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Eliminating waste - without damaging service.

Many wholesalers do not look at identifying and eliminating waste (unproductive costs) as an ongoing responsibility of all levels of management. They often fail to continually control waste and are then forced into major cost cutting to bring expenses back in line. It is easier and less painful to continually eliminate waste than it is to make major cost cutting adjustments. Management needs to adopt ongoing waste elimination as a preventive strategy. If done properly, the wholesaler will avoid a situation where painful cutting to the bone is necessary.

Today's beer market requires that the wholesaler watch his costs. The purpose of this article is to point out common areas where we have found waste. If the president meets with him management team and discusses each of these issues, proactive steps can be taken to eliminate waste. Also, when discussing these issues, the management team will more than likely identify other areas where waste can be eliminated. Last, but not least, when the management team discusses these issues, a cost-conscious, waste elimination attitude can be adopted which will pay big dividends.

Product Deletions

We will start with the controversial area of product deletions. Carrying packages that do not sell creates waste in many ways--they tie up inventory dollars and increase opportunities for breakage and spoilage, handling in the warehouse, as well as administrative costs associated with keeping a package "on the books." These are the tangible costs.

The largest cost associated with carrying packages that do not sell is the opportunity cost from a sales perspective. Products that do not sell can divert salesmen's and management's attention from the products that do sell. If a salesman goes into an account with 175 packages for sale in his "book," he will be less focused than if he goes into the same account with 135 packages for sale. Packages that do not sell take valuable shelf space away from packages that would benefit from more facings. Packages that do not sell are also the ones with unhappy suppliers. These suppliers will often ask for or offer incentives specifically directed at their packages. This takes management time and sales focus away from products that do sell.

Have your accounting department rank your packages on the basis of gross profit dollars from the highest to the lowest. We are not talking about gross margin (i.e., $2.30, $2.26, $2,25, etc.), we are talking about gross profit contribution after discounts (Unit sales x gross margin per package - discounts = gross profit). If you are unable to rank packages by gross profit dollars, ask your software company to assist you.

Once you have the ranking, continually work to improve or eliminate the lowest items on the ranking. Develop a deletion policy that you and your suppliers can live with.

Warehouse Payroll

Another way to eliminate waste is to reduce payroll in the warehouse when it does not negatively affect the ability to rotate product and properly load the trucks. Common areas in the warehouse to look at include the following:

* How many man-hours does it actually take to load a truck versus how lond does management think it should take? What time does the loading crew come in and what time are the trucks and the load sheets available to be loaded?

* Who's fixing breakage, your highest or lowest paid people? Are there too many managers or supervisors in the warehouse? What time do they start and stop work, and what do they do?

Many warehouses are overstaffed or are wasting manpower due to downtime, low productivity standards or poor work assignments. Have a member of the management team spend some time in the warehouse on all three shifts. Develop productivity standards (cases per man-hour or man-hours per truck), and use the standards to schedule and measure productivity.

Unprofitable Draught Accounts

Some suppliers exert tremendous pressure on wholesalers to increase draught accounts. This is understandable. For wholesalers, however, the draught department is often a profit-losing situation. In wholesalerships that have separate draught departments, it is not uncommon for the direct costs of this department (draught labor, equipment, truck expense and supplies) to exceed the gross profit generated from the sale of the kegs. Therefore, the department loses money before any overhead is applied.

There are a number of steps to be taken to eliminate waste. Consider combining draught and package on the same trucks to maximize route productivity and reduce draught trucks. Check your service levels on the small accounts to make sure you are not overservicing. Run a draught account sales ranking, and look at how many accounts are buying less than one keg a week. Consider trying to convert small, non-prestigious keg accounts to package. Make sure that draught sales effort is pursuing profitable draught accounts. All these strategies will require direction from management.

Fleet Costs

The best way to eliminate waste in the fleet are is to eliminate routes, but this is not always possible. The following are fleet cost areas where waste can be eliminated:

* Get competitive bids (at least twice a year) on commonly used items, e.g., tires, fuel, major parts, etc. This can offer a great savings to the wholesaler.

* Implement a purchase order system to verify quantity purchased, quantity received, and price quoted from suppliers. Many wholesalers unrealistically expect a fleet manager or mechanic to remember the price quoted by the vendor and the number or items received 30 days ago. Due to the good old boy network, fleet expense is generally the biggest area of purchasing fraud.

* Ask your fleet manager what his people are doing. Determine why they are doing certain work in-house while other work is being sent out. Be specific, even if you are not mechanically inclined. Let him know you are concerned about costs. Compare the cost of keeping your own shop running to contracting out all maintenance.

Use of Pre-Salesmen

Pre-salesmen making stops to take two or three case orders is often a waste of a high-priced salesman's time. Consider tel-sell or driver-sell to these accounts.

Also, it is not cost effective for a high-priced salesman to spend 40 to 60 percent of his time merchandising. Merchandising can be done by lower-paid people. If the salesman is spending a large percentage of his time merchandising, you probably need fewer salesmen and more merchandisers. You'll end up with just as many peopole, but fewer payroll dollars.

Sales Supervisors Role

Supervisors should not be the salesman's assistants. Using supervisors as merchandisers, display builders, or relief salesmen is a waste of sales payroll and talent.

Look at the number of supervisors you have, relative to the number of salespeople. Profitable driver-salesman to supervisor ratios are three or four to one. If your ratio is one supervisor to two driver-salesmen, consider pre-sell. Also consider having lower-paid swingmen run relief so you are not paying premium supervisory wages for the relief effort.

Profitable pre-salesman to supervisor ratios are four or five to one. If your ratio is lower than this, examine what the supervisors are doing and consider reducing the number of supervisors.

Top Management Payroll

Since the market requires more services and costs at the account level, but profit strategies require the wholesaler to be lean and mean, the productivity and need for each top manager must be questioned.

Often times, top managers become paper pushers and have gotten away from what they do best. The clerical portion of the manager's job can be delegated to lower paid and more efficient clerically trained people.

When reviewing the top management positions, the owner must ask fi each manager's job can be delegated to lower paid and more efficiently clerically trained people.

When reviewing the top management positions, the owner must ask if each manager's contribution can be measured. If they cannot, the owner must ask if the manager is necessary.

Is top management pay based on performance? Are pay levels for top managers too high? Have pay levels increased because of inflation and growth or because that manager's contribution to profitability has increased? Are bonuses subjective or tied to performance? Salaries that are too high or bonuses that are not tied to performance are wasteful.

Unproductive Family Members

Unproductive family members are wasteful, but it is also the owner's prerogative. Waste occurs when family members are placed in key positions with inadequate skills or training or are overpaid relative to the position they hold. This too is the owner's choice; nevertheless, the owner should be conscious of how these choices affect the company's costs, the perception of employees, and the customers within the market. For example, owners, family members, and non-family members must realize that excess pay to family members minimizes porofit. If having an unqualified and overpaid member in a position affects the performance and profitability of the company as well as the morale of the other non-family employees, the owner will have to take corrective steps. The key is to make the family members productive and to continually work on increasing the skills of family members. This does not just happen. It must be planned and managed. A formal training program should be developed for each family member as should a career development strategy that outlines which positions the family member will hold and for how long. The qualifications the family member needs to get the next promotion should be clearly defined and understood by everyone involved.

Accounting and Administrative

Staff

Accounting and administrative departments are often overstaffed. This occurs because management has not taken the time to clearly define and chart the work flow and determine what each person is doing and how long functions should take. Without these basic tools, accounting and administrative personnel usually end up scheduling their own work, developing their own productivity standards and managing themselves. Do not assume that because everyone is busy, you are properly staffed. With office and administrative work, the old rule that work expands to meet the time (and staff) allotted applies to accounting and administration as much as anywhere.

Discounting Without Execution in

the Trade

If you discount and the retailer does not pass the price reduction on to the consumer, you have thrown away gross profit dollars. If you discount and get a price reduction at retail but do not get an ad or display, you will still lose money on the price discount. This is a large area to target for reduction of waste. Wholesalers spend too much time wishing they coul discount less (even though the supplier won't let them) when management time and effort could be better spent on determining how to make price discounts more effective. The answer to this, we all know, is better sales execution at retail. Promotions are only profitable when you succeed in advertising and displaying the product.

Inventory

Carrying too much inventory is costly. It ties up money and increases costs. Some experts estimate the cost of carrying excess inventory to be as high as 30 percent annually. These costs include cost of funds, out-of-date product, breakage, handling, floor space, insurance and theft.

Many of the big suppliers are dictating inventory levels to the wholesalers. There is not much that can be done in these situations. Second- or third-tier suppliers have less clout, and inventory levels of their products can be managed. Setting up days-on-hand objectives and implementing an inventory "buying budget" will help the wholesaler to control inventory investment.

Another inventory area to look at is shrinkage. Theft is only part of shrinkage but is continuing to grow. The control systems you implemented years ago need to be checked. Are they still in place? Are they still followed? Are they still appropriate? Do not assume the answers to these questions are affirmative. Management must go into the warehouse and follow the procedures step-by-step to see first hand if they work. Also, on a monthly basis, review a copy of the book-to-physical inventory variance report before the adjustments are made.

Routing Efficiency

Sales and delivery routing are two areas where waste is most prevalent. The key to eliminating this waste is to do it without negatively affecting service. Look at the following items and try to reduce waste:

* Is the service policy written and formal?

* Are you using tel-sell? If you are, are there more accounts that can be added to tel-sell?

* Are on-premise accounts driver-sold or pre-sold, and why?

* Is a manager monitoring and following up on call-ins to develop ways of reducing them?

* Is bulk delivery regularly used? Can it be expanded?

* Were sales and delivery routes built on the basis of properly developed time standards?

* When is the last time sales an delivery were re-routed? If it was more than a year ago, your routes are probably obselete.

Margins are under constant pressure and the demands of the retailer are increasing. If the wholesaler doesn't adjust to these negative conditions, he will make less money. For many distributors, eliminating waste is not optional. Eliminating waste must be a part of the wholesaler's plna. It is the least painful way to ensure profitability.
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Article Details
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Title Annotation:beer wholesalers must remove unproductive costs
Author:Verno, Joseph J.
Publication:Modern Brewery Age
Date:Sep 9, 1991
Words:2173
Previous Article:Taking care of business.
Next Article:The hard truth.
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