Costs, Costs, Costs: How Managerial Decision-Making Impacts Pricing Negotiations with Reginald Tomas Lee

Reginald Tomas Lee is a Professor of Business Analytics at Xavier University in Cincinnati, Ohio. He has a PhD in Mechanical Engineering, and he's been involved in supply chain since '96. Reginald's most recent book is called Project Profitability. And one fun thing, he can't go on vacation, because he has two killer dogs.

In this episode, Reginald shares wisdom with regards to the modeling he's been making as he talks about the power of helping people understand more clearly how what it is that they do impacts cash.

Why you have to check out today's podcast:

• Understand why you should start seeing things from a cash perspective in relation to knowing what it is that it enables you to save
• Learn about the difference of cash cost and non-cash cost through situational examples from real life experiences
• Find out how your actions and decisions impact how you generate cash in a business

"Don't focus on accounting margins."

– Reginald Tomas Lee

Topics Covered:

01:17 – How Reginald shifted from being a mechanical engineer to thinking about supply chains and costing

03:44 – What Reginald does: Helping people understand how their decisions impact cash

07:18 – Talking about contribution margins: Accounting for things from a cash perspective

11:09 – How to figure out the optimal price without using some measure of contribution margin

14:34 – Hope as a strategy: Mark's opportunity cost vs. Reginald's opportunity revenue

17:15 – Two types of costs: The cash cost and the non-cash cost

21:41 – Reginald's sales pitch: Very specifically identifying what the savings are

24:02 – Discussion about Mark's value table and Reginald's improvement projects

27:59 – Projecting revenue and the uncertainty that comes with it

30:24 – Reginald's piece of pricing advice for today's listeners

Key Takeaways:

"We should shift away from looking at accounting data and look specifically at operations and cash." – Reginald Tomas Lee

"From a cash perspective, materials and labor don't vary. When we look at contribution margins for products that we make, and we assume that those costs vary and they affect the contribution margin, my argument is they don't vary. And so therefore, it's not a reflection of cash." – Reginald Tomas Lee

"As we know, hope's not a strategy. We're hoping that the demand would be there, but I've seen situations, actually, where people have bought more just to get a lower price so that they can report a higher gross margin. It's not a good business decision at all. And that's why I shift over to cash, because cash will tell you don't do that, but accounting may, because I can put it in inventory." – Reginald Tomas Lee

"If you want to save money, what you have to do is basically buy fewer people. Buy four people instead of buying 10 people. Buy less capacity, then I'm spending less money." – Reginald Tomas Lee

"I focus specifically on what changes the software will enable, and then point out that if you want the cash savings, you need to make managerial decisions. You have to make a decision to get rid of the four people because the software is not going to fire them. That's what you have to do. The software is not making the cost savings happen. It's my management decision and action that was at that." – Reginald Tomas Lee

"I define efficiency as engineers do – output over input. So, if my input is my organization, what I'm spending on the organization, and the output is what it is that they can do, then what this will do is that we'll generally allow them to either create more output with the same group, or consume less of that group to create the existing amount of output. But the size of the organization itself doesn't change until I, as a manager, change it." – Reginald Tomas Lee

"Based on how we choose to calculate this cost, that may have an impact on whether we take the business or not. So instead of focusing on accounting margins, if you can take a look at the cash impact of the decision that you make, then I think you'll be in a much better position to be able to negotiate price and feel good about taking prices that in some cases you may not have taken just because someone calculated a number that happen to be lower than someone else's calculation." – Reginald Tomas Lee

People / Resources Mentioned:

• Project Profitability: https://www.amazon.com/Project-Profitability-Ensuring-Improvement-Projects/dp/1637421699
• The Goal: https://www.amazon.com/Goal-Process-Ongoing-Improvement/dp/0884271951

Connect with Reginald Tomas Lee:

• Email: reginald.lee@bdrco.org
• LinkedIn: https://www.linkedin.com/in/reginaldtomas/

Connect with Mark Stiving:

• LinkedIn: https://www.linkedin.com/in/stiving/
• Email: mark@impactpricing.com