3 minute read
OPERTryIING OPPORTUNITIES
Wally Lynch
Builders Express, lnc. 11550 Plano Rd.
Daf f as, Tx. 75243
LVally Lynch, after two years of writing for thb magazine on delivery management, is exponding hb monthly column to the wider range of operatiors in general. Hb expertise and experience will provide valuable industry insights for our readers. We are pleased to present the Jirst in hb new series of columns-ed.
T HERE is a cost/sales relationship rhat by segmented associations operating data is published in "lump form" or as averages. One such publication indicates their participants spent money to make money in a certain relationship to sales and profits.
I has long existed in the business community to generate profits. When incoming sales exceed outgoing expense, earnings result. If the reverse occurs, losses follow. To the casual observer. businesses are profit ogres which reap enormous gains yearly for little or no effort andlor expense. The process, by magic, goes on to the benefit of a very few and, seemingly, is never ending.
In truth, as published by a variety of sources, businesses annually spend on average about 970 to produce $l in sales and 30 in pre-tax profits. It's not really the rosy picture for management that the outsider looking in perceives it to be.
From whatever source, each year the average management must somehow come up with 970 to pay the costs ofevery dollar of sales generated. Operating statements and accounting data provided is sometimes awesome and difficult to deal with, but, when reduced to their common denominators, all business expense may be lumped into four major categories.
Within these areas exist the total expenditures made each year to gain 30 for each 970 sent out the company's door in search of sales. It has always appeared to this observer that great benefits to profits €ue more easily obtainable when management balances its attack proportionately on sales production simultaneously with operational effectiveness. Reducing 970 to 96c has always seemed imminently easier to do to produce 40 in profit than to raise sales enough dollars to accomplish the same feat. Actually, if volume remained constant and expense were reduced by the one penny, profits would increase by 33.3s/0. If expense, in the example, could be reduced by 30 it would be the same as doubling sales. Volume solves a lot of problems, but operating effectiveness and profits are not among them.
From these basic beliefs have come the P.A.I.D. Program, the Black Hole series of books on managing operating costs, this column entitled Operating Opportunities, and P.A.I.D. Associates, a Division of Builders Express, Inc.
Competing and thus surviving, and more important thriving, are what the program is all about. P.A.I.D. is an acroymn for the four major expense categories of the retail world of the lumber and buildine materials dealer.
(l) People: Salaries, benefits, payroll taxes, purchased services, etc.
(2) Advertising: Advertising, training, public relations, entertainment, contribution, dues and subscriptions, etc.
(3) Inventory: Cost of goods sold, receivables, bad debts, shrink, discounts, etc.
(1)IeoPle
(2) Advertising
(4) Display: Depreciation, truck and auto expense, repairs, insurance, taxes, utilities, rent, supplies, licenses, equipment. etc.
It's virtually impossible to categorize the classic lumber and building materials dealer in a meaningful way, but the P.A.I.D. Program provides a workable approach. In a fragmented industry served
(4) Display
12.540/o $ 125,400 1.07s/o S 10,700 5.73V0 $ 57,300 2.54u/o$ 25,m
(3) Inventory 78.120/o $ 781,200
(5) Profits Totals100.0090 $1,000,000
Viewing competition through the P.A.I.D. Program works something like this:
(1) Discounter: Lowers people expense so other costs may be increased accordingly. Average profits remain about the same.
(2) Cataloger: Reduces all other expenses proportionately so that advertising costs can be between 890 and 1090. Average profits remain about the szlme.
(3) Cash & Carry: Reduces inventory pass through costs by reducing services and holding one price for all, paid in cash. Margins are higher but benefits are lost in expense shift to other areas. Average profits remain about the same.
(4) Warehouser: Reduces all expense in proportion to disploy which moves to a high level. Oddly, occupancy costs go up and the industry calls it a warehouse. Average profits remain about the same.
Somewhere on either side of the "classic dealer," every going operation sits manipulating their own P.A.I.D. Program for survival. This simplistic view of competitors answers many questions posed on how to survive in the "Chain Age." An equally basic approach to managing under the concept is to ask who is responsible for the effective use of each of the four cost centers. Finally, this approach to profit through error elimination must answer how each expenditure best serves what customer.
The operating opportunities inherent within the answers to these questions and the P.A.I.D. approach to profit will be the subject of this column each month. It will be dedicated to answer questions in these specialized areas for the non-specialist.
