Docile acquiescence of a problem that chronically plagues performance too often is accepted and referred to as “just the cost of doing business.” These types of problems that mute or stifle performance can usually be partially or completely solved. It may be time-consuming and costly, but an investment to eliminate an issue or even mitigate a heretofore perennial profit drainer can provide a sustained and significant payback.
There are recurring costs in every business, such as the obvious SG&A (sales, general and administrative) expenses that keep the place afloat. Nonetheless, there is a lot of nonsense between the top line and the bottom line of a company’s P&L statement that demands attention.
The best way to identify what can be improved is to assess the IRR (internal rate of return) or the amount of money that can be saved once the cost of the fix or improvement is paid for. As an example, assume the same problem costs your company $200,000 every year. Management makes a guesstimate that for $300,000, the problem can be permanently eliminated. That’s a cheap investment because the payback starts in 18 months and over just five years, returns $700,000. Do an IRR calculation, and it’s not rocket science to determine that this is a great use of resources, even if it takes a mini-moonshot effort to accomplish.
One of the biggest obstacles is that management looks at competitors and says, “This is an issue everyone seems to live with, and we’ll just build the cost into our pricing.” This is a cop-out. Innovative managers instead constantly look at opportunities that many times are disguised as problems and put together a task force backed by the appropriate resources to explore improvements.
For illustration purposes, let’s use retail chains’ inventory shrink, which nationally averages about 1.5 percent annually. Shrink, which is a reduction of gross profit, is typically caused by paperwork errors, waste or more nefarious reasons such as internal theft or plain old-fashioned shoplifting. Reducing this amount to zero will never happen because people make mistakes, and there are always a few bad apples internally and more than a few walking the streets.
Short of strip-searching every employee and customer, or hiring only those who are perfect, a better alternative is to spend money on software, equipment and better procedures. These efforts can dramatically reduce shrink by as much as 0.5 percent of sales, which amounts to serious savings that go right to the bottom line.
The hot spots will be different in various industries, but the concept is the same. Take your biggest issue, envision solutions, commit to the most logical or innovative fix, and then set a time frame for completion. Put one of your best and brightest in charge. And don’t be afraid to fail. Even if you succeed only one out of three or four times, the math likely still works. By accepting “that’s the way it is” as a mindset, you’ll always follow, but never lead.
Michael Feuer co-founded OfficeMax and in 16-years, as CEO, grew the retailer to sales of $5 billion in 1,000 stores worldwide.
