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Teaching managers to think about profit.

The beverage industry has been slow, if not negligent, in teaching its key managers to understand basic cost and profitability concepts. In the past, it may have been possible for a three-million case distributor to personally approve all pay changes and sign every check, and by doing these tasks, stay in total control. Then, margins were higher, growth was steady, the business less complicated and the customer more manageable.

But today, with more than 250 packages, 20 different types of customers, hybrid sales systems, a variety of employees, increased supplier demands and mountains of government regulation, managing a distributorship effectively and profitably is too big a job for just top managers to worry about. As profit margins shrink and costs continue to rise, the days of the owner and his or her accountant being the only ones with key financial information are coming to an end. The problem with managing in this increasingly complex environment is that more and more decisions must be made by lower-level managers and often these decisions impact profits. Because of the enormous workload, the wholesaler has no alternative but to continue delegating decisions such as whether or not to run a hot-shot delivery, do a special event, carry extra inventory or increase delivery frequency. If managers and supervisors are going to make these decisions profitably, they must have a better understanding of the wholesaler's costs of doing business and how these decisions fit into the company's long-term financial goals.

Changing the Culture

Historically, the beverage industry has been dominated by major suppliers whose main directive has been to sell as many boxes as possible and to provide service to retailers at any cost. Thus, it made sense that the training that managers and supervisors received was primarily sales-related. With high margins and relatively low costs, cost-effectiveness and profit management was not a primary consideration, nor was it important to share financial information with managers.

Unfortunately, this traditional culture has created managers with extensive experience in sales and delivery, but little ability or motivation to work with cost and profit information. As the needs of the beverage business change, we have no choice but to encourage a more open exchange of information. While we should not open our books to every employee, we should start sharing some basic cost information and train managers how to use this information competently when making decisions that affect profitability. Some information you may consider sharing with managers and supervisors includes:

Cost per Stop

The cost per stop, which can be calculated for total expenses or direct expenses, is probably the most valuable number you can share with managers and supervisors. The formulas for calculating cost per stop are as follows:

Total Costs divided by Total Stops = Total Cost Per Stop

or

Direct Costs divided by Total Stops = Direct Cost Per Stop

It is important to communicate that this number is an average cost. Some stops will cost more than the average while others will cost less. For example:

If a distributor's annual direct sales and delivery expenses are $5,854,000 and the company makes 154,000 delivery stops a year, then the direct cost per stop equals $38. Furthermore, if the company's average gross profit per case is $2.30, the company needs to deliver 17 cases to cover its direct cost $38 divided by $2.30 = 17 cases). This doesn't mean the distributor should stop doing business with all accounts that buy 17 or fewer cases, nor does it mean that 17 cases is now the delivery minimum. Instead, this number will help managers and supervisors realize that many accounts are not profitable and the company needs to research alternative sales methods or changes in service frequency.

These low-volume, low profit accounts are still important from a marketing standpoint and they need to be properly serviced. At the same time, the company cannot afford to expend excessive resources in these accounts at the expense of properly servicing larger and more profitable ones. Managers who are aware that it costs $38 to take and deliver an order will be more sensitive to wasting resources. They can then adopt loss-minimizing philosophies that may include tel-sell, every-other-week service, having a less-expensive employee perform certain functions in the sales and delivery cycle, and/or selling one more package a week to the smaller accounts.

Total Employee Cost

How many times do your managers drive across town to deliver a draught knob? How often does a supervisor spend 80% of his or her time merchandising accounts? Both of these tasks have to be done, but does a highly paid employee have to do them? Probably not, but often, whoever is making these decisions does not know, understand or appreciate the cost of the person carrying out the task. Many owners and upper-level managers are reluctant to share salary information with managers and supervisors lower in the organization. But this creates decision makers who do not appreciate the value or cost of an individual's time and thus, don't use employees effectively. To prevent this, owners should allow managers and supervisors to know the total payroll cost of each of their subordinates, including commission, salary, auto expenses and fringe benefits. If a supervisor's salary and commission is $40,000, for example, and other employee expenses are an additional 30%, the supervisor's total cost is $52,000. If the supervisor works 50 hours a week, his cost to the company is $20 per hour. A $20,000 a year merchandiser with 30% in other employee expenses, costs the company $26,000 a year and based on a 50-hour week, costs the company $20 per hour. This information makes it clear which employee can deliver knobs and merchandise products most cost-effectively.

Break-even on Discounts

With discounting becoming the norm, everyone will need to become better educated in pricing, promotion execution and gross profit management. Managers seeking to understand gross profit management should begin by learning the amount of additional sales required to replace the gross profit dollars given away with a discount. The easiest way to determine the additional sales needed to replace gross profit dollars discounted in a promotion is as follows: Gross profit (per case) - 1/Gross profit (per case) less your portion of discount = % Volume Increase Required

Here's an example:

$2.50 minus 1/$2.50 - .50 = 25%

In this example, a 25% sales increase is required to break-even on the discount and replace discounted gross profit dollars. This does not take into consideration cannibalization or incremental sales or delivery costs. Managers and supervisors should also know how reduced shelf price, ads and displays make or break the price promotion. (Call DMG at 1-800-777-6364 for complete discount chart).

According to Progressive Grocer, a price promotion that is not passed on and results in no shelf-price reduction results in zero sales increase - in other words, a loser. If the discount results in a 10% shelf-price reduction, sales will increase 20% - still a loser. If the 10% price reduction is supported with an in-store ad, sales will increase 78% - a winner. If a 10% price reduction is supported by a display, sales will increase 105% - a real winner. If you get a 10% price reduction, an in-store ad, and a display sales will increase 203% - a home-run.

Managers who understand the economics and impact of discounting know that failing to properly execute at the retail level makes discounting a losing proposition. When a manager understands these concepts, he or she is better able to set proper quotas, target and track display execution, target visits to accounts who refuse to pass on the discount, and target accounts for in-store ads.

Cost of Over-age Beer

Obviously, the main reason to manage code dates is for product quality. But over-age product also costs a great deal of money and for this reason, there is no excuse for not making product quality the number-one priority for everyone in the company.

The labor cost associated with replacing over-age beer is very high. Moving close-dated product to higher-volume stores also is very costly. A wholesaler has to sell four or five cases of beer to generate enough gross profit to replace the cost of one case that is destroyed because it is out of code. When net profit is considered, the wholesaler has to sell 20 cases of beer to recover the loss of one case of overage beer. By communicating these cost relationships to employees they'll begin to understand you did not get the beer for free. Controllable Expenses

Distributors who want to share financial information, but not profit information, can still share controllable expense information with managers. TABULAR DATA OMITTED Controllable expenses are expenses a manager can partially or totally control.

Sharing this information with managers helps them understand some of the real costs of doing business and allows management to hold them accountable for control of expenses them manage. Some controllable expenses by department are:

Carrying Cost of Extra Inventory

Buying extra inventory is something every wholesaler does, whether it is in response to supplier pressure or to help a rep hit his or her quota. But managers responsible for inventory ordering need to understand that extra inventory erodes profits.

The following example illustrates the cost of carrying extra inventory:

1 Million Case Wholesaler 5 extra days inventory = 11,390 cases @ $8.00 a case = $91,120 tied up 8% finance rate = $7,290 cost 15 cents handling/case = $1,709 cost total carrying cost = $8,999 total carrying cost = 79 cents per case

The 79-cent carrying cost does not include cost of inventory insurance, breakage, repack, shrinkage, extra utilities, floor tax, rotation costs or space. If the basic cost is 79 cents, and most wholesalers make less than 75 cents, one conclusion could be that the extra inventory is not profitable if it sits in the warehouse an extra five days. The difficulty with this example is determining what normal and extra days of inventory are.

Revenue per Route

Pass sales-people in the hall and ask how much they sold that day, and chances are their response will be expressed in cases which, unfortunately, is not an accurate measure of sales or profitability. If the sales-person tells you he/she sold 500 cases, for example, was that a good day? What if 400 cases were sold on deal and 100 cases were imports? Managers need to start thinking in terms of dollars because bills are paid in dollars and not all cases are created equal. Both managers and the sales force need to absorb the idea of revenue per route. Routes should be calculated based on sales dollars and gross profit contribution.

CONCLUSION

The entire management culture in the U.S. is changing and managers in the beverage industry should follow suit because the need for distributors to provide more financial information to managers is becoming a crucial element for success. Wholesalers are shocked when they realize the bottom-line impact of costly decisions being made by managers not privy to or untrained in the use of key financial data. In an age of increasing managerial empowerment and delegation, the wholesaler should not overlook an opportunity to train and improve the effectiveness of managers. Relevant financial information in the hands of properly trained managers will become an increasingly valuable and effective tool in achieving the profitability goals and objectives of all beverage distributors.

Joseph J. Verno is a founder and managing partner of the Denver Management Group, Inc., a management consulting firm to the beer wholesaling industry. Verno has served as a consultant to brewers and wholesalers and is a speaker at seminars and workshops throughout the U.S.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:beverage industry
Author:Verno, Joseph J.
Publication:Modern Brewery Age
Date:Jan 31, 1994
Words:1940
Previous Article:Pioneers end up with arrows in their backs!
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