Increasing People Productivity

Transcription

1 Increasing People Productivity The Profound Indicator of Distributor Profitability An I.B.I.S., Inc. Executive Brief by Brent R. Grover Research Fellow NAW Institute for Distribution Excellence

2 1 Introduction How much emphasis does your management team place on people productivity? 1. We re on it! We pay close attention to our Personnel Productivity Ratio ( PPR ). 2. Not enough. Our team should pay more attention to PPR. We know we re overstaffed. 3. Very little. We don t track people productivity. We manage more by gut feel. Bringing up the subject of people productivity conjures up images of an evil dictator trying to sweat more work out of his subjects. Some of us may think that the secret to high labor productivity is trying to get employees to do more work for lower wages. A more enlightened view is working smarter. People productivity is actually much too complex to try to address with a simple solution. Distribution is such a labor-intensive business that it s nearly impossible to generate superior profits if productivity is a major weakness. Measure overall distributor people productivity with the Personnel Productivity Ratio (PPR): Total Compensation (including benefits) Gross Margin Dollars People productivity varies widely in different distribution industries. For example, in a recent year median performer PPR ranged from 51% (pet supplies) to 67% (electrical supplies). We have observed the PPR difference between high profit and mediocre performers in the same distribution industry range as widely as 4 to 10 percentage points. Productivity in branch-based distributors can be measured on a functional level (by department): 1. Sales functions: Sales, sales management and sales support compensation 2. Back office functions: Accounting, information systems and clerical compensation 3. Physical distribution functions: Handling and delivery compensation This article talks about three ways to improve people productivity for distributors: (1) Eliminate unnecessary work; (2) Become more efficient; and, (3) Lean distribution.

3 2 Eliminate Unnecessary Work Traditionally, distributors create a value package of services for their customers and they tend to provide the entire bundle to all customers regardless of needs and cost to serve: Many customers don t need (or want) the services of an outside sales representative. These customers may be served best (and at much lower cost) by a proactive inside sales rep, the customer service department, electronic commerce and/or web marketing. Some customers don t need same day or next day deliveries. They don t need shipments to come in on the distributor s truck when a less expensive parcel service would do the job. More and more customers are paying distributors by credit card. The bank fees are 2.5% of sales, or more, plus personnel costs. Many of these customers would be willing to pay by EFT (electronic funds transfer). Distributors tend to do work that doesn t add value for customers. It s tempting to try to treat all customers equally by providing services that customers don t need. Become More Efficient As a rule, when distributors installed their first computer systems they insisted that the programmers duplicate the business processes that the staff was accustomed to. Consequently the methods and procedures for routine tasks such as replenishing inventory, cycle counting, approving credit applications take too long, require too much labor and yield poor results: Newer technologies can perform routine tasks faster, better and cheaper. Technology also enables new methods (such as live meetings via web). Distributors have invested least in technology to make the sales process more efficient. This is counterintuitive as selling is the most expensive business function, consuming about half of total compensation and benefits. Being a labor-intensive business, distribution profits are highly sensitive to obvious inefficiencies such as unnecessary overtime. It s more difficult, but even more important, to identify inefficiencies caused by hiring the wrong people and high turnover.

4 3 Lean Distribution: Eliminate Waste The Toyota Production System is the origin of lean distribution. The focus of lean is the seven wastes in manufacturing, as adapted to services and particularly distribution. Examples include time-wasting delays, duplication of effort, unclear communication, stock outs, service errors and unnecessary movement: As consultants we often see unnecessary overtime built in to the warehouse and delivery schedules. Truck routing is still done manually by feel by many distributors who would eliminate much unnecessary cost by automating the function. Distributor inventory levels are often excessive, and ironically stock outs too frequent, due to manual overrides and underutilization of the replenishment system. Distributor pricing is often done by staff without market pricing information and without using the available tools to do pricing faster, better and cheaper. Long before the term lean management became popular, well-run distributors learned to reduce waste in both people and non-people areas of their companies. Wasting time is critical for a business in which almost 60% of gross margin dollars are paid out in employee compensation and benefits. Final Thoughts As consultants, we ve never seen a high-profit distributor with low-productivity employees. Outstanding profit performance and an excellent (low %) Personnel Productivity Ratio (PPR) go hand-in-hand. Call now to discuss how to leverage technology and drive productivity

5 4 About the Author Brent Grover Brent Grover founded Evergreen Consulting in 2001 as a boutique firm advising companies in the wholesale distribution channel exclusively. Brent is a Research Fellow at the NAW Institute for Distribution Excellence, faculty member at Case Western Reserve University and a board member at five companies. He is a CPA (inactive) and winner of the AICPA s Elijah Watt Sells Award. Brent was CEO and co-owner of a nationally known and highly innovative distributor (National Paper & Packaging Co.). He started his career in consulting at Arthur Andersen & Co. He has written nine books and many articles on distributor management. Brent also writes a weekly blog covering the latest trends in the distribution industry. About I.B.I.S., Inc. I.B.I.S., Inc. is a premier Microsoft Dynamics Partner with over 26 years of experience implementing Microsoft Dynamics AX, GP, and CRM solutions along with Advanced Supply Chain Software for distributors and manufacturers. With four Microsoft Gold Competencies, including enterprise resource management (ERP), customer relationship management (CRM), business intelligence (BI), and application development, IBIS has the expertise to implement, customize, and support a wide range of Dynamics business applications. IBIS is a two-time winner of Microsoft Dynamics Outstanding Partner of the Year Award, the winner of Worldwide Partner of the Year Award for Microsoft Dynamics GP, a Worldwide Finalist for the Microsoft Dynamics AX Partner of the Year, a Microsoft Global Independent Software Vendor Certified for Microsoft Dynamics, and a ten-time Microsoft Dynamics Inner Circle Partner. IBIS is AMR Research Industry Certified in distribution and discrete manufacturing. About Advanced Supply Chain Software for Microsoft Dynamics AX Advanced Supply Chain Software for Microsoft Dynamics AX powered by IBIS is the leading supply chain management solution for distributors and manufacturers who want to optimize their supply chains for profitability. Fully embedded in Dynamics AX and designed in partnership with industry and supply chain experts, Advanced Supply Chain Software for Microsoft Dynamics AX is uniquely suited for the supply chain challenges of a new generation.