February 28 2005
Volume 1 Issue 2       

Employee Productivity Drives Down Costs 

The SOFI Report is a study made every year by the NAMP (North American Meat Processors), for meat distributors/processors. SOFI (Study of Food Industry), profiled 51 processing/distribution firms and surveyed them on their income statement, balance sheet and other operating data for the year of 2003.

Here at “CC4F News” we realize that you do not have the time to look through this report. So, we have done it for you, and found a goldmine of Cost Reduction tools. This analysis relies heavily on the SOFI report and experience in the industry . We want to thank the NAMP people for this valuable data and invite our readership to visit them at www.namp,com for additional help.

There are certain “Pillars of Profitability” that are consistent or all Companies regardless of industry they are in. They are:

-          Barriers to Entry- Competitive battles are not fought on every item, on every transaction, on every single day. Instead competition is waged between alternate business systems.

-          De-Commoditization- The overall product assortment offered allows for both tonnage sales and reasonable margin opportunities from non-commodities.

-          Employee Productivity- New procedures for controlling payroll expense have been implemented

-          Internal Profit Understanding—There is a clear understanding within the decision-making ranks of how profit is generated or destroyed by employee actions.

-          Profit Focus—The maximization of dollar profits takes priority over the maximization of sales or the minimization of asset investment.

We will focus on Employee Productivity for now. The best overall measure of employee productivity and expense is what is called the Personnel Productivity Ratio, or the PPR. The PPR measures the percentage of each gross margin dollar that must be devoted to payroll (including fringe benefits). The calculation is simply fully loaded payroll costs divided by gross margin dollars. For the typical NAMP member from Exhibit 1, the calculation of the PPR is:

Payroll Costs/Gross Margin=  $1,130,400/$2,355,000 = 48.0%

This means that for every one dollar of gross margin that is generated, the firm must spend 48.0 cents on payroll. The figure is too high for long-term financial success.

In trying to improve the PPR, firms have three distinct opportunities:

-          Actual Cost Levels—The amount spent per employee on payroll and fringe benefits.

-          Productivity—The amount of output that is generated per unit of labor input.

-          Workload—The number of orders, deliveries, invoices and the like that must be processed.

While distribution firms are blocked on lowering payroll costs, they face an almost impossible battle on fringe benefits. Firms have engaged in some rearguard programs such as increasing co-pays and deductibles on health insurance. The best that can be hoped for, though, is to reduce the rate of increase.

Enhanced productivity has been the focal point of distributor activity in recent years. Inevitably, this has lead to increasing sophistication in terms of technology and operating systems. The use of technology to drive higher levels of productivity has been the great success of distribution. At the same time, the impact on the bottom line has been infuriatingly small.

The vast majority of employee-productivity technology has been industry wide. That is, new technology thrusts, such as bar coding and increasingly, radiofrequency identification, ultimately are widely adopted by almost all distributors. The result is that costs go down for everybody.

The bottom line on this is that if you are not automated in your internal operations effectively you carry a cost burden higher than your friendly competitor i.e. Sysco, Us FoodService or any organization equipped with internal technology deployed correctly.

Cost of Operations that is a high PPR will slowly erode your ability to survive as well as compete.

Lets now look at Workload.

Controlling the workload involves a combination of better analysis of costs and more sophisticated selling:

-          Analysis—Before excessive activity can be eliminated, it must be identified. Activity Based Costing tools are now cheap enough (with Excel or other spreadsheets) that every firm should know its costs to process an order or make a delivery. The cost-understanding issue is no longer a barrier.

-          Selling—Understanding is different than taking action. Programs must be in place to educate the sales force, and ultimately customers, on the essential need for fewer, larger orders throughout the channel.

The net of this is we must understand our cost structure and then address lowering it once we understand it. Lowering our cost of delivery through better warehouse management and picking and billing procedures are not trivial savings. Understand your cost and then once you know where they are attack them.  Figure your PPR today and set a goal of where you want to be and drive to that goal. Easier said than done.

REMEMBER IF YOU DON’T START YOU WILL NEVER FINISH.

To Unsubscribe to this newsletter please respond to email with "UNSUBSCRIBE" in the subject line.

Thank you.