Unlike its competitors, the company uses No. 2 lumber, which has more knots than the No. 1 premium grade but costs less. The company can still produce superior products because it cuts the defects out of the raw material. "The furniture's a hell of a value for the money," says Jerry Epperson, a furniture-industry analyst with Mann, Armistead & Epperson Ltd., in Richmond, Va. The 1996 savings from No. 2 lumber: $3.25 million.
K&G Men's Center Inc.
Atlanta; $88-million discount-clothing retailer
Minimal operating expenses are credited for the 30% to 70% price breaks that have fueled K&G's growth. The company's 19 stores are located primarily in low-cost warehouses, where some rents run $3.50 a square foot versus $22 at upscale malls. Shops are open just Friday, Saturday, and Sunday, which holds down labor costs. Overall operating costs represent only 16% of net sales. At competitor Men's Warehouse, they account for 31%.
10 Tips from Tightwads
WANNA BE CHEAP LIKE THE COMPANIES WE FOUND? THEN . . .
- Don't offer meal per diems; employees have to eat anyway.
- Use secondhand furniture; a new desk isn't going to make a company more profitable.
- Buy used machinery for low-tech jobs.
- Pay for major purchases within 10 to 15 days for the 2% discount.
- Self-insure as much as possible.
- Attend fewer conferences and drop out of all trade associations.
- Buy directly from manufacturers if possible.
- Give employees certificates or small monetary rewards for coming up with great cost-cutting ideas.
- Have managers scrutinize operational expenses monthly.
- Don't hire secretaries; you don't need them.
Did We Say Cheap?
WHAT WE REALLY MEANT WAS . . .
Cheapness may be hip in this age of lean and mean, but commentator John P. Kotter--a renowned Harvard Business School professor and author--says cheap is exactly what the best low-cost operators are not.
INC.: So even Southwest Airlines, famous for undercutting its industry, isn't cheap?
KOTTER: Absolutely not. Cheap is trying to get your prices down by nibbling costs off everything. If you're selling paper plates, you make them thinner. You hire people at minimum wage. Mindless stuff. But customers will eventually see the cheapness of it all. They'll notice that the paper plates don't work as well. They'll get tired of going into a grungy store with surly personnel, and they'll simply say to heck with it if they have an alternative. They'll shop at Wal-Mart.
INC.: So how do the smartest low-cost players keep their costs and prices down?
KOTTER: By being unbelievably productive. That's what people don't understand. Those companies are thinking "efficient," which is very different from thinking "cheap." They recognize that you don't necessarily have to take a few pennies off of everything. Sometimes you might even spend more.
INC.: For example?
KOTTER: Southwest Airlines doesn't try to shave costs by buying used planes; in fact, it has the youngest fleet in the business. But it buys only one type of plane--and that results in all sorts of efficiencies. You don't have to inventory spare parts for different kinds of planes, for instance, and you don't have to have mechanics with expertise in 10 different airplanes, either. Southwest is not at all a cheap company. It's an efficient one.
INC.: Why don't other airlines emulate Southwest?
KOTTER: Because once you have an established pattern, it's hard to radically change.
INC.: Has the cheap model been discredited?
KOTTER: Not yet. I think lots of people are still embracing it in one way or another. Perhaps they haven't seen some of the consequences, including those to employee morale. Cheapness can make workers feel degraded, which means they won't be as productive.
INC.: Is cheapness ever worthwhile?
KOTTER: It's hard to come up with a situation where cheapness beats the more clever focus on productivity. Cheapness tends to be associated with a person or a small number of people who are frugal and make all the decisions. The paradigm I'm talking about almost always demands a larger number of people playing the game. The clever ideas don't come from one or two people. In an increasingly competitive world, the more complicated productivity paradigm is beating the cheap paradigm partly because you're getting more brainpower into it.
INC.: We found a company that is relentless in its search for ways to reduce costs. When this company's trucks deliver products, they return carrying another company's goods. I think the term is freight for hire. Isn't that an example of cheapness working?
KOTTER: That's not cheap. Cheap is looking for a less expensive truck. Your example is closer to the high-productivity paradigm. That's clever.
INC.: Another company has figured out a way to use a lower grade of wood to produce high-quality furniture at substantial savings. Isn't that cheap?
KOTTER: I bet the decision to go with that wood was a complex one. I bet it wasn't one guy who made the decision alone but a team of people deciding ways to better use company resources. It involved figuring out how to use and laminate the wood to make it look like an equal or a more expensive grade. That wasn't a simple one-two decision. By contrast, the cheap syndrome is kind of mindless. Make the wood thinner. A 10-year-old can think cheap but would have a hard time with productivity. That furniture company realized it had only x bucks for production and figured out a way to make the most of those x bucks. That's productivity.
INC.: Are cheapness and productivity mutually exclusive?
KOTTER: Cheapness as I've defined it is almost always a worse paradigm because it's much less clever. In the cheap model, a CEO might decree that all furniture at corporate headquarters be secondhand. The productivity model would raise an infinitely more complicated question. Why do we have furniture in the first place? Maybe we can get away with less furniture if we use it in a different way.
