INC.: There's something I don't get about this. Here you have a manager whose business got into trouble because it was filled with waste. Why hasn't he already eliminated the waste?
HENDRICKS: Because he's not aware of it. He doesn't see the waste. That's true of most businesses. People don't see the waste because there are no standards. How many employees should you have? How much rent should you be paying? How fast should you be turning your inventory? People don't know the answers. Sometimes they don't even know the questions.
INC.: So you give them both the questions and the answers.
HENDRICKS: Right. For example, we want $450,000 in sales per employee. That's our standard. Well, the guy in this failing business hasn't ever had a standard like that to go by. He might be working with three employees at $150,000 per employee, which means he has two too many. Chances are, they're bitching about their jobs, too, saying they need more help. Bored people are the most unhappy people in the world. They hate their jobs, and they complain about how lousy the company is, as demonstrated by the way it uses their time. People have to feel good about getting a paycheck. Otherwise, they look for a reason to level it in their own minds. That comes back to trust and character. You destroy character when you employ too many people to do a job. Busy people are happy people.
INC.: Let's stick with the standards for a minute. How many do you have, and where do you get them?
HENDRICKS: We have standards for everything. We get them from experience. I've done most of these jobs myself. I know how to turn inventory because I've done it. In my roofing company, we used to fix our own trucks, so I know what that costs as well. Real estate? I spent 10 years buying and selling real estate. The point is, if you can do a job, you can figure out what you should be spending. Or you can make a study of who does something better than anyone else, find out how he does it, and then use that to set up your standards. But you have to have standards, or you won't know where the waste is.
INC.: But how do you figure out what categories of standards you need, what numbers you should be measuring?
HENDRICKS: You have to look at your P&L. Where are you spending money? Everywhere you've got an expense you need a standard to tell you how much it should be. Then you have to show your people those numbers on a regular basis, so they know how they're doing. And make sure they get a big reward when they beat the standards.
INC.: How often do you show people the P&L?
HENDRICKS: Every month. They get it on the 10th of the month, both for the store and for the whole company. Everybody sees the numbers on the same day.
INC.: You do all this by computer?
HENDRICKS: Hell, no. This is manual. We've got computers in the bigger stores, the ones with more than $3 million in sales, but nobody's on-line to the central office. I checked on what a computer system would cost for our company, and it was something like $6 million. Our whole system -- people, mail, everything -- doesn't cost us $500,000 a year. That's less than the interest on the damn computer system.
INC.: How far down the organization do you let people see the numbers?
HENDRICKS: Everybody sees the numbers. Hiding the financial statements is the single biggest mistake I see owners making. If they're losing money, they're afraid employees will find out and quit. If they're making money, they're afraid employees will leave and start a business of their own. Meanwhile, they've got people who have no idea what it costs to do business. We've asked new employees how much they think we make on a $20 bundle of shingles. The answers range from $12 to $6. This is a 20% margin business. We're making $4, tops. A guy making $8 an hour can screw up and come back two hours late from a delivery, and he's just blown the job without knowing it. I absolutely want them to see the numbers and know what they mean.
INC.: OK, but how? What if they can't read a P&L? What if they don't care?
HENDRICKS: You've got to train them. You've got to show them how it works. We make it as simple and as clear as possible. Our whole management system is on two pages that we send out to the stores each month. One page is their P&L for the previous month, with comparisons with a year ago. It gives them everything -- sales, cost of goods sold, salaries and wages, rent, vehicle repair, travel and entertainment, the works. On one page. Then there's another page called the contribution report, where we show the corporate costs being allocated to the store, deduct those from its net operating profit, and calculate how much annual bonus they've earned so far, if any. If you run a store, you live by those two papers. You show them to all of your employees, and you say, "Hey, we've got to beat the standards on this." Because if you beat the standards, the company makes money, and so do you. The employees get a big share of the store's profits.
INC.: How is it divided up?
HENDRICKS: The manager gets 40%, and the balance is distributed at the company's discretion. In a lot of cases, that balance comes out to $7,000 to $10,000 each -- for secretaries and truck drivers whose regular wages may be $18,000, $20,000 a year. You're talking about big incentives here. We have managers earning bonuses of $80,000 a year. So everyone has a stake in beating the standards.
INC.: Do they have standards for everything on the P&L?
HENDRICKS: Yes. We give them a standards sheet that runs down the companywide P&L for the previous year. It shows the percentage of sales represented by each line on the P&L. You can compare those percentages with your own and get a pretty good idea of how you're doing.
