www.JobShopPricing.

com

2 Fatal Flaws
of the Job Cost Estimating & Quoting Process
that MUST be corrected
to make sure YOUR shop is Profitable!
By Brad Stillahn, Science of Business, Inc.

You have another opportunity to quote. That’s the good news.

The bad news is all the time and effort required to prepare the job’s time estimates,
cost calculations, and the internal debate over the size of the markup.

Your team reviews the assumptions your estimator made and “you negotiate with
yourselves” about the final quoted price.

After all, you want to win the quote. But when you run the job, there can’t be any
surprises, and the job must be profitable, or at least not be a loser. So, the quoted price
must be right.

If the quoted price is a little too high, you lose the quote. In fact, this is normally the
case. You win only a small percentage of the jobs you quoted. That ends up being a lot
of your estimator time wasted.

If you win the quote, probably at the lowest quoted price, there is always the dread of
trying to figure out where you screwed up in the estimation process.

Or, maybe, but unlikely, you could have won the quote at a slightly higher price.

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 1 | 13
©2016 Science of Business, Inc.
Your customers pressure you for the lowest prices. And your pesky competitors seem
to find a way to quote lower than you most of the time. Perhaps their overall costs are
lower and/or their productivity is better. So, you try to manage all your variable and
fixed costs so you can quote reasonable prices and have a reasonable net profit, too.

Your customers also pressure you to be responsive. Despite the backlog of requests for
quotes (RFQs) you have, it is difficult for your estimator to juggle all the priorities. Some
great jobs are lost by not responding quickly enough. Some jobs that are not a good fit
are won because of customer pressure.

Sometimes it is difficult to determine whose side your sales people are on. Just like
customers, they pressure you for lower quoted prices and faster turnaround on quotes.

Estimating mistakes can be made when your estimator is under pressure. It takes time
to correctly estimate times for every operation and to turn those time estimations into
cost estimations that everyone has confidence in.

When you win the job, but when it runs the actual times are much longer than the
estimated times, the inevitable consensus is that “we lost money on that job”. Often
the accounting department will recalculate to determine the actual versus estimated
profitability of the job. And, management will convene a meeting for a postmortem
analysis of jobs that lost money. Great fun for your estimator being skewered.

Your estimator also reviews prior job histories prior to making a new quote for the same
job, resulting in different quoted prices every time a job is quoted. Because the price
must be right!

So, from this, what do we know about your job cost estimating and quoting process?

1. Customers (and sales people) pressure you for lower prices.

2. Competitors seem to be quoting at lower prices, yet survive.
3. You strive to make sure every quote won is profitable.
4. You are captured in a conflict between quoting lower or higher prices so you
strive to determine the “right price”.
5. Engineering time estimates are time consuming.

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 2 | 13
©2016 Science of Business, Inc.
 6. Cost calculations are time consuming.
7. It takes too long to quote, and customers (and sales people) pressure you to
turnaround quotes more quickly.
8. There is a backlog of RFQs waiting, priorities get confused, and mistakes can be
made if the estimator rushes.
9. Actual processing times often exceed estimated times, resulting in requoting
every job every time it runs.

Summarized differently, you feel compelled to compete on price and to make detailed
preparations for every quote. Despite the time and effort of doing so, sales
opportunities are lost by quoting too high or taking too long to quote, and productivity
is disrupted when the wrong jobs are won or the job takes too long to run.

Regardless of how you summarize it, the result is lower revenue and net profit than
desired for your job shop overall.
What are you to do about it? If you are like most job shops, your improvement efforts
are driven by the belief that lowering job costs will lead to winning more jobs and
ensuring a better net profit margin.
This is the approach of most job shops – trying to improve everything, everywhere, all
the time. That is why implementing Lean initiatives are so popular.
What if there was a better way?
So much has changed in the world in the last few decades.
Is it possible that there are any new developments to become aware of and adopt to
improve your job shop quoting process and thus increase sales and net profit?
Is it possible to select products and markets where customers don’t pressure you for
lower prices and where competitors aren’t successful competing on price?
Is it possible to price where each job won provides the desired margin?
Is it possible to simplify the time estimating and cost calculation processes so they are
not so time consuming, and yet there was confidence in the resulting quote?

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 3 | 13
©2016 Science of Business, Inc.
Is it possible that such simplification and confidence could speed up quoting to the point
that quotes are always responsive and the RFQ backlog is mostly eliminated?
The source of the better way is identified.
About the same time as writing the popular book "The
Goal" in the mid-1980's, Dr. Goldratt claimed that Cost
Accounting was 'The Number One Enemy of Productivity'.
Surprisingly, cost accountants agreed but asked: "what is
the alternative?".
Dr. Goldratt took this need seriously and developed
"Throughput Accounting” and wrote about it in his book "The Haystack Syndrome"
published in 1990. In this book, Dr. Goldratt introduced the concepts of Throughput-
margin and Operating Expense.
While like Contribution Margin and Fixed Costs, respectively, the biggest conceptual
difference was carefully clarifying what is and is not considered a Totally Variable Cost
(TVC). Materials, outsourcing/subcontracting, freight in and out, and sales commission
are usually considered totally variable.
Every other cost that is not totally variable is considered an Operating Expense. Thus,
direct labor is switched from the variable cost bucket to the Operating Expense (period
cost) bucket. This because direct labor does not directly vary with sales revenue. Direct
labor is not a variable cost!
(For GAAP reporting purposes, accountants are legally required to account for direct
labor as part of Cost of Goods Sold; however, since Throughput Accounting is a form of
management accounting for internal management purposes only, it is preferable to look
at the financials in this more realistic and effective way).
Sales revenue minus Totally Variable Costs is Throughput-margin. Throughput-margin is
the new margin available to the company to pay for its Operating Expense for the
period. Throughput minus Operating Expense is Net Profit (or Net Loss).

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 4 | 13
©2016 Science of Business, Inc.
Throughput-margin is additive from all the jobs invoiced during the period, just as
Operating Expense is the sum of all individual categories of Operating Expense during
the period.
In “The Haystack Syndrome” Dr. Goldratt logically proved that increasing Throughput-
margin is much more important than cost reduction. The opportunity to increase
Throughput-margin is not limited, while the opportunity to reduce Operating Expense is
finite and limited by zero.
By the time “The Haystack Syndrome” was published, Dr. Goldratt, a scientist, named
the body of knowledge he was developing the "Theory of Constraints (TOC)". (For many
practical business people, the name is off-putting. But as a scientist, Dr. Goldratt's
intent was to rigorously and logically hold the new knowledge to the highest standard of
validity.) His point was that performance of every system, including your for-profit job
shop, is limited by an identifiable system constraint.

A different way of thinking.

Your job cost estimating and quoting process is based on the "Cost-World paradigm"
which views a system (in this case, a job shop) as series of independent components,
and the cost of the system is equal to the summation of the cost of all the sub-systems.
This view focuses on reducing costs and judges action and decisions by their local
impact. Cost allocation is commonly used to quantify the local impact.
This is the Fatal Flaw # 1 of your quoting process! Your job cost estimating and quoting
process uses cost allocation. Even accounting professionals agree that “the allocation of
the overhead cost pool is inherently INACCURATE”.
Contrast that to the "Throughput-World paradigm", which is the scientific view that a
system consists of a series of dependent variables that must work together to achieve
the goal and whose ability to do so is limited by some system constraint.
The unavoidable conclusion is that the global improvement is the direct result of
improvement at the constraint, and cost allocation is unnecessary and misleading.
The common belief is that all processing time is equally important. But it is NOT – it is
only the time of the system constraint that is crucial.

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 5 | 13
©2016 Science of Business, Inc.
This is the Fatal Flaw # 2 of your quoting process!
If you speed up your constraint you produce more, but if you speed up any of the non-
constraints, you will see no different in output. Your output is dictated by your
constraint. So clearly, all time is NOT equally important.
Better measures for decision-making.
Throughput Accounting has been rigorously analyzed and evaluated by knowledgeable
accounting professionals that agree it can help you better manage your business.
Throughput Accounting provides simple yet effective decision-making tools. For
example, comparing the incremental Throughput-margin to the incremental Operating
Expense of an opportunity is all that is necessary to make a good decision.
Leveraging the new knowledge of TOC and Throughput Accounting makes a better
quoting model possible. What was lacking but needed was a workable procedure to
replace the job cost estimating and quoting process in common use.
My story.
In the late 1990’s, I carefully, systematically developed a new pricing process for the
custom label printing company I owned using the then recently developed Throughput
Accounting concepts.
I had successfully implemented Dr. Goldratt's Theory of Constraints (TOC) "Drum-Buffer-
Rope" production solution in 1996. Then Dr. Goldratt had visited my company in early
1997 in Denver as I hosted a plant tour for the APICS Constraints Management Special
Interest Group (CM-SIG) after which he demanded that I take advantage of my
dramatically improved production capability to grow sales.
My problem was that the market my company had been serving (providing custom
business identification labels to small independent retailers across the country) for more
than 45 years was shrinking rapidly and I needed to find and grow a new market – which
I did (providing custom product identification labels for specialty food and beverage
manufacturers).

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 6 | 13
©2016 Science of Business, Inc.
I then needed to develop new pricing for the new market we were pursuing. All the old
price lists we used for years had previously been developed by long-since-gone
controllers using cost accounting. Our traveling field sales representatives used these
price lists to sell without the need to call in to get a quote from headquarters. We had
no quoting process. (This turned out to be a blessing.) Instead, historically, every
couple of years we would have an across-the-board price increase of a few percentage
points when our costs increased and we need more revenue.
I had not been involved in the development of those historical prices and I was not a
cost accountant, so I did not have any intuition or evidence as to where we were making
money: which products, which processes, which customers, which sales people - you
name the way to slice and dice it, and I did not have the information. So, I needed to
start over from scratch.
Yet, I knew enough about Throughput Accounting to logically understand the pricing
solution I was developing should be with Throughput Accounting, not cost accounting.
(I had some experience developing cost rates, but the process just did not make any
sense to me. For example, what does the square footage “footprint” required for a
machine really have to do with its hourly rate? My best equipment just so happened to
have a very small footprint, and the old equipment took up a lot of space, which is
better than the other way around, but the cost calculations to determine the overhead
cost rates seemed almost completely arbitrary. So, I knew enough not to trust the cost
allocation process.)
But Throughput Accounting was new, and there was only a trickle of books coming out
building the new body of knowledge, and these were from smart financial people and
CPA's that were talking over my head. However, none of these people had any
knowledge, experience or intuition about pricing, so there was nothing written about it.
Same with the TOC consultants I used. I was on my own.
No problem. My skills and experience were sufficient for this task. To that point, for
instance, prior to buying my business I was Director of Corporate Marketing of a mid-
sized privately held company, overseeing the marketing strategy and marketing
operations for 25 independent business units, each with completely different markets

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 7 | 13
©2016 Science of Business, Inc.
and product offerings. So, evaluating and determining preferred target market
segments and a preferred product mix in a systematic way was right in my wheelhouse.
I just needed to think through how to use Throughput Accounting for pricing.
To start the analysis, I studied the pricing of my competitors. Fortunately, some had
“distributor pricing” in addition to published list retail prices, so I could determine the
maximum market price available to me for our new product offering even though we
used field sales representatives, not distributors.
For me, the crown jewel of TOC and Throughput Accounting is the concept of
Throughput-margin. "For a company to make more money, its Throughput-margin must
grow (and continue to grow) much faster than Operating Expense". So, our new pricing
process was based on Throughput-margin.
I calculated the Throughput-margin that was available from the competitive prices. I
then reversed engineered the likely set-up and run times assumptions, as well as the
cost allocation methods these competitors were using to quote their prices. The
interesting thing about cost allocations is that competitors believe them! In this case, it
was clear from the analysis that competitors believed their “set-up costs” were high and
used high minimum prices and minimum order quantities to avoid short-runs. Hmmm…
My system constraint was the printing presses. Using Throughput-margin and the
system constraint, I could compare the prices I needed to charge with the market
“distributor pricing”. From that, I could tell the preferred product mix, target market
segments, and quantities that were my “sweet spot” for pricing and making money!
In total, it took me several months to be confident enough in my analysis to fully
develop the new pricing. But then, after only 6 months of implementing, we went from
breakeven to a 20+% return on sales.
The pricing I developed I did “the hard way” by analyzing competitive pricing. But in the
end, when the pricing was complete, I had “invented” a new pricing method (what we
call the proprietary “Stillahn Pricing Algorithm” – SPA) at the heart of the pricing process
that customizes pricing based on Throughput-margin and the system constraint and
enables quoting quickly with confidence. The algorithm also includes the flexibility to

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 8 | 13
©2016 Science of Business, Inc.
cope with competitive market pricing on the one hand, and to enjoy higher margins
when offering products with perceived value to a target market on the other.
For years and years afterwards, until I sold my business in 2010, I considered the
method my "secret sauce" and did not share it, lest my competitors find out about it. At
the time, I also was not at all sure it would work for other companies.
But since then, over the last dozen years, I have analyzed the pricing approach of our
clients to confirm the method is applicable in other industries and environments. It is.
It also works for pricing in other logistical environments like project management,
distribution, and retail where the system constraint is very different from production.
I have also read everything I could find about pricing methodologies; none of them are
based on Throughput-margin and none acknowledge the existence of a system
constraint, and therefore none mitigate the negative effects of both Fatal Flaws that are
an integral part of these Cost-World pricing methodologies.
In 2011, I presented an overview of the new pricing process
(“Competing against Blind Kittens” – Pricing the TOC Way) at the
annual TOCICO (Theory of Constraints International Certification
Organization) conference.
This is when and where TOC experts worldwide gather to learn of new developments in
the rapidly growing TOC body of knowledge. If a new process does not pass muster in
that vetting environment, the presenter would likely be shunned by the TOC community
as a charlatan. Fortunately, it was well received and I am a member in good standing!
Professor Emeritus of Baylor University, Charlene Budd, Ph.D., CPA, who originally
recommended my presentation to TOCICO, praised the analytical approach that
resulted in this new pricing process. Professionally, Dr. Budd has rigorously compared
the Accounting Policy & Practice requirements of a variety of Improvement Initiatives
like Six Sigma, Just in Time, Lean, Demand Flow, TOC and others. So, I consider that her
support is “high praise, indeed”.

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 9 | 13
©2016 Science of Business, Inc.
Since 2011, we have offered a variety of our Science of Business job shop clients help
implementing this new pricing process while I was testing the effectiveness of different
ways of customizing workable procedures of the Job Shop Pricing system for them.
I have encountered all kinds of interesting issues including terrible data quality,
extraneous cost accounting information, and difficulty getting good reports from ERP
systems which complicated getting good information about Throughput-margin and the
system constraint. The Job Shop Pricing system can deal with these and other issues.
I also discovered one very big reoccurring negative result from the way pricing is
commonly done – watch the webinar to find out what it is. Fortunately, it is directly
alleviated by the Stillahn Pricing Algorithm (SPA), which in part is why a such a
significant jump in net profit is possible by implementing the Job Shop Pricing system.
The results have been fantastic, the Job Shop Pricing system is now ready for prime
time, and I am now ready to help many, many more job shops implement the system.
Job Shop client comments about the Job Shop Pricing system.
From James, Owner, machine shop:
“I could not have seen the things on my own that Brad has pointed out. When Brad
began to get me to look at my pricing decisions, I realized I had always been shooting in
the dark. I’d put on my markups without being able to see what the margin was. It was
kind of a gut feeling, but you can’t put a gut feeling into an equation. I couldn’t tell until
it was too late if I had shot myself in the foot, especially if I had priced it too low. I’m
also able to say where I want to be based on the difficulty of the job. Before I was just
guessing. It allows us to look at current customers and determine which ones we are
making money on, which are marginal, which we’re losing with, and then act
accordingly. So far Brad and I keep dissecting one area and then move on to another
one. I’m uncovering things I just never knew. The biggest thing for me has been
financial. My cash flow is much better. Before it felt like I was making money, but
now I can tell when I’m making money.”

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 10 | 13
©2016 Science of Business, Inc.
10 percentage point profit gain in 18 months! 30 percentage point profit gain in 6 months!!!

From Chris, Business Development Manager, auto industry supplier:

“We used to look at the business from the old cost accounting perspective. We weren’t
looking at the whole company. It was very complex and we would end up very
inconsistent, not knowing where we were going. We found it took too long to get the
pricing done. I wanted to find another way of estimating. Learning to reduce pricing to
just three elements saved our company time estimating. It is simplified pricing. Now
it is easier to focus on where we want to be and how we can get their and yet still
meet the market price. I did a quote today that was double and I think I can get it. It
really allows us to set goals as to how do we get there once we estimate. We have
jobs that are lower margin, with no opportunity of increasing prices, so we want to
manage our capacity so those jobs hit where we want them to be. I know we can
increase capacity with TOC. Brad has been more of a mentor than a consultant.”
From Jonathan, Co-Owner and COO, custom manufacturer:
“The price was right and we worked on the phone. It was very convenient. Brad
provided guidance. He didn’t just come in and do the work for us. He helped me find the
specific areas that needed attention. He showed us how to identify our system
constraint and Throughput-margin. Once I knew what my margins were, I began to
better manage capacity. I could see disruptions related to the constraint, and
ultimately better pinpoint any changes needed operationally or in pricing. We finally
have a picture of what it costs us to run this business, and because of the awareness
and decision-making skills we now have, I feel confident. Before TOC, I don’t think we
would have reached the same conclusions in the past. As a company, our people are

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 11 | 13
©2016 Science of Business, Inc.
more constraint-oriented. We have that mentality of how we can minimize the
constraint.”
The system and expected results overviewed in 17 minutes.
I review the results you can expect from implementing the Job Shop Pricing system in a
short webinar I call "Quote Quickly and Make More Money, too!" You’ll find out what
is involved in deciding to implement the Job Shop Pricing system in YOUR shop so you
can take the next step to getting started on the path to significantly more net profit.
How can the results be so big and come so fast?
I explain that using Throughput-margin and the system constraint can dramatically
improve and simplify the pricing process. While that is counter-intuitive, over several
years, I have developed a system for implementing it in your shop reasonably fast.
Yes, there is homework involved to customize the system for you, but in the process of
doing the homework, you will come to have a much better understanding of how,
where and why your shop makes money, and you will also develop confidence using the
new Job Shop Pricing system. And you will also have the techniques to quote quickly!
The “evil scheme” revealed.
What's the catch?
We were all taught Cost-World concepts, and they are so engrained in all of us that you
will want and need guidance from someone comfortable and knowledgeable with the
Throughput-World. And who better than the inventor of the Job Shop Pricing system? I
have vast experience over many years dealing with the special circumstances that
require customization of the system, so I can lead you through the homework process to
the best solution for you.
Together, we will develop a pricing system customized for YOUR shop. My experience is
that an improvement of 10% Return on Sales is realistic, however unbelievable you
might find that claim to be right now.
Think about it. If you could increase the bottom-line net profit of your job shop by 10%
of Sales Revenue now and in the future, how much is that? For example, from

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 12 | 13
©2016 Science of Business, Inc.
breakeven to 10% net profit. Or from 5% to 15% net profit. For a job shop with $10
million in sales, that is a million dollars of additional net profit a year.
So, first attend the free webinar “Quote Quickly and Make More Money, too!” If you
are struggling with your job cost estimating and quoting process, want to respond with
quotes quickly or simply want to make more money, don't miss this webinar!
Sign up here: www.JobShopPricing.com/webinar
Once you are there, you'll be able to register for one of my upcoming webinars or watch
a replay of a previous one immediately.
Thanks,
Brad Stillahn, Science of Business
Job Shop Pricing Expert
Inventor of the "Job Shop Pricing" system
Brad@ScienceofBusiness.com

P.S. After you have attended the webinar, I invite you to sign-up for a free Strategy
Session with me to discuss whether the Job Shop Pricing system is a good fit for your
shop at www.JobShopPricing.com/contact/

P.P.S. In the process of doing the homework assignments for the Job Shop Pricing
system, you will learn how to improve productivity by leveraging your system
constraint. No other improvement initiative, including Lean, will help you with that.
You will also determine your preferred target market segments and your preferred
product mix. You will also do a thorough Throughput Accounting financial analysis of
your business and have a “control spreadsheet”, customized for YOUR shop, to track
ongoing improvement after the system is implemented.

P.P.S. Relative to your potential benefit, the cost for my guidance implementing the Job
Shop Pricing system is very reasonable and affordable. I will help job shops on a first-
come, first-served basis. So, avoid the waiting list, and sign-up for your Strategy Session
today. I would enjoy guiding you to Quote Quickly and Make More Money, too!

For more information, check out the webinar:

www.JobShopPricing.com/webinar/ P a g e 13 | 13
©2016 Science of Business, Inc.