories with one supplier, 2013
Single Supplier
Category
Company
Fiberglass
FGCI
$
777.53
$
Plastics
Piedmont
$
1,562.65
$
‐
Fasteners
Merit
$
245.13
$
‐
Resin
Reynolds Advanced
$
8,149.54
$
414.24
Sign Supplies
Tube Lite
$
524.41
$
126.19
Solid Surface
Parksite
$
2,869.24
2013
Q1 - 2014
137.44
$ 3,276.28
54
In 2013, JK2 purchased approximately $96,000 for materials and sub-contracting
services. Lumber accounted for 29% of total materials purchases, followed by
cabinet/hardware (21%) and sub-contracting (19%). Next was paint with 9%, followed by
resin (8%) and miscellaneous (6%). The remaining six categories combined to make up
the left over 8%.
Two predominant areas of concern exist with respect to JK2’s sourcing strategy.
The first is the limited number of suppliers for each category. For example, JK2
purchased 100% of their resin, totaling $8,150, from one supplier. Fiberglass, fasteners,
plastics, sign supplies, and solid surface materials were all sourced from single supplier
categories. As a result, JK2 passed up opportunities to compare and contrast potential
avenues. Potential avenues including opportunities for cost savings, improved quality
and/or service, and product variety.
The second area of concern for JK2 involves the results of the supplier
evaluations. JK2 purchased and continues to purchase materials from suppliers that do
not comply to JK2’s standards and expectations. In 2013, JK2 sub-contracted Dune
Design Studios for $7,500; approximately, 7.7% of their total material purchase for the
year. In fact, their evaluation results were the lowest of all the suppliers. Star Scenic’s
results ranked it fifth out of six suppliers in the paint category, however was the leading
paint supplier in 2013. Suppliers that do not meet JK2’s standards and expectations do
not deserve their business.
Methodology
Supplier evaluations are in an important aspect to strategic sourcing. Before
expanding one’s supplier base it is important to evaluate the current purchasing
environment. In order to obtain the most accurate information for analysis, Tim Bartell
reviewed and evaluated JK2’s suppliers on the basis of the following:
1. Overall quality of service
2. Reliability
3. Timeliness of delivery
4. Quality of part/product/material
55
5. Price Sensitivity
6. Product Selection
Next, each supplier category (lumber, paint, metal, etc.) was evaluated and each
factor was given a number between one and ten, depending on how valuable the factor
was for the given category. This provided a factor-weighted scale and benchmark score to
compare each supplier’s results. To improve the accuracy of the analysis, JK2’s invoices
from 2013 and the first quarter of 2014 were collected and reviewed. The subsequent
section is a detailed analysis for each supplier category, followed by recommendations
for JK2 to improve its profitability, efficiency and its competitive advantage.
Category Analysis
Lumber
In 2013 28.72% of material purchases were spent on lumber, amounting to
$27,621. 90% of the lumber purchases were purchased from Dixie Plywood and Hood
Distribution, while Thomas Lumber Co. and W.M. Cramer Lumber Co. accounted for the
remaining 10%. In the first quarter of 2014, lumber purchases totaled $17,740. On the
other hand, 95% of the lumber came from Hood Distribution. Assuming that business is
steady, JK2 should expect to spend a total of $71,000 on lumber alone, which constitutes
an increase of 157% from the previous year.
According to the supplier evaluations, Dixie Plywood scored the highest,
followed by Thomas Lumber Co. and Hood Distribution respectively. That means that
Dixie Plywood outperformed their competitors based on JK2’s evaluations. Dixie scored
higher than Hood in reliability and the quality of materials. While Thomas Lumber Co.
scored the second highest average, they only accounted for 3% of category spend in 2013
and Q1 of 2014.
Due to the recent closure of W.M. Cramer Lumber Co., JK2 must decide which
supplier will win their business. Furthermore, JK2 should fill the void with an additional
lumber supplier. This will reduce the risk of relying on three suppliers and provide JK2
with an additional selection of products. Going further into 2014, it is recommended that
JK2 purchases lumber from the supplier that best aligns with JK2’s expectations. Based
56
off of the recent evaluations that supplier is Dixie Plywood. Alternatively, the suppliers
that are unable to live up to JK2’s expectations should be awarded less business and
reserved for last resort purchases.
Paint
Paint accounted for 9.3% of total materials purchased in 2013, totaling $8,939.
$5,891, or 65.9% of the paint materials were purchased from Star Scenic, while Color
Wheel and Ben’s Auto Paint split the remaining 33%. Paint purchased in the first quarter
of 2014, equaled $1,706. Unlike the previous year, where Star Scenic dominated the
category, purchases were evenly distributed amongst Star Scenic, Color Wheel, and
Ben’s Auto Paint. Multiplying JK2’s Q1 results, paint sales may be estimated to be
$6,826 for 2014, a 24% decrease from 2013.
Ben’s Auto Paint scored the highest in the category according to JK2’s supplier
evaluations. Sherwin Williams, who recently acquired Color Wheel, scored the second
highest. Following Color Wheel were Lowe’s, Star Scenic, then Home Depot. Star Scenic
underperformed their competitors in the quality of service, reliability, timeliness of
delivery and price sensitivity. As a result, further consideration should be made before
purchasing 65.9% of paint materials from them.
Due to the recent Color Wheel acquisition and Sherwin William’s favorable
evaluation, increased business should be awarded to them. On the other hand, JK2 added
a paint supplier to their list in 2014. Given the opportunity, Lanco may prove to be a
reliable and regular supplier to JK2. Moving forward into 2014, paint purchases should
be directed towards the suppliers that best perform according to JK2’s standards and
expectations.
Metal
Metal sales in 2013 totaled $1,818, which accounted for 1.89% of total material
purchases. Sunbelt Metals owned 85% of the competition, while Alro made up the
remainder. That has not been the case for 2014. By the first quarter of 2014, JK2 spent
$4,277 on metal purchases alone. This time around Rafab earned 67% of metal
purchases, while Rafab earned 33%, leaving Sunbelt with 0%. Multiplying the Q1 results
57
by four, estimates that JK2 could spend $17,111 for metal purchases in 2014. That
constitutes an 841% increase from the previous year.
JK2 evaluated their metal suppliers favorably, apart from Alro Metal Service.
Sunbelt scored the highest, followed by Alro Metal Plus and Rafab. While Sunbelt lead
their category in reliability and timeliness of delivery, Rafab scored the most favorable
with respect to price. Moving forward into 2014, JK2 must decide which supplier it
wishes to be their go-to supplier. Fortunately, they have three reliable suppliers who
conform to their expectations.
Cabinet/Hardware
Cabinet/Hardware purchases in 2013 totaled $19,882,making it the second largest
category of spend. Central Florida Cabinet Supply accounted for 67.5% of
cabinet/hardware purchases, while A&M accounted for the remainder. Purchases of
cabinet/hardware were $2,640 for Q1 of 2014. Contrary to the previous year, all
purchases came from CFCS.
Reeve Store scored the highest for their category, followed by CFCS, A&M
Supply and Barr Display. There were no invoices on record for both Barr Display and
Reeve Store, which leads one to believe that no purchases were made from them.
Nevertheless, CFCS outperformed A&M Supply in quality of service and reliability,
however scored lower with respect to price sensitivity. Based off of 2013’s material
purchases, JK2 will benefit by pursuing a strategic/collaborative approach to sourcing
cabinet/hardware in the future.
Plastics
Plastics purchases for 2013 totaled $1,562 and accounted for 1.6% of total
material purchases. There is no information for plastics purchases for the first quarter of
2014. All plastics purchases in 2013 were from PiedmontPlastics. JK2 evaluated Farco
the most favorably, followed by Piedmont Plastics and Outwater Plastics. The only area
Farco outperformed Piedmont was on price. Additionally, Farco is located approximately
30 miles closer to JK2’s shop.
58
Subcontractors
JK2 subcontracting expenses totaled $18,283 in 2013, which made it the third
largest category of spend. JK2 worked with TJ Cabinetry and Dune Design Studios. The
former was paid roughly $10,825 while the latter was paid $ 7,458. While TJ Cabinetry’s
evaluations were average, however that was not the case for Dune Design Studios. R&M
Millwork received the highest evaluation scores; however there was no proof of business
transactions in 2013. Compared to the ideal benchmark score of 4.88, Dune Design
scored a 2.43. They scored lowest in quality of service, reliability and timeliness of
delivery. As a result of their poor evaluations, it is highly recommended that JK2 search
for potential suppliers to work with in the future, opposed to continuing to sub-contract
Dune Design.
Fiberglass
Fiberglass purchased in 2013, totaled $775.53, accounting for .81% of total
material purchases. FGCI’s evaluations are in line with JK2’s standards and expectations.
Unfortunately, FGCI is located in in St. Petersburg and is the only fiberglass company
JK2 works with. Furthermore, during the first quarter of 2014 FGCI failed to deliver
quality materials in a responsible manner. Since they are the lone fiberglass supplier to
JK2 and underperforming, it is vital that JK2 expands its supplier base.
Fasteners
Purchases of fasteners in 2013 amounted to $245. Although JK2 evaluated two
suppliers, all purchases came from Merit. Due to the availability of fasteners and the
minimal use for them, it is not necessary for JK2 to change their current sourcing strategy
with respect to fasteners.
Resin
In 2013, JK2 spent approximately $8,150 on resin alone making it the fifth largest
category of spend. 100% of the materials purchased came from JK2’s only resin supplier.
Reynolds Advanced Materials’ evaluations were 3.67, while the benchmark was 4.67.
59
They underperformed in quality of service and price. Consequently, it is highly
recommended for JK2 to seek out new suppliers to do business with.
Solid Surface Materials
Solid surface material purchases were $2,869 in 2013, and accounted for 3% of
JK2’s material purchases. Once again, all the materials came from one supplier with subpar evaluation results. Where JK2 prefers excellence with respect to quality of material,
Parksite was evaluated as average. Additionally, Parksite scored below JK2’s preferences
in every category apart from price. By the end of the first quarter, solid surface materials
totaled $3,276. It is safe to assume that sales for 2014 could be $13,105, granted business
continued at a constant rate. That is a growth of 357% from the previous year. Needless
to say, additional solid surface material suppliers would provide opportunities for JK2 to
lower costs, while improving quality.
Sign Supplies
Sign Supply purchases in 2013 were minimal, totaling $524. 100% of the
purchases were from the supplier, Tube Lite. Although sign supplies constitute a small
percentage of JK2’s material purchases, it is important that they comply with JK2’s
standards and expectations. According to their evaluation, that was not the case. Tube
Lite scored a two for overall quality of service and did not receive one five. As
previously stated, JK2 should not do business with suppliers that fail to meet their
standards. To resolve the issue, additional suppliers must be solicited.
Miscellaneous
Suppliers that provided miscellaneous materials were classified as miscellaneous
and grouped together to provide an aggregate total spend. In 2013, that number was
$5,488 and accounted for 5.7% of total material purchases. Grainger and McMaster Carr
supplied the materials to JK2. Miscellaneous material purchases totaled $1,590 in the first
quarter of 2014. Between Grainger and McMaster Carr, McMaster Carr’s evaluations
were better in every category apart from price. Both suppliers were evaluated as sub-par
with respect to price sensitivity. Due to the variability of materials purchased in the
60
miscellaneous category, it is recommended that JK2 looks to diversify their
miscellaneous supplier base.
Summary
•
Lumber – 1st category of spend, 4 suppliers, lack strategic partner.
•
Paint – 4th category of spend, 6 suppliers (Including Lowe’s and Home Depot),
Only specialty supplier evaluated poorly.
•
Metal – 8th category of spend, 3 suppliers, $4,277 spent in first quarter of 2014,
suppliers evaluated favorably.
•
Cabinet/Hardware – 2nd category of spend, 4 suppliers, 2013 purchases were
from two suppliers. Q1 2014 purchases from one supplier, lack strategic partner.
•
Plastics – 9th category of spend, 3 suppliers, 100% purchases from one supplier.
•
Subcontractors – 3rd category of spend, 4 subcontractors, diversify
subcontractor base, Find alternative to Dune Design Studios.
•
Fiberglass – 10th category of spend, 1 supplier, additional suppliers needed.
•
Fasteners – 12th category of spend, 2 suppliers, suppliers evaluated favorably.
•
Resin – 5th category of spend, 1 supplier, only supplier evaluated poorly,
additional suppliers needed.
•
Solid Surface Materials – 7th category of spend, 1 supplier, supplier received
sub-par evaluation results, Q1 2014 purchases totaled $3,276, additional suppliers
needed.
•
Sign Suppliers – 11th category of spend, 1 supplier, supplier evaluated poorly,
additional suppliers needed.
•
Miscellaneous – 6th category of spend, 4 suppliers, diversify supplier base and
make purchases in bulk.
*Category spend positions based on 2013 invoices.
61
Kraljic Model
Figure 17 – Kraljic Model
Kraljic Model
Leverage
Strategic
Cabinetry/Hardware
Profit Impact
Paint
Subcontrac;ng
Lumber
Specialty
Solid Surface
Fiberglass
Metal
Non‐Cri;cal
BoCleneck
Paint Tools
Sandpaper
Fasteners
Cleaning Materials
Plas;cs
Resin
Hardware
Supply Risk
The purpose of the Kraljic Model is to provide a framework for purchasing
managers to reduce risk and improve profit. The model works by categorizing the firm’s
inputs based on associated risk and profit impact. The next step is to develop sourcing
62
strategies for each category. Essentially, procurement is moving from a transaction-based
approach to a strategic approach.
Sourcing Strategies
Non-Critical:
•
Pool resource requirements – The goal is to reduce the logistics and complexity
with respect to purchasing these items. This is accomplished by purchasing
multiple items in bulk and standardization of inputs.
•
Efficient ordering – The goal is reduce administrative costs with respect to the
purchasing process.
Leverage:
•
Exploit Buyer Power – This may be accomplished by deploying a competitive bid
process. It is important to remember that in order to pursue this strategy the buyer
must possess a considerable amount of buyer power.
•
Develop strategic partnership – Instead of leveraging one’s buyer power, they
may decide to develop a strategic partnership.
Bottleneck:
•
Accept dependence – It is important to identify the bottleneck items then
minimize risk by building inventories or accepting higher prices.
•
Reduce dependence on suppliers – Increase the supplier base will help to reduce risk
and lower cost.
Strategic:
•
Maintain strategic relationship – Develop a strategic partnership. This will reduce risk
and cost on one end while improving reliability and quality on the other.
•
Accept a locked in partnership – This occurs when the supplier provides a product
that unique and difficult to reproduce. As a result, the supplier possesses the power.
63
•
Terminate partnership – It is necessary to consider terminating the supplier
relationship if suppliers fail to comply with the buyer’s criteria on an on-going basis.
Recommendations
1. Pursue a Strategic Sourcing Strategy.
2. Increase the number of suppliers per category.
a. Especially categories with one supplier.
3. Re-allocate business from underperforming suppliers to preferred suppliers.
4. Work to develop strategic/collaborative relationships with suppliers within large
spend categories.
5. Minimize reliance on Lowe’s and Home Depot.
6. Take advantage of economies of scale by purchasing select materials in bulk.
- Resin, Paint, Paint Materials, Millwork Materials, Hardware, Cleaning
7. Allocate space for inventory.
8. Strive to standardize processes where applicable.
9. Hire employee for procurement.
10. Evaluate suppliers on an annual basis.
11. Batch ordering to reduce shipping/delivery cost
Project Plan
Strategic Sourcing
The implementation of a strategic sourcing strategy requires a considerable amount of
dedication, time and patience. The proposed project plan will take approximately one year to
complete. The following steps are necessary to ensure success:
1. Conduct internal assessment – Seek to understand all categories of spend and their
suppliers. It is important to set standards for each category and the various purchase
methods involved.
62
2. Conduct supplier market assessment – Identify potential suppliers, not including current
suppliers. Analyze the benefits and risk of each potential supplier.
3. Collect supplier information – Conduct a survey for both current and potential suppliers.
Verify the spend information for each category to determine priority categories.
4. Develop sourcing strategy – Determine the competitiveness of the supplier market. Is
there a need to test the current supplier relationships? Determine if a competitive or
collaborative sourcing strategy is appropriate.
5. Solicit and evaluate bids – Prepare a request for proposal (RFP) and prepare to solicit
bids. RFP should include service specifications, delivery and service requirements,
pricing structure, and financial terms and conditions.
6. Negotiate with and select suppliers – Once suppliers respond the evaluation criterion is
applied, then negotiation begin.
7. Implement recommendations – Suppliers for each spend category are selected and
notified.
8. Evaluate suppliers annually and act accordingly – This step involves a three-pronged
approach. 1) Measure and report 2) Capture Learning 3) Ensure Compliance
Figure 18 – GANTT Chart
Strategic Sourcing GANTT Chart
Days
0
50
100
150
200
250
300
350
400
Conduct Internal Assessment
Conduct Supplier Market Assessment
Collect Supplier Informa;on
Develop Sourcing Strategy
Solicit and Evaluate Bids
Nego;ate With and Select
Implement Reccommenda;ons
63
Evaluate Suppliers Annually and Act Accordingly
450
Inventory
Building an inventory will reduce costs, wait time, and transaction costs. The following
steps are necessary to creating an efficient inventory.
1. Assign space to store inventory
2. Select materials to be inventoried
3. Purchase materials in bulk
4. Keep record of materials in inventory, and replenish when necessary
Metrics
KSF 1 – Efficiency:
Keeping track of the following metrics and striving to attain the goals pertaining to each
metric will depict the efficiency of the strategic sourcing strategy.
•
Gross Margin – Reducing the cost of materials with respect to sales will increase the
gross margin. The goal is to increase 4.1%; as a result gross margin will be equal to the
industry average of 19.5%.
•
Inventory –The number of times inventory stock is exhausted, thus resulting in over the
counter purchases. The goal is minimize the purchase of over the counter purchases. This
is done by storing inventory on hand and replenishing it when levels are low.
•
Bulk Purchases – The number of invoices in a year. Benchmark total invoices against
previous year. The goal is for the total number of invoices to decrease on an annual basis.
KSF 2 – Supplier Base:
Upon implementation of the strategic sourcing strategy it is important to monitor the
changes in JK’s supplier base. This can be done by monitoring the following metrics.
•
Strategic Partners Established – An important aspect of strategic sourcing is the
establishing of strategic partners. It is best to establish these relationships with suppliers
from the largest categories of spend. The goal is to establish five strategic partners for
the five largest categories of spend.
64
•
Additional Suppliers – Adding suppliers to one’s supplier base is extremely beneficial for
the purchasing firm. The goal is to add at least two suppliers for each single supplier
category and one to the remaining categories.
•
Dropped Suppliers – Look to drop suppliers that are scoring well below the category
benchmark.
65
Pricing / Cost Strategy
When addressing the gross margin there are two levers that have great effect. The first
was discussed in the strategic sourcing section, and the second has to do with pricing. An
increase in price will drive down the proportion of sales that cost of goods sold is currently
consuming, resulting in increased gross margins. This is an important concept when the recent
industry conditions are taken into account.
The construction industry has seen prices driven downward by increased competition as
the recession forced many companies to cut price in order to win business. Rising energy costs
and increased prices on inputs has further placed importance on the clear understanding and
application of pricing strategy. If prices do not reflect the changing environment, the
profitability of a company will suffer. In the case of JK2, the pricing strategy is straightforward
and basic, and has not changed since the inception of the scenic division. The amount to be
charged on a project is a function of the costs associated with the project. All material and labor
costs are estimated, followed by a 30% markup on that bottom line. Since this markup is being
applied to both materials and labor, the gross margin should be a direct reflection of this markup,
at 30%. In fact the gross margin would be slightly higher than 30% as labor is being marked up
and this is an operational expense, something that is not taken into account in the gross margin.
This represents a 16% variance in the gross margin as current performance is roughly 14.1%.
In order to address this discrepancy, there are a number of actions that can be taken. The
first of these would be to simply increase the markup that is being charged. The effects of
increasing the price markup are reflected in Figure 19 .
Figure 19 – Pricing Analysis
Pricing Analysis
Sales
COGS
Gross Profit
Additional Unrealized Contribution
Markup Rate ‐ Current 30%
30%
35%
$4,537,782
$4,764,671
$3,899,431
$3,899,431
$638,351
$865,240
n/a
$226,889
40%
$4,991,560
$3,899,431
$1,092,129
$453,778
66
An increase in the markup from the current 30% to 35% would result in an additional
$226,889 in contribution. This is a 35.5% increase to the contribution, which would increase the
net profit by this amount multiplied by (1-tax rate). As JK2 ended 2012 with a net profit of
$305,252, this slight change could greatly improve overall profitability. Assuming a basic
corporate tax rate schedule, without taking into account deductions or exemptions, this additional
contribution would add $116,152 to the bottom line. This was calculated by applying the IRS
corporate tax rate schedule as stated below.
Figure 20 – IRS Tax Rate Schedule - 2013
This additional $116,000 represents an increase in overall profitability by 38%. If this
same process is repeated, however with a 10% increase to a 40% markup, the effect is markedly
greater. The addition to contribution would be $453,778, a 71.1% increase. This increase in
revenue would equal $299,493 in additional net profit, a 98% increase. Through this exercise it
can be seen that small changes in the pricing strategy can greatly affect profit.
There are risks associated with increasing price. One of the differentiating factors of JK2
is the mix of quality and price. The company has not experienced any pushback on the bid
pricing thus far, which can be interpreted as an opportunity to increase markup without a high
risk of overbidding projects. It is recommended that JK2 immediately start applying a 35%
markup on new projects in order to realign the gross margin with industry standards. If there are
67
no negative responses to this change, an additional increase to the 40% markup is recommended.
This can be done at little to no costs, as the only change needed is to apply the new markup
factor to bids.
The profitability of projects is based largely on the accuracy of the construction of bids.
As was stated earlier, if a 30% markup is applied across the board to labor and materials, and all
inputs are accurately estimated, the gross margin will mirror the markup. As the 16% variance
exists, the accuracy needs to be investigated. Currently JK2 does not review finished projects by
comparing the estimated costs to actual costs. This is an exercise in business that carries great
importance as areas of inefficiency or waste can be identified and improved upon. In order to
address this, a formal variance report was generated.
Figure 21 – Variance Report
Total Project Variation
Category
Estimate Amount
Actual Amount
Category Variance
Materials - Carpentry
Labor - Carpentry
Trucking / Equipment Rental / Subs
Shop Paint Materials
Paint Labor
Specialty Items
$
$
$
$
$
$
26.63
-
$
$
$
$
$
$
37.28
-
$
$
$
$
$
$
(10.65)
-
Total
$
26.63
$
37.28
$
(10.65)
Materials - Carpentry
6.50%
QNTY
Pine 2x4
Labor Burden rate
COST
5
35%
Units
5
SUB
Tax
25
0
0
0
0
0
0
0
0
0
Total
1.625
0
0
0
0
0
0
0
0
0
26.625
0
0
0
0
0
0
0
0
0
SHOP MATERIALS TOTAL $
27
68
Materials - Carpentry
6.50%
QNTY
Pine 2x4
COST
7
Units
5
SUB
Tax
35
0
0
0
0
0
0
0
0
0
Total
2.275
0
0
0
0
0
0
0
0
0
37.275
0
0
0
0
0
0
0
0
0
Total Category Variance
Labor Burden rate
35%
Variance from
Estimate
$
$
$
$
$
$
$
$
$
$
(11)
-
$
(11)
SHOP MATERIALS TOTAL $
37
The above figures are screenshots of the Excel Variance Report that will be
utilized as JK2 in the comparisons of estimated and actual costs. The first page is an overview of
variances broken down by category of spends. The second page is where the estimates on
amounts and prices of inputs from the bid will be recorded. This can be done by simply copying
and pasting from the bid, or the bid can be generated by directly inputting the data into the
variance report. The third page is the actual usage and pricing. The difference between the
second and third pages is that on the third page an extra column that calculates the variance from
estimate is present. This will not only break down variances based on individual inputs, but also
by category, which will then be transferred to the first page for the overall project variance.
This is a basic variance report that will help identify the areas that need further attention
so they do not consume profit potential in the future. It can also identify if there are trends in
under or overestimating when these variances reports are studied together. This variance report
can be modified to include the different types of variances, such as price and volume variances,
however for the ease of use and interpretation the current version is the recommended tool.
There is little cost in the implementation and usage of this variance report beyond the
time needed for inputting the information and reviewing the results. Utilizing this tool can be a
step towards rectifying the differences and inaccuracies that can be a limiting factor of
profitability.
69
Summary
Recommendations
Marketing
Contract a graphic designer for logo development
Take professional photos of past projects (Appoint a “photographer” in all future
projects)
• Contract web developer
• Invest in Search Engine Optimization
• Engage in multiple social media platforms
• Hyper-local optimization
• Reformat collateral with updated photos and content provided by agency
• Join multiple professional industry organizations
• Hire a marketing coordinator / marketing intern
• Create a reporting schedule
Growth Plan
•
•
• Read The Goal
• Identify capacities of each production step
• Apply Theory of Constraints when deciding areas of investment
Sourcing Strategy
• Pursue Strategic Sourcing Strategy
• Increase number of suppliers per category, in particular those with one supplier
• Reallocate level of spend from underperforming suppliers to preferred suppliers
• Develop strategic/collaborative relationships with suppliers within large spend categories
• Reduce reliance on over-the-counter purchases
• Take advantage of economies of scale by purchasing select materials in bulk
• Allocate space for carrying inventory
• Standardize processes and inputs where applicable
• Hire a procurement professional to manage purchasing and inventories
• Evaluate suppliers annually
• Batch order to reduce transportation costs of delivery
Pricing/Cost Strategy
•
•
Raise markup from 30% to 35%
Utilize the Variance Report for post-hoc analysis of each project
70
Project Plan
The project plan associated with the aforementioned recommendations requires a
comprehensive approach. It is to be understood that it will take time for the work to pay off,
however it is important that patience and persistence remain at the forefront of the firm.
Furthermore, it is important to note that not all recommendations outlined by the project plan
begin immediately. It is necessary to stress the importance that in order for marketing to benefit
the firm, the firm must possess the capacity to respond the increase in demand. If not, then the
increase in demand will negatively impact the image of the firm.
Marketing Plan:
•
Appoint a marketing manager
•
Take professional photos of past projects and appoint per-project photographer on all
future endeavors.
•
Hire a marketing agency to build a new website
•
Establish a schedule for updating the website and reporting on analytics
•
Establish social media strategy
•
Reformat collateral
•
Hire a marketing intern
•
Join professional organizations
•
Report on the metrics for the implemented strategy to use as a benchmark for future
strategies
•
Reestablish the objectives of the marketing team for next fiscal year
Growth Plan:
•
Identify the constraint
•
Exploit the constraint
•
Subordinate and synchronize to the constraint
•
Elevate performance of the constraint
•
Repeat the process
71
Strategic Sourcing:
•
Conduct internal assessment
•
Conduct supplier market assessment
•
Collect supplier information
•
Develop sourcing strategy
•
Solicit and evaluate bids
•
Negotiate with and select suppliers
•
Implement recommendations
Inventory:
•
Assign space to store inventory
•
Select materials to be inventoried
•
Purchase materials in bulk
•
Keep record of materials in inventory, and replenish when necessary
Pricing/Cost Strategy
•
Apply 35% markup to bid
•
Monitor and record material purchases and labor used
•
Once project is complete, refer to variance report
•
Analyze the variance report and look for significant variances
•
Investigate significant variances and act accordingly
•
Repeat process
Metrics
The project objectives will be measured through the utilization of key performance
indicators. These indicators will allow JK2 to quantify the effect that these recommendations
have on the business, with measurable, easy to collect data. These key success factors are the
result of the aggregate recommendations.
Key Success Factors
72
•
Accuracy of Cost Estimates – Bids that are won and the profit made on those bids should
be aligned. The profitability of a project is dependent upon the accurate estimation of
material, labor, and design costs associated with the work.
•
Financial Health – Maintain healthy financial ratios, improving upon those ratios that are
underperforming.
•
Supply Chain Efficiency – A strong network of strategic suppliers that creates reliability,
quality, and cost effectiveness. This includes maintaining necessary levels of inventory
and the proper sourcing strategy for inputs.
•
Online Presence – Having a strong and targeted online presence will drive demand
toward the company.
Accuracy of Cost Estimates Measures
•
Accuracy of estimates can be measured through the use of the variance report, with the
total variance determining accuracy. The beginning goal is to be accurate within 10% of
the initial bid estimates.
•
Specifically the estimated design hours and the actual design hours need to be monitored
for accuracy. The goal is to be within 1.5 hours of the estimate.
•
Gross Margin will increase due to the decrease in underestimating of costs. This can be
monitored on a year-to-year basis, comparing the current year to the last. The goal is to
have a gross margin no less than 19.5%.
Financial Health
•
Increasing Gross Margin, Net Profit Margin, and Return on Assets compared the prior
year.
•
Decreasing Debt-to-Worth ratio compared to prior year.
•
Increasing Total Asset Turnover compared to prior year.
Supply Chain Efficiency
•
The number of suppliers per category. No less than 2.
•
The number of times inputs are purchased from suppliers outside the strategic supplier
list. The lower number of times the better.
73
•
The number of times inventory is completely depleted without replenishment en route.
The lower number of times the better.
Online Presence
•
Amount of sales generated through online channels.
•
Web traffic as measured by Google Analytics.
•
SEO rank in comparison to competition, with a focus on hyper-local optimization.
These metrics should be reviewed on a regular basis in order to gauge the effects of
implementation.
Conclusion
The Letter of Engagement identified three primary concerns that this report was to
address. The objectives were to develop a full marketing plan for the client’s scenic division,
assist the client in broadening their supply/support base to encourage growth opportunities by
developing a positive growth plan, and lastly to develop invoicing techniques that emphasizes
price strategy.
Part of the initial request by JK2, the marketing plan addresses the ways by which to
increase brand awareness in the Central Florida area, establish a plan for increasing Jk2’s online
presence, and determines the best avenues for JK2 to pursue to increase customer acquisition and
expand clientele within the specialty construction industry. Through web site development,
search engine and hyper-local optimization, and a new content strategy JK2 will increase their
overall digital footprint, reputation, and presence within the construction industry in the Central
Florida area. JK2 has been operating at capacity for an extended period of time. This requires
that the marketing plan be accompanied by a growth plan that addressed the theory of
constraints, and recommendations to overcome them.
The strategic sourcing section addresses issues directly related to the consultant-identified
concern, the gross margin discrepancy. The team researched and included a detailed analysis on
the sourcing strategy as well as price/cost analysis. Strategic sourcing was identified as a concern
74
and because supply chain efficiency can be directly correlated to the over financial health of the
company, it is important for the company to build a network of strategic suppliers that will
ensure reliability, quality, and cost effectiveness.
The recommendations made directly address the marketing strategy, the growth plan, the gross
margin and the sourcing strategies. These recommendations include a redevelopment of the
website by a third party, increased utilization of SEO, creation of updated collateral, levering up
spends with strategic suppliers, increasing markup by 5%, and using the variance report to
identify problem areas. The goal is to increase the gross margin to the industry average of 19.5%.
By increasing price and decreasing input costs, it is estimated that JK2 will be able to realize an
additional $473,000 in contribution.
The recommendations set forth in this report were organized based on research with the
intention to increase competitiveness and profitability of JK2 by using affordable and powerful
business analytics. A complete understanding of the competitive landscape as well as the
creation of strategic direction will allow JK2 to be able to thrive in this incredibly competitive
industry.
75
Appendix
A. Income Statement
Sales
Cost of Goods Sold
Gross Profit
Depreciation
Operating Costs
Rent
Advertising
$
$
$
$
$
$
$
Income Statement
2011
2,048,867
1,744,532
304,335
50,402
623,462
61,236
100
EBITDA
Operating Profit
Interest Expense
Taxes
$
$
$
$
(71,333)
(121,735)
‐
‐
$
$
$
$
306,565
305,252
‐
‐
Net Profit
$
(121,735)
$
305,252
$
$
$
$
$
$
$
2012
4,537,783
3,899,431
638,352
1,313
506,976
61,236
608
B. Balance Sheet
$
$
$
$
$
$
$
Balance Sheet
2011
505,237
$
133,350
$
‐ $
576,115
$
1,214,702
$
5,626
$
1,308,979
$
$
$
$
$
$
$
218,893
30,673
1,001,272
73,683
1,074,955
800
$
$
$
$
$
$
136,501
21,370
525,195
51,127
576,322
800
$
$
$
299,120
234,024
1,308,979
$
$
$
299,120
390,725
967,047
Assets
Cash
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets
Fixed Assets
Total Assets
Liabilities & Equity
Accounts Payable
Short‐term Debt
Current Liabilities
Long‐term Liabilities
Total Liabilities
Common Stock
Additional Paid‐in
Capital
Total Equity
Total Liabilities + Equity
2012
28,946
340,747
‐
580,861
950,554
16,493
967,047
76
C. Ratios
Liquidity Ratios
Current Ratio
2011
1.21
2012
1.81
Industry
Average
1.98
0.64
0.70
1.55
4.59
1.48
2.10
2011
0.149
2012
0.141
Industry
Average
0.195
0.059
0.067
0.035
0.090
0.320
0.800
2011
15.100
2012
13.100
Industry
Average
8.000
23.800
27.400
45.000
7.900
28.100
11.100
45.800
12.800
32.500
1.560
4.690
n/a
Current Assets / Current Liabilities
Quick Ratio
(Current Assets ‐ Inventory) / Current Liabilities
Debt‐to‐Worth
Total Liabilities / Net Income
Profitability Ratios
Gross Margin
Gross Profit / Sales
Profit Margin
Net Income / Sales
Return On Assets
Net Income / Total Assets
Asset Management Ratios
Receivables Turnover
Sales / Accounts Receivables
Average Collection Period
365 / Receivables Turnover
Payables Turnover
Cost of Goods Sold / Accouts Payable
Average Payment Period
365 / Accounts Payable Turnover
Total Asset Turnover
Sales / Total Assets
77
D. Cost of Goods Sold Analysis
Cost of Goods Sold Analysis
Sales
COGS
Gross Profit
Gross Margin
Additional Unrealized Contribution
Actual Performance
2011
2012
$2,048,867
$4,537,782
$1,744,532
$3,899,431
$304,335
$638,351
14.85%
14.0675%
n/a
n/a
Under Industry Average
2011
2012
$2,048,867
$4,537,782
$1,649,338
$3,652,915
$399,529
$884,867
19.50%
19.50%
$95,194
$246,516
E. Pricing Analysis
Pricing Analysis
Sales
COGS
Gross Profit
Additional Unrealized Contribution
Markup Rate ‐ Current 30%
30%
35%
40%
$4,537,782
$4,764,671
$4,991,560
$3,899,431
$3,899,431
$3,899,431
$638,351
$865,240
$1,092,129
n/a
$226,889
$453,778
F. Markup and Gross Margin Adjustments
Markup and Gross Margin Adjustments
Markup
Gross Margin
Sales
COGS
Gross Profit
Additional Unrealized Contribution
30%
14.01%
19.50%
$4,537,782 $4,537,782
$3,899,431 $3,652,915
$638,351
$884,867
n/a
$246,516
35%
14.01%
19.50%
$4,764,671 $4,764,671
$3,899,431 $3,652,915
$865,240 $1,111,757
$226,889
$473,406
40%
14.01%
19.50%
$4,991,560 $4,991,560
$3,899,431 $3,652,915
$1,092,129 $1,338,646
$453,778
$700,295
78