Oftentimes, during my discussions with textile rental owners and operators, the topic of rental pricing comes up, including the costs to process items in the client’s plant and profitability by account. Usually the client answers, “I know what my overall costs are” and “I think charging the rental prices we do keeps us competitive with the industry.” What is often overlooked are the costs on a more detailed level, which leads to a more educated pricing and profitability model. This improved model can be achieved by performing a cost study.
What is a Cost Study?
A cost study is a detailed and custom tailored engagement between a Textile Rental Company and WeiserMazars, with the ultimate goal of gaining an understanding of variable and fixed plant costs per piece served, merchandise consumption per piece served, and delivery costs per minute to serve customers.
These three key pieces of information assist a textile rental operator to better understand costs at the item and route levels, and, ultimately, be able to adjust pricing or product mix to achieve increased profitability without necessarily increasing top line revenue. WeiserMazars takes a turn-key approach and will perform a cost study with the assistance of company management.
Cost Study Process
Step 1 – Identify specific items to be cost out. These are usually the core items that a plant processes, summarized by similar product weight, purchase price, and workflow.
Step 2 – Identify work centers within the plant. Through a walk-through of a typical plant, the work centers will be identified by area where a process is happening or where productive labor performs a process.
Step 3 – Establish the workflow by item. Each item identified in Step 1 will have a unique workflow through the plant and through the work centers established in Step 2.
Step 4 – Allocation of costs. All income statement costs related to the processing of rental items will be allocated at the work center level. The allocations include building overhead, electricity, fuel, machinery overhead, water and sewer, and supervisors. Each allocation has its own set of criteria (square footage, machinery horsepower, etc.).
Step 5 – Reclassification of the Income Statement into the Textile Rental Chart of Accounts. The purpose of the cost study is to establish cost per item to process, based upon your actual operational costs. You have the ability to review current processes during the cost study and make pro forma adjustments based upon changes to be made in the plant in the short term.
Step 6 – Further allocation of costs at the item level. These allocation factors include pieces per operator hour, washroom costs, etc. at the item level to ensure the most accurate costs to process by item.
Step 7 – Cost per minute to drive and serve. All delivery costs are separated by route and a cost per minute to drive and serve is established to assist in reviewing a customer’s profitability by account. Massachusetts, New York and Virginia, treating this as a protected activity while other states, such as Florida, New Jersey and Pennsylvania do not. States are also split on whether other transportation-related activities, such as delivery in returnable containers and backhauling constitute protected activities.
Benefits of a Cost Study
A properly completed cost study leads to reliable and accurate cost information. Performing a cost study and gaining a true understanding of the costs of their plant and delivery systems will give a textile rental operator advantages over the competition through:
- Establishment of sound pricing policies – understanding the break-even point and profitability of specific processed items can assist in establishing rental floor pricing for your sales team.
- Profitable proposals for new accounts – the ability to price specific rental items based upon the known mix and volume of a prospective customer can help achieve desired profitability prior to any proposal.
- Informed and justifiable price increases – prior to contract renewals, the data generated from a cost study can be shared with a customer to fully disclose the performance of their account in the past and the desired performance in the future, helping to retain the customer and strengthen the relationship.
- Benchmarking against competitors and pinpointing of problems in operations.
All of the above benefits of a cost study lead to one core goal – increasing profits.
“Sometimes it is hard to be a small family-owned business competing with larger businesses that seem to have a department for everything. A cost study has helped us manage data better with software in order to make smarter business decisions based on more than just a gut feeling.” says Kait O’Hara, Vice President of Falvey Linen Supply.
WeiserMazars has developed software which marries up the benefits of a full turn-key cost study and the ability to import customer data to run specific Profitability by Account reports on a customer by customer basis. The Profitability by Account reports contain both overall profitability and contribution to overhead to help assist in making management decisions on the customer level. ProfitEdge is the only cost accounting software designed for determining profitability by account specifically for the textile rental industry.
To best maximize profits, management must know which customers are profitable, contribute to overhead or generate losses. Firms that can identify these customers are better able to maximize profits by retaining profitable accounts and improving on others.