Vol. XXXIII

Dear Managers,

In the past month three manufacturers have notified me that, in order to maintain profit margins, they had “reluctantly” chosen to alter or reduce their current financial responsibilities to their sales organizations. This was accomplished in a variety of ways, including the reduction of our exclusive account base, elimination of commissions on direct orders and, in one instance, simply reducing commissions across the board. Each of these factories is consistently positioned as a leader in their field and is currently experiencing record growth.

Taken at face value, this is an example of management exercising its fundamental responsibility to maintain fiscal profitability for the organization. I sincerely support the profitability of the manufacturers associated with our organization with almost the same tireless enthusiasm that I support the need for the profitability of my organization and those associated with it. All parties must first sustain profitability for a relationship to exist. Prior to an evaluation of each of these conclusions, let’s take a look at the premise for the decisions.

The new year is a critical wake-up call for all companies relating to that elusive profitability issue and controlling or reducing ones fixed costs. Profit and loss sheets are complete for the previous year and, for most of us, hidden but very real expenses have eroded our anticipated profits. How do we possibly get these costs under control and, more importantly, how do we do so with the least amount of interruption and impact on future growth? Obviously, reducing overhead at the expense of growth should be our absolute last course of action. In this scenario we have simply exchanged one critical concern for another.

There are many fixed costs that have no relationship whatsoever to future growth potential. The process begins by addressing these areas. The erosion of profits effects all of us on a relative basis. Following are a few examples that should be addressed by all individuals and organizations in a position to impact and enhance the bottom line.

PHASE ONE: OFFICE EXPENDITURES

Historically, this is the area with the greatest opportunity for cost reductions. Often, a full 20% can be shaved off current budgets with a relentless review of all fixed costs. Savings in these areas have little appreciable relationship to the future growth of the organization.

• POSTAGE: When was the last time you reviewed this money pit? Batch mailings to customers and sales agencies, third class mail for catalogs, and re-negotiating air express charges are all areas worthy of your review. I have worked with a manufacturer for a number of years who continues to mail a single page invoice in a 9 x 12 envelope; we receive these envelopes 3 or 4 times a week!

• OFFICE EQUIPMENT: With technology moving forward on what seems like a daily basis, do we truly need the very latest on the market? Will last year’s model adequately meet our needs? Developing strong relationships with individuals who are familiar with secondary markets creates an opportunity to save from 30% to 50%. Computer hardware, telephone systems and copy machines are just a few areas where last year’s introduction will adequately service our needs. We all enjoy the smell of a new car, but how does that smell translate itself into increased sales productivity?

• FINANCING COSTS: Most organizations work with a line of credit through their bank to even out the ebb and flow of cash reserves. Do you anticipate your needs and activate funds prior to actually using them? I recently changed my credit line to only activate upon checking account overdraft. With careful cash flow management, my line of credit use was reduced by 50%. Have you reduced or eliminated excessive credit card interest charges by using a line of credit on occasion? This can add up to a 50% savings on interest rates alone.

• FACILITY COSTS: With interest rates relatively low, is there an opportunity to purchase a facility that can meet your current and foreseeable needs? I recently purchased our office building, which will significantly reduce operating expenses in its third year and beyond. If leasing is your only realistic option, have you taken a proactive role in securing favorable rates for your current and future needs? Simply knowing the current market and the options available will assist in your negotiations.

• PROMOTIONAL EXPENSES: The desire to continually expand our trade show presentations has dramatically increased costs for many of us. As exhibitors, we are very important to these show management companies. I have found them to be willing to assist in managing costs (such as storage fees, lighting and drayage) by negotiating long-term commitments; very few people even ask. By the way, are you charging these fees on a credit card to earn frequent flyer mileage for future business travel awards? Strategic credit card purchasing can make a significant impact on your travel budgets.

By nature, office expenditures have a tendency to compound themselves year after year. The solutions come from asking the question, “Do the systems that were established to meet the needs of a previous time continue to create an advantage in today’s market?” It may be time for some cost-effectiveness house cleaning.

PHASE TWO

This area of review may not return the 20% seen in Phase One, yet even a 10% cost savings in areas with much larger budgets can be very significant to any organization. This review (and the ultimate reductions) will begin to unlock the doors of ones organization. There is the potential risk for an emotional price as compared to Phase One. Approached correctly, the risk is limited and will have no significant impact on the future growth potential for the organization.

• MANUFACTURING COSTS: I have toured many facilities and was amazed to view the varied levels of productivity found acceptable from one facility to another. I saw warehouses full of obsolete product, production lines slowed by little or no departmental management and pride, and little incentive to correct the problems. Certainly these are only surface judgments, yet has corporate management abandoned incentivising the productivity of those at the bottom of the scale for a job done accurately and well? If so, is it time to revisit out-sourcing this critical area of business?

• STAFFING COSTS: As an alternative to increasing staff salaries, have you considered increasing vacation time in alternating years of their review? I have often found this to be very well received. In many cases, and with proper preparation, other staff members can assist with the temporary additional load.

• MANAGEMENT AND MARKETING COSTS: With just a bit more planning, can that four-day trip be condensed into three days? Can the three-day trip be condensed into two with an earlier flight? Have we adequately negotiated the most favorable advertising rates, based on the size and duration of our advertising? Simply by creating an “in-house” advertising agency, you can save 20% off the top!
Have we finely tuned our budgets for the cost of printing sales materials, catalogs and order forms, by getting three to four bids? Printing is a very competitive field, and a great place to leave money on the table.

Have you considered an in-house staff member to manage and monitor these and the many other costs in doing business? You may find their position will pay for itself, again and again and again.

PHASE THREE
(You had to know there was a sacred cow somewhere in our midst)

In my twenty-five years in business I have worked with hundreds of manufacturers. As my experience relates to competent managers and sales professionals, I have never seen one that was being over compensated. I have certainly seen incompetence in sales and management being over paid but, evidently, ownership found this scenario to be acceptable.

The implementation of Phases One and Two have in no way impacted the heart of your organization. This heart is shared between your management and sales staff. I can’t help but ask, “Has ownership thoroughly exhausted all avenues of cost management prior to carving out the heart and source of growth for their organization?”

Without question, there is a time and place to implement Phase Three cost reductions. There is a very real moment when costs exceed revenues and profitability no longer exists. There can be no other alternatives; all Phase One and Two cost analyses have been addressed. Survival becomes ones singular concern and, ultimately, a heart transplant is the only course of action. On this occasion, allow me to be first donor in line to assist in protecting the long-term interests of the ailing organization.

Personal Regards,

Keenan

INTERPERSONAL© is published by INTERPERSONALBIZ.COM, Keenan Longcor, Editor, ©2009. Duplication of this publication is permitted for both personal and business use. Excerpts may only be quoted with acknowledgment of INTERPERSONAL/INTERPERSONALBIZ.ORG as the source. For re-publication rights, please contact the editor at KEENAN@INTERPERSONALBIZ.COM