INC.: You make this all sound very easy. It's as if you set up the bonus program, give people the standards, send out the monthly reports, and -- presto -- the business is transformed. The losers become winners.
HENDRICKS: It's not quite that easy, but there's nothing very complicated about it, either. It's all basic stuff. Business is basic. You've got to be able to identify value, and you've got to know how much it costs to bring it out and where you're spending too much. We're giving people the tools to do that. If they use the tools, they can turn the business around in no time. We've got a window plant right here in Beloit that we turned around in two months.
INC.: How did you do that?
HENDRICKS: We just applied these principles. The plant lost $650,000 last year. There were 18 employees, and I knew it was overstaffed by a third because of the 30% rule. Remember, in any business, there's 30% in lost productivity just because of people goofing off. So we went around the plant and asked people, "What if we paid you 50¢ more an hour? Could you do your job plus this other one over here?" The ones that said, "Oh, yes," got the job. We laid off 6 people in one tour of the plant. Now that the 30% is out of the way, I go back to the employees and say, "What can I do to make your job quicker and easier?" They come up with the idea of a production chart to show the improvement. In two weeks we go from 2.8 hours a window to 1.1, which means we've more than doubled our output with a third fewer people. This is in two weeks! Meanwhile, I'm making sure they get rewarded as the production goes up -- a 10% pay increase, 20%, and so on. But now we have a quality problem. So I go to the guy at the end of the line, the one who wraps the windows. He's the last guy to see the finished product before it goes to the customer. I make him the foreman. I say, "I don't want you ordering anybody around, and you can't hire or fire, but I want to know when there's a part on the window that isn't proper." He never had to call me once. He went back to the people in the plant, and he said, "We've got to do this better. This part has a rough edge, and the window isn't going together right." Our costs go down another 20%. Wages go up another 20%. We went from building 30 windows a day with 18 people to 100 windows a day with 11 people. Two months.
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INC.: Yes, Ken, but that's you. What about a manager who's not used to operating that way?
HENDRICKS: We do everything we can to teach him, and we make it awfully hard for him not to learn. At our regional meetings, we put up charts comparing how the stores did in each category. We'll have a chart on inventory turns, with all the stores listed in order of performance from top to bottom. We'll do the same thing with receivables, sales per employee, vehicle expense, and so on. I don't have to say a word. Nobody wants to be on the bottom.
INC.: What's the difference between the stores at the top and the bottom? Are the ones on the bottom in tougher markets?
HENDRICKS: No, it's execution and the learning process. Remember, we're growing 35% a year, so a lot of the managers are new, and some of these guys literally don't know how to read a P&L when they start. We've got one manager who had been a salesman. He came here for training three times. He'd say, "I don't mean to sound stupid, but would you explain the P&L to me one more time?" Today he's one of our best managers, but he was unprofitable for two years.
INC.: But what exactly are people learning? It's not just a matter of understanding the numbers, is it?
HENDRICKS: It's paying attention to details. It's seeing how all the details add up. I have one manager who kept giving me a hard time about our trucks. I told you before, we don't buy new trucks. When we get them, they're falling apart, and we rebuild them from the ground up. By the time we're through, we may have $25,000 in that truck, but it's worth $50,000, and it runs as good as new. Anyway, this store was spending a lot on maintenance, and the manager was blaming the trucks. He said they were junk. He wanted to lease new trucks, thinking he'd save on maintenance. I said, "You're wrong," but I let him go on handling the problem his way, and it cost him his bonus.
INC.: Why?
HENDRICKS: Because he didn't have an equipment problem. He had a management problem. One day I'm standing in his yard, and a truck drives out with a full load. As it goes around the corner, I can hear the driver grinding the gears. This is a 10-speed truck, and he's going from first to fourth to eighth to the end, because it's faster that way. He's a lazy truck driver. So I say to the manager, "Let's go inside and pull the maintenance on that truck." Sure enough, four clutches in one year at $1,800 each. He spent $7,200 because of that driver. That's half the driver's wages. Do you know how much roofing you have to sell at a 20% margin to make $7,200? $36,000. The point is, you have to pay attention to the details. If you're spending too much on maintenance, you have to figure out why. Today that manager has the lowest truck-maintenance costs in the company, 0.03% of sales, and with the same trucks as before. He got one of the largest bonuses this year.
INC.: It sounds as though you stick with these guys a long time.
HENDRICKS: Yeah, well, I want them to catch on on their own. I want them to start doing things I didn't think of. It's important for them to feel the business is theirs, and not mine. Sometimes that process takes two, three, even four years. But once they learn how to manage, they're there for life.
INC.: What happens?
HENDRICKS: They see the bonus money, and their employees see the bonus money. Nobody really believes it, or gets it, until it happens. But once they ring the bell, everybody's on and things start falling into place. Then you'll see them just go up, up, up.
INC.: Meanwhile, they're losing money, aren't they?
HENDRICKS: Yeah, or they're just breaking even.
INC.: Doesn't it bother you to be carrying these guys for years?
HENDRICKS: Not really. As long as I feel they're giving it an honest effort, the money is no big deal. That's a mistake my competitors make. They are out there for the money. They want people under their thumb. I don't. I want systems in place. I want people who can figure out a better way and let me know what it is, so we can improve on what we've got. I'm trying to create entrepreneurs. My competitors are looking for more and more control. That's why I have no fear of their stealing my secrets. I really don't have any secrets. Everything I do is basic business. My competitors would have done it a long time ago if they understood it. I'm beginning to realize they don't.
