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Talking Cost

The next time you give employees a lecture on cost control, you might want to try speaking their language.
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Maybe your company is different, but at most companies I know, controlling costs is a subject guaranteed to cure insomnia among employees and middle managers. It's not that they don't care about profit margins and such. They do. They just have a lot of other things on their minds, such as their jobs. Profits, revenues, costs -- those are the big numbers that chief executive officers are supposed to worry about. And if the numbers get out of whack, well, that's the CEO's problem, isn't it?

This attitude is, of course, a source of considerable frustration for CEOs, who can't really do much about the big numbers without a good deal of cooperation from below. But how can they elicit the cooperation? What's the trick? There must be some technique, they figure, some clever device for getting employees charged up about controlling costs.

There isn't. When you come right down to it, cost control is almost entirely a matter of attitude -- yours, as well as your employees'. You can't make them care about controlling costs unless you show them what the problem is, and how they can help solve it. That involves giving them information, often sensitive information, but more important, giving it to them in a form that they understand.

All this came to mind recently as I was listening to Bob Popaditch, who owns Thrifty Scot Warehouse Food Inc., a chain of discount grocery stores in Orlando. It was a warm Friday afternoon, and we had just finished lunch with a half dozen or so of his store managers. Popaditch was saying a few words on the subject of cost control and profit margins. He has a pretty firm grasp of such matters. He has to: his business does not leave much room for error. Nevertheless, his managers were less than enthralled.

"Let's talk about the last 36 weeks," he began. "You could say that things look pretty good. Sales were just 2.09% off budget. Not bad. Payroll was over budget a bit, but only by 0.24%. Pretty close.

"And look at this." He flipped his hand-drawn chart. "Gross [profit] margin was off only 0.1%. It was supposed to be 15.8%, and we came in at 15.7%."

CEOs find such numbers fascinating, as do competitors. Indeed, many companies would not dream of sharing them with employees. But they held little magic for Popaditch's managers, who were clearly getting bored. They had stores to run, merchandise to move, people to supervise, and problems piling up while the CEO stood there talking about his problems. Not their problems -- his. They slumped in their metal folding chairs.

But Popaditch knew what he was doing. "The 2% shortfall in sales comes to $244,000 for 36 weeks," he went on, apparently but quite deliberately unmindful. "You'll notice that that's just $6,000 short of being a quarter of a million dollars. If we hand made those sales and converted them at our 15.7% gross margin, we'd have $38,308 that we now don't have to help us pay bills. If you assume we've paid our bills, what would have happened to that $38,308? It would have gone, swish, right to the bottom line."

There are no notes being taken. I imagine that the managers are thinking, "It's his bottom line, not mine."

"What about payroll?" Popaditch asked."Just 0.24% over. Well, 0.24% times $11.5 million in sales over 36 weeks is $27,496.

"Year-to-date summary of missed earnings?" He had to answer his own question. "The $38,308 in gross margin plus $27,496 in over-budget payroll . . ." -- he produced a long sigh -- "is $65,804.

"That's the bad news."

Popaditch paused.

"But you know the joke about 'How do you eat an elephant? . . . One bite at a time.' Let's break our sales down."

And here, just when he'd almost lost his listeners for good, Popaditch turned the session around.

"Sales," he said, flipping the chart again, "were short by $244,000. If you divide that by 36 weeks, it's only $6,778 a week. Divide that by three stores and you get $2,259 per week per store. That's all the more each of you had to do."

The audience perked up. Here was a number that meant something.

"Let's divide the amount per week per store by the hours we're open," said Popaditch. "It comes down to $26.85 an hour. If the average customer spends about $18, that's the same thing as one and a half customers. We just need one and a half new customers per hour per store."

Now everyone was attentive. This was getting interesting. The boss was finally talking about things a store manager could visualize. After all, you can't do much with a big number like $244,000, but one and a half customers per hour -- that's something store managers understand. Very clever, I thought.

"Let's look at it another way," Popaditch went on. "How much is it per customer?" Several pencils went to work."What's $26.85 per hour divided by 87 customers per hour?"

"Thirty-one cents."

"What's 31? per customer? Well, what's her average ring? It's $1.09. The customer goes into the store and fills her buggy with 10 items, and it's going to cost her roughly $11. What we're talking about here is adding one-third of the average item, 31?, to every shopper's cart. Or add one item to one person's cart, and you don't have to do it for two others. That's all we need: 31? per customer . . ."

A number everyone could absorb.

". . . times 22,000 customers a week comes to nearly $7,000, which is all we'd need to come out on target."

Popaditch had engaged his managers' minds by taking his problem down to their level. The man on the sales floor can't do anything about a quarter-million-dollar revenue shortfall, but he may be able to put one extra item in every third shopper's cart. That's what he's supposed to be good at. That's a problem he can work on.

"Let's look at payroll the same way," Popaditch said to a crew that was now giving him its full attention. "We were over by $27,490; per store, that's $9,163; per week, that's $254; and per hour, it's $3.02. Our average hourly rate is $4.85. So what we're talking about is 62% of one wage, roughly half a person per hour. Could you have done without that?

"Look at it this way. We need to cut $254 per week per store. That's about 52 hours of labor. Each store has about 50 employees, so we're talking about one hour per employee per week -- 60 minutes.

"That's the way we gotta look at our problem: 30? per customer, 60 minutes per employee."

End of speech. It had lasted only 20 minutes or so, but Thifty Scot's store managers had not only gotten a thorough briefing on the company's financial performance, they also knew exactly what their goals had to be to bring it up to expectation. Popaditch had kept them awake, and it hand been real easy: he just talked their language.

Popaditch reminds me of my father. Mom tried to explain things. "Honey," she'd begin her little speech, "we think that until you are a little older it would be better if . . ."

Dad, on the other hand, always came right to the point. "In by one," he'd say, "or you're grounded."

"But, Dad . . ."

"Twelve-thirty."

"Oh, come on, Dad."

"Midnight. You want to try for 11?"

He may have been short on style, but there was no mistaking his message. Grounded -- that I understood: no car, no date. Dad was talking my language. Executives with a message to deliver, not just a speech to make, might consider the point.

Last updated: Feb 1, 1986




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