Cut Customer Costs Instead of Prices

June 06, 2005

Case categories include: Leadership   Operations   

By Robert Sher
Just because concrete is grey, ugly, heavy and a “basic” industry, doesn’t mean that the science and technology behind the manufacturing and delivery of this essential building material isn’t exciting.  Made from sand, gravel and cement, this most basic building material isn’t what you think, and isn’t what it used to be. It is a global business.  Through high-tech logistics, RMC Pacific Materials is reducing their customers’ costs by improving construction efficiency, not by dropping their price.  The reduction of customer costs has become a big competitive advantage, and commands a price premium as well.  Perhaps you can do this in your business, too.

RMC Pacific Materials operates three businesses in the Bay Area related to concrete:  a quarry to mine sand and gravel, cement factories that make the grey powdery substance, and 14 ready-mix plants, that on demand mix cement, sand, gravel and water and fill concrete trucks that deliver to construction job sites.  At the site, the customer (a contractor) must have men at the ready to receive the ready-mix concrete and form the material into its final shape – a pillar, a foundation, a floor, etc.

Supplier and customer must work well together to be efficient
Having plants close to jobsites is critical, as it minimizes the time it takes to deliver the load of ready-mix, and improves the likelihood that each truck will arrive at the jobsite exactly on time.  Most large jobs require many truckloads of ready-mix, which must be timed to arrive at predictable intervals.  Every minute a truck is late means the entire construction crew stands idle.  Every minute the truck is early means the truck stands idle.

Each of the 14 mixing plants has a fixed daily output capacity, road traffic is everywhere, and a new concrete truck costs $140,000.  As RMC acquired those plants, they had the opportunity to reduce costs and improve service by getting the right jobs routed to the right plants.  Eric Woodhouse, President of RMC Pacific Materials, oversaw the creation of a centralized call and dispatch center in Pleasanton, and closed each plant’s dispatch office.

The call center was a huge step forward, but with an average of 300 orders each day, over 300 trucks, and 1,500 truck-trips per day, the process still wasn’t as efficient as it could be.  RMC built a customized computer application that tracks capacity levels at each plant and all order data, so that work can easily be shifted from one plant to another, even after the original order is booked and placed.

Still, the age old question, “Where is my ready-mix truck?” was hard to answer.  Traffic was only worsening.  RMC installed GPS units in each truck, connected to the call center via web-phones, which report the location of the trucks by the minute, as well as the truck’s activity ( loading, driving, standing or pouring), providing a complete, real-time data stream of information, allowing not just for answers but for immediate corrective action.

With the changes in our world today, freight and transit costs will be growing for many businesses.  Manufacturing is going offshore, so the merchandise takes longer to arrive and the percentage that freight occupies of total costs will grow significantly.

Everybody must Reduce Costs
Every industry – even “basic” ones – must continue to reduce costs.  You’re never finished.
Attractive low labor costs are pushing work farther away and reducing some costs, but transit costs are increasing, and their percentage of total cost will rise.  The logistics of managing the flow of product will become more critical than ever.  RMC, manufacturing a heavy, perishable product, is a great illustration of the attention that must be paid to this by more and more businesses.

My favorite way to reduce costs is to help my customer save money at someone else’s expense.  In RMC’s case, their investment in their delivery system means that their customer will have less manpower waste and will stay on schedule.  Those are two really huge issues for the construction industry.  While RMC had to invest in some technology and infrastructure to do it, they became more competitive without reducing price.  One can measure the average man-hours of a concrete crew to do their job and chart the reduction in those hours because of improved delivery of the concrete.   That savings represents real competitive advantages and is one of the reasons that RMC was awarded the concrete portion of the new San Francisco Bay Bridge (yes, that is a LOT of concrete).

Reduce your customer’s costs by reducing their workload – and take credit.
Like RMC, you have to understand your customer’s costs and process, and integrate your operations with theirs.  Only through customer intimacy and innovation can you blend the old lines of demarcation and create processes that make the total process of two or more companies in the supply chain more efficient.  At first glance, there are likely many ways of becoming more efficient, and all of them are good.  But to create a competitive advantage, you must find some that make a tangible, measurable, significant difference.

Efficiency, once accomplished, has a way of being taken for granted.  If you’re saving your customers money, make sure you tell them.  Keep making the point, over and over again, in all your sales and marketing efforts.  At the bargaining table, customers will want to forget everything except price.  You’ll want to be able to easily and forcefully argue that the total cost of dealing with your firm will be much lower than the competition, and that your service and product is worth a premium.

Concrete is indeed gray, ugly and heavy.  But with deft use of technology and a clear understanding of customer needs and issues, RMC is a leader in their industry.  Think about how you could do that in your industry every time you drive over RMC’s concrete on the new Bay Bridge.

Takeaways:
• All customers demand more and want to pay less.
• Rather than give them your margin, give them the margin from someone else in the value chain, or help your customer reduce costs elsewhere.
• Solving your customer’s problems often allows you to maintain or grow your margin.

Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages.  He is the author of The Feel of the Deal; How I Built a Business through Acquisitions.  He may be reached at Robert@ceotoceo.biz.

Company and Case Facts:

Company: RMC Pacific Materials, Inc., a division of Cemex, Inc.
Person: Eric Woodhouse, President
Alliance Member since: 2001
Business Founded: 1930s
Annual Sales Volume: $300 million in 2004
Growth Rate: Doubled in 10 years
Head Count: Approx. 900
Product: Cement and ready-mix concrete
Typical Customer: Concrete contractor
Written: June, 2005
Address: RMC Pacific Materials, Inc., 6601 Koll Center Parkway, P.O. Box 5252, Pleasanton, CA 94566
Web Site: www.rmcpmi.com
Phone: 800-227-5186