July 18, 2005
Volume 1 Issue 20       

Cutting Costs Without Cutting Payroll 

In these very difficult days of making more money the independent distributor must find new ways to cut costs and keep margins where they need to be not only to survive but grow. After all not many distributors can pass on to their customers the rising cost of fuel and health costs. In reading through the March,2002 Issue of Industrial Market Trends® although over 3 year old brings to light areas that should be focused on to cut costs.

The distributor’s first instinct to cut payroll and although that is compelling from and expense line standpoint most distributors have already washed their Company of non-productive employees. Often savings gained through downsizing is lost by the cost of hiring and training new people as they need to ramp up to meet new demand. Probably redeployment of labor into more money saving roles is a much more long term productive solution.

Instead of focusing on cutting payroll lets focus on selling, general and administrative expenses. These areas are much more under our control.

Purchasing is a huge area for savings by examining how freight is billed. This is an area that needs close examination. Freight is a huge expense that a lot of distributors overlook. As we have discussed before effective forecasting of product demand will allow you to buy smarter and in bigger quantities allowing for more room for negotiating and leveraging your existing vendors. Supply chain errors are also a black hole of lost money, Dr. Don Rice of Don Rice & Associates feels that 25% of time spent in the purchasing Dept. is tracking errors. “In 2 out of every 100 invoice lines there is an error. What a great way to make money, Editors note: The flip side of that may be true. Make sure your billing error rate isn’t that high, especially my variable weight friends.

Bates also suggest to use Activity Based costing, reviewed in previous edition of CC4F News, to see who your least profitable customers are. Bates estimates up to 10% of a distributors customers are money losers due to their demands and low margin selling. Find these guys and make them pay up or move them along. That’s more money in your pocket and more time to focus on the customers who help you make money and deserve your time.

Of course this discussion about cost cutting would never be complete without looking at or old friend, that bank vault called inventory.  Scott Stratman of the Distribution Team in Colorado Springs, CO. offers the following tips.

• Reduce the number of items added to your stock. Unless they have a proven sales track record they don’t belong.
• Develop a selling strategy for those you keep.
• Identify the true cost of carrying and item.  (This has been discussed extensively in previous issues)
• Maintain fast moving item sales while aggressively attacking slow movers to rid your inventory of them and reduce those carrying costs further. Remember our Turn and Earn Index of items from issue #5? These are the items you should focus your investment in to maximize your return on dollars.

FOCUS ON REDUCING OPERATING EXPENSES BRINGS NET BEFORE TAX PROFIT TO YOUR BUSINESS

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