SHELTER

July/August  2004

Distributor Dilemmas

 

The Numbers Don’t Lie—Part II
Obsessing about the Bottom Line Comes at a Price
by Steve Linn

Editor’s Note: This is the second part of a two-part series (see June SHELTER, page 8).

The old saying, “There’s more than one way to skin a cat,” is true. Let’s say your market has a very competitive labor challenge. Your labor percentage as a percent of sales would most likely be higher than another market where labor is more plentiful. You can still achieve the same or better net profit percentage by outperforming your competitors, which should lead to commanding a higher gross margin. I’m simply saying that productivity numbers can vary from market to market and still be acceptable.

A Short Story
To better make my point, I’m going to share a story.

Once upon a time there was a large building supply corporation (we sometimes refer to it around here as the evil empire) that was on a mission to become an even larger corporation. Their strategy was ultimate domination and control of all markets by acquiring as many smaller companies as possible and adding them to their ever-growing chain of power.

One day a new acquisition of a long-time successful independent building supply company was underway. The leader of the empire said to his accountants, “Go forth and analyze the productivity numbers and bring back your recommendations.”

In a flash, the team was back with their recommendations on how to become a low cost producer and put more money on the bottom line. The accountants were sure that their report would impress their leader because after all “the numbers don’t lie.”

The report from the accounting team was as follows: After a careful study of all productivity numbers, we feel there is much room for improving the bottom line by cutting costs and improving efficiency in a number of areas. 
First, according to our highly sophisticated data that has been compiled from our previous markets, the outside sales force is being compensated considerably above our other markets. We recommend their compensation plan be reduced and brought into line with our other locations. 

Second, benefits and holidays for the rank and file seem to be somewhat excessive and should be adjusted to our current policies. We further believe that by cutting overtime 80 percent and reducing the current amount of employees by 15, we could save a significant amount of unnecessary expense. 

Third, upon applying our sales per truck ratio to the delivery department and our inventory turns goals to purchasing, we believe two delivery vehicles should be eliminated and inventory should be reduced 15 percent.
Upon analyzing the receivables, we found that although most accounts were in pretty good shape, we could save money by eliminating the credit manager and turning over collections to our regional credit department. It appears that in the area of purchasing we might be able to eliminate the current purchasing manager role and utilize our corporate purchasing department to make all major stock purchases. This would allow us to change vendors and take advantage of our national programs and our tremendous buying power. It would also allow us to use a less experienced and less expensive buying clerk at the local level.

Finally, by converting to our current corporate software program and linking to the rest of our system, we will achieve more efficiency and control over the local branch. By linking and monitoring the branch’s performance, we will be able to provide consistent feedback and recommendations to the corporate officers for the implementation of timely decisions. As you can see from our recap and careful evaluation of the numbers, we should be able to add an additional 3 percent to the bottom line once our recommendations have been implemented. As you know, “the numbers don’t lie.”

The Memo
Six months later a memo came from John Doe, the local branch manager who had only been in place for three months after taking over for the acquired manager who had resigned in frustration. It read as follows: 

Dear Empire Leader,
I am writing this memo out of frustration in hopes that you will provide some guidance on the continuing challenges that we are facing here in our new local market. As you know, since the acquisition, we have lost five of our most productive salespeople to the competition. I believe our decision to change the long-time commission rogram that had been in place has not worked out. I’ve been told that the salespeople who quit were unhappy with a number of changes. First and foremost, they believe that their years of experience and the relationships with their customers were completely discounted in our decision process. They also noted that our decision to cut hours, personnel, benefits and equipment hurt the morale of the operations people severely as well as lowered our ability to service our customers. 

All of our former sales people have gone to our competitors and have taken a large majority of their customers with them. As you are also aware, both our former purchasing manager and credit manager have also gone to our competitors. It appears to me that our decisions, based strictly on the numbers, have caused a chain reaction of resignations and a severe loss of business. We seem to be left with a group of inexperienced people that are only here for a paycheck. 

In addition, I would like to make you aware that our remaining customers are not pleased with our service and continual backorders. I believe that allowing the corporate purchasing department to buy for us has been a mistake. Customers are also complaining that our invoices are not easy to understand. Plus, the new software conversion continues to be a problem.

A great man once said, “Our success in life is in direct proportion to how well we serve others.” To serve customers well in our business requires a team of dedicated and experienced people who put service first. It requires ample resources of equipment and product to get the job done. It requires a general manager that has a feel for the market and sensitivity for the people. It requires the autonomy necessary to make decisions and react quickly at a local level without the fear of being second-guessed by the corporate office. Our branch has been gutted to the point that we are no longer able to provide an acceptable level of service. I hope the next general manager will be able to turn things around. 

Please accept my resignation as I am taking a new position with the competition. As for those productivity numbers, they may not lie, but they sure can lead you down the wrong path.
Sincerely, 
John Doe 

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