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August 2018

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« Time to batten down the hatches or turn up the heat? Part 1 | Main | Time to batten down the hatches or turn up the heat? Part 3 »

Time to batten down the hatches or turn up the heat? Part 2

OK, by now you and your management team have completely analyzed your present situation.  Is it a position of strength?  Weakness? Somewhere in between?  Hopefully you have developed pro-forma financial statements where you can perform sensitivity analysis on a number of key inputs – like GP%, brand volumes, average selling price, some measure of discounting, and some key cost inputs.  You need to really examine the sensitivity of your financial model to changes in these inputs.  You must be extremely wary of a situation where a small change in an input drives significant change in the overall financial situation.  Those are risky environments where you would be well advised to be pro-active, rather than re-active in making operational adjustments.

And what of the whole issue of pro-active versus re-active change.  Do you wait until tough times come and then make changes?  Or do you plan to ride out the tough times with no changes?  Or do you see tougher times coming and make changes now so they have little to no financial impact (assuming this can be done).  Or do you knowingly take a financial hit during these hard times and aggressively expand your sales and merchandising efforts?

One thing is certain; there may be no better time to review service frequencies, service types, special event participation, etc.  Often in the heat of competition, we collectively bid up the costs of things like special events to the point where the cost far exceeds any value received.  If you are looking to tighten down on anything provided at retail, now is the time to do it.  The economy and fuel prices will give you perfect cover.  Have you allowed bad habits to take hold in some retail accounts?  Get rid of these problems now… if not now, you will probably never do it.

Don’t be foolish in the process, but an account-by-account (and event-by-event) review is most definitely in order.  But remember, chain power isn’t going anywhere and fighting them is probably fighting a losing battle.  Use your head when you do the account reviews.

But where possible, now may be a good time to dial these things back at retail…  Or do you go for all the special events, etc. and try to gain share and exposure during tough times? Perhaps tie them into a long-term contract so they are yours far into the future?  It depends… on your goals, your market situation, and your competitor’s actions.

On the cost side, ultimately there really are few costs which are truly within the distributor’s power to control… other than organizational design.  And sooner or later that is where this analysis will point.  And ultimately when we talk about organizational design changes, we are talking about reductions in overall payroll.  Getting the same work (or even more) done with fewer employees.  Increasing the efficiency and yes, even elegance of your organization.  That is ultimately the challenge.

The only way this can be successfully done long-term, is through better design and increased performance from employees throughout the organization.  Note that I emphasize long-term… any pinhead can cut costs.  You simply walk around and point at people, “you don’t work here anymore, nor you, nor you…”  And for 6 – 9 months or so, this may even work.  But the remaining people will soon tire of carrying a bigger and bigger load and sooner or later the wheels fall off.  Read the business publications, this is a normal feature of bad cost cutting.  And it is far, far too common.  But for a short period of time you can do it and look like a hero.

If you do need to reduce head-count, do it from a system-wide perspective, not by being “fair” to departments.  It is a mistake to say, “We need to cut 4 people so each department must cut one position”.  One department might be significantly over-staffed and another at the bare necessity.  Put more thought into the analysis and look at what is best for the entire system, not any single department.  I’d sure rather squeeze my office staff than my merchandising (or sales or delivery) folks.  If this steps on departmental toes, so what?!  Get over it.

But remember, cutting costs can only go so far.  And there are two sides to your income statement, income and expenses.  At some point you will find attempted expense reductions become an illusion because:

1.                  They have a significant negative impact on sales (income), or

2.                  They create significant operating issues of which the net effect is to increase costs, not reduce them.  The infamous penny wise but pound foolish situation.

Also, finding near-term financial solutions in cost cutting is much easier for larger companies than smaller ones.  From just a mathematical perspective, one employee is 1% of our work force if we have 100 total employees.  But one employee is .001% of our work force if we have 10,000 employees.  For this cut to be equivalent, the 10,000-employee company would have to cut 100 employees.  Plus there is always much more fat at a larger organization, it’s just the way it is. 

Another area to investigate for improvements in efficiency and cost reduction is in matching the person, i.e. pay, for the job… You don’t want to pay managerial wages for merchandiser work yet far too many wholesalers (especially A-B) have high paid managers whose almost full-time job it is to do low-level work.  It is a great luxury being able to have trained, experienced managerial people to throw at any problem which pops up, but it is very expensive.  Ensure the work matches the pay.  And of course the surest method to solve this problem is to ensure everyone does 100% of their job, so high-paid managers don’t have to waste their time doing things that other’s should have.

Look at your delivery team. Far too many wholesalers have their delivery management (or sales/delivery management if it is structured as such) running routes and helping make deliveries rather than doing their real job.  This is a waste of man-power, a waste of payroll, and is very demoralizing to the “manager” who in effect is just an all-purpose delivery driver.

But the challenge here is that a leaner organization MUST function better… it must be better designed and operated.  Fat organizations don’t have to operate as efficiently since they can always throw people at problems.  Thus if people don’t do their jobs, it isn’t as big a deal.  In a lean organization, everyone must do their job 100%.  This cannot be over-emphasized… lean organizations must be very efficient, with no wasted effort… they must operate seamlessly… and they must be high-performance organizations where 100% task completion is always the norm. 

Perhaps this is just a self-serving belief since this is what I do, but I believe ultimately when an organization is looking to become more efficient, you need to re-build the organization from the ground up, not just can a few people.  In a November 2005 post here I described it as follows:

How not to re-organize your business – an analogy

If you wanted to improve the efficiency of a V8 engine you would not simply pull off a couple spark plug wires; thereby “turning it into” a V6.  The results would leave you more than a little depressed.

Yet many wholesalers do effectively that when they look to improve the efficiency of their business – cut a route or two and that’s that.  Wrong.

It is possible to build a V6 which is more efficient, quieter, faster, and more powerful than the old V8.  But to do so you must start from scratch – start anew.

If you truly want to improve the efficiency of your business you need to re-design it from the ground up.  You need to design it for the world of today and tomorrow – not yesterday.

How?  In business-speak you need to begin with strategic planning.  Start with a completely blank slate.  Your territory is where it is, the roads are where the roads are, the bridges are where the bridges are, and the retailers are where the retailers are.  Your warehouse is where it is but this can be changed in the mid- to long-term.  Do you see my point?

As a mental process assume your organization has no employees since there is no organization yet.  Therefore things like present routing or compensation or employee concerns or a thousand other issues don’t restrict our thinking since none of them exist – we are building a new company. This is the first step in building a new organization, not pulling off a couple spark plug wires and watching your “new” V6 sputter and lurch down the street.

From there you develop a plan and then implement the plan.  Simple.

Often my re-organizations don’t focus on cutting costs but rather reallocation of resources… rebuilding the organization to address today and tomorrow, not yesterday.  In cost cutting situations, don’t plan to put 100% of the savings in your pocket… it generally can’t be done.  Share some of it with your remaining employees.   If you want only A-players, you have to pay them as such (and demand A-player performance). Whether in war or business, I’d rather have “fewer but better”.  I’ll win a lot more battles with that structure.

Next post - Open your eyes to other possibilities… cutting costs can only go so far.


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