It’s amazing to us how little people know about how companies operate and make money. The political rhetoric has twisted the word profit to mean greed. Corporations are made out to be villains when in fact 80% of all companies in the country (and in this industry) are small business entities which create the majority of new jobs.
While this is disappointing, we see it as an opportunity for owners and management to create a dialog about their company, recognizing employees as stakeholders. How can they get better performance? How can you incentivize them to increase profitability? What are you as the business owner willing to share with them?
We feel it is extremely important to teach first-line department managers and then full-time warehouse employees. If you use a large contingent of part-timers, you may not want to involve them to the same degree.
To keep employees from going glassy eyed, you’ll need use of real creativity in trying to get your main points across. Many people are not analytical and don’t relate to numbers easily.
Here are six key topics which affect your profitability and a few ways you might consider explaining their impact on your business. Be prepared for some revelations and “aha” moments.
Why We Need to Make a Profit
How do you spend your money from sales? Show warehouse employees the biggest expense categories like inventory, wages, salaries and benefits, outbound shipping and marketing. Find ways to simplify the categories and stress their importance. For example: On every dollar of sales we make, we spend 50% on inventory (assuming a 50% cost of goods sold).
How much profit does your company make? For many direct-to-customer businesses it’s just 5% to 10% net profit. Given those thin margins, what positive things can you talk about in terms of profit and reinvestment in areas like new facilities and systems – and contribution to employee benefits?
Every employee wants to earn more. In areas with the greatest potential of pay-for-performance increases, like picking and packing, how can you address this in a positive way? What kind of productivity increase would you need to see in order to bump up key producers? With low unemployment, there is great risk in not doing so given rising labor costs and employee turnover.
This is the largest balance sheet asset. One thing warehouse employees can do is process dock receipts quickly. If you can’t locate product, you can’t ship. Stress the importance of cycle counting, inventory accuracy and security. Dusty and damaged cartons appear like distressed product to a customer. You can also discuss vendor claims and reworking returns for sale, the importance of inventory turns and liquidation of overstock.
Cancellations and Returns
These both decrease the gross demand generated by promotions. They also erode gross sales and profitability. What percentage of cancellations does your business experience and why? Is it due to back orders, late vendor shipments or product problems? What can be done to reduce cancellations?
What are the reasons for returns by vendor/style and SKU (i.e. sizing and color, inadequate product copy on your website)? What can be done to reduce your return rate?
The Customer Experience – Good and Bad
Our work over 32 years shows the cost of an error is in the range of $35 to $50. That’s bad but let’s talk about error rates from the customer’s perspective. A 1% error rate might sound efficient but how does that translate to the customer experience?
A 1% error rate for a seasonal volume of 100,000 orders means 1,000 customers didn’t receive their package as expected. In terms of teaching employees about your business, what are the sources of your major errors, such as mis-picks and damage in shipping? How can we decrease the error rate?
For most companies this expense exceeds the sum of all other fulfillment expenses including management, labor, packing materials and facilities. Most companies are spending a lot of effort trying to control this expense.
In the past year we have found that smaller companies may not be effectively dealing with products that creates dimensional weight issues. You have to find the proper balance between products being too fragile, where a reduction in dunnage can lead to damage in transit, to the other extreme of excessive packaging materials and shipping air. This cost is only going to increase so make sure your employees are focused on it and understand the issues.
As you approach the New Year, find ways to make your warehouse employees partners in achieving progress. Invest time in their education, including your business goals and sharing in your success. Once you get a program going share results at least annually.
Curt Barry is Founder and Chairman of F. Curtis Barry & Company