Employee payroll is often a major expense for most businesses. In today’s competitive environment, businesses can’t afford an overhead item that produces less than the maximum. Even when revenues are advancing, the reason is in part driven by an increase in overhead expenses such as payroll, advertising, or additional product displays or services.
Assume your business has an after-tax profit of 4%. For every $100 in sales, the profit is $4. To increase your net profit by $1, you must increase sales to $125 or an increase of 25 percent. As mentioned above, there are a variety of increases in overhead that must occur to generate an increase in sales of 25%. But what decrease in the cost of sales would generate $1 in net income? What if your staff could become more productive?
Trying to raise revenues 25% is often something a manager has less than total control over. Reaction from the marketplace might not allow it no matter how hard a business tries. However, increasing productivity is an excellent way to raise that net income percentage because the company has much more control over that activity. When a sales force can produce more sales more quickly, the end result is a reduction in the cost (of sales) to sales ratio.
First, the business must define the productivity measures. Most common is sales per square foot, cost (of sales) to sales, or average invoice amount. One might want to consider the conversion of “lookers” to buyers (the close rate) or the return rate of customers (repeat purchases or customer retention). Both of these measures are specific to productivity problems and thus lead to more effective solutions.
Second, the accounting or tracking system must have a simple way to measure against the standard. One might consider asking the employees being measured what standard they would use or how they would do it. Being in the trenches, they frequently have the answer.
Consider the following as part of a self-audit:
• What would your firm’s likely response be to upward wage pressures? Raise prices, accept lower profits, or increase productivity.
• How do your expense ratios compare to the industry standards? Higher, lower, or about the same.
• Can you measure the busiest time period for each department in your store?
• Can you identify individual employee productivity differences in qualitative terms?
• Can managers identify optimum staff size for varying productivity periods or conditions?
What will this tell you? If your expense ratios are higher than the industry you have productivity issues to deal with. If you are paying more for your staffing you must find ways to recover those additional expenses without just raising prices and becoming less competitive. Efficient staffing requires knowledge not only of customer traffic patterns but also individual employee productivity. Once one knows the production capability of each employee, staffing and training can be adjusted to meet market demands.
Studies show the largest impact comes from simply having the conversations with staff and developing the measuring system. The old adage “what gets measured gets done” is true more today than ever in our busy and hectic business world. Then look closely at how things are done. Remember, the greatest gains in productivity come from doing things differently as opposed to doing them better.
Jim Kress is on the faculty at COCC where he works with businesses on productivity and process improvements. He can be reached at 383-7712.
Retail Operations: How to Get That Extra One Percent
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