On today’s show we are talking about the trade-off of unbundling.
When you undertake a project, it’s tempting to have a one stop shop take the full responsibility for managing a project from start to finish. After all, the detailed steps along the way are not that complicated. How much more will you end up paying by bundling a few tasks together.
You would expect the small steps along the way to be fairly priced.
But detailed analysis almost always uncovers inefficiency.
Let me give you a few examples.
The first one is for a demolition project. The demolition contractor is someone I’ve used before. They’re being contracted to demolish the structure on a newly acquired site and to scrape the site clean.
I got a decent quote from the demolition contractor. But then I asked him a simple question. How much was he paying for disposal of the demolition and he said that he was paying $1,800 for a 40 yard bin. These are the really huge bins that you often see on construction sites that roll off the back of a truck with a hydraulic winch. That price included the bin and the disposal fee at the city landfill. It turns out that I have a relationship with a disposal company where I pay $225 for the bin and $95 per ton. So on an apples to apples comparison, I’m paying about $700 per bin as compared with $1,800 per bin.
A waste disposal bin is strictly a commodity. There is nothing about one bin that is going to result in a better finished product than another. When you multiply the number of waste bins needed, the savings are about $10,000. We’re talking about $10,000 in exchange for making one phone call and then sending 8 text messages when it’s time to deliver a new bin. The return for unbundling that segment of the project is very clear.
At the other end of the spectrum, we have an assisted living project that is scheduled to open in the next month. The budget for furniture is about $500,000. There are tables and chairs and sofas and coffee tables and artwork and outdoor furniture and umbrellas and on and on.
They need to tie together aesthetically and be functionally appropriate for an assisted living care home. This means that the furniture has to be durable and strong. This is not the kind of furniture that you might find at Costco or Ikea.
Initially we contacted a supplier who specialized in that kind of furniture. Very quickly it became clear that we would not meet the budget requirements if we sourced the entire project from a single supplier. So instead we decided to hire an interior designer. At first you might think that adding a designer would be an additional expense to the project. If we were budget challenged before, then adding an additional expense for a designer might seem strange.
There are a lot of moving parts and a multitude of details to be managed in sourcing the furniture, choice of fabrics, coordination of lead times and delivery to match the construction schedule.
By hiring the right designer, we were able to choose from a wider array of suppliers. Outdoor patio furniture which sees lower utilization than the indoor furniture could be from a less expensive product line. In the end, by using a designer we were able to stay within budget, despite the additional cost of hiring a designer.
Ultimately it comes down to managing the tradeoff of time versus money. Hiring someone to take charge of shopping around for the best deal only makes sense if you have leverage. Leverage means a small number of items where the savings can be substantial for minimal effort, or a large number of high value items where it makes sense to dedicate a staff member to getting the best deal.