A burgeoning business comes with many costs. And if business owners are not careful about these minor expenses, the costs can often exceed the profits, placing the entrepreneur in some serious problem. In order to cater for growing costs, most distribution businesses consider limiting the number of employees. This in turn shifts the work load on the shoulders of existing employees, slowing down the operations and ultimately the profit.
In order to effectively reduce costs, it is very important to first understand what cost reduction is. It is important to realize that cost reduction doesn’t simply happen from a single business area. Furthermore, in order to truly work against the triggers that increase your costs, it is best to break it down into variable and fixed costs.
Fixed costs are the ones that are not dependent upon volume and stay consistent e.g. rent of the building etc. On the other hand, variable costs are the ones that change based on the volume e.g. packaging of products, fuel of trucks, direct labor etc.
And then there are costs that are contain both components. For example management and electric costs may be fixed; however, if the volume changes, the cost starts to vary too.
Therefore, if you want to cut down costs, first you need to clearly figure out the right tools to measure the amount of cost being incurred in the first place.
Measuring costs can get tricky. Therefore, it is best to keep the comprehensive picture in mind and then slowly work towards all areas and their minutest details. Following are the most significant cost components in any distribution business.
- All types of labor (direct, indirect, fixed staff vs. seasonal staff)
- Losses in stock
- Low production costs
- Low quality costs
- General expenses such as electricity, heater, water etc.
Before we discuss in detail about each of these areas as how distributors can work towards saving costs, it is important to have a comprehensive picture first.
The first thing in figuring out the cost process and its impact on your business is to be able to fully answer these questions.
Why is it important for you to reduce costs? How much should you be cutting down your costs? Are you sure that the costs that you are working to cut down will do you good in the long run?
Is your data accurate that depicts that your costs are exceeding that of your competitors? Or is it that you are just cutting down costs so that your coming quarterly profit and loss statement would show encouraging stats?
While deciding to cut down on costs, it is very important to have a solid motive with a sound planning that would span around quite some months.
Quick solutions can often play havoc with your business infrastructure; therefore, it is important that you implement properly planned solutions that have long term, positive impact on your business in terms of finances and overall quality of the operations.
Once you know your strategy for your cost reduction, you can work on gathering useful data.
You might be able to obtain data prevalent to the costs occurring in your business, but it is probable that it won’t be available in a format that can come handy to you.
It is best to have data in the following format. If you don’t have it, then work towards converting it into a form that is usable by you.
It’s best to have data from the past three years that is broken down into months. This means that you should be have a data for the past 36 months.
- Labor costs should be broken down into direct and indirect costs. The contributors of direct costs would be staff that performs hourly work and indirect costs would depend upon salaried management or supervisory staff. Direct costs can further be broken down into permanent and temporary staff.
- An average of orders and items in each order should be obtained for distribution costs. The best way to sort out this data is by considering top 10-20 customers based on the orders and items that they purchase, since nearly 80% of the volume comes from only 20% of your customers. The service type for these orders such as overnight, 3-day etc. should also be taken into consideration so that cost of each service type can be taken into account. If your distribution operations are not outsourced to another company, then you should also gather data related to costs of labor, fuel and maintenance of truck etc. Lost/damaged items during transit add up to business’ costs and should definitely be noted down.
- Any losses in the business stock are to be noted down in separate sections of month, shift timing and product type.
- Costs related to packaging should be sorted out on basis of tape, packaging material and so forth.
- Direct labor costs should also be segregated on basis of permanent and seasonal staff, shift timings etc.
- Costs related to low quality should be taken into consideration by segregating amount of time spent in focusing on the issue, reporting and taking measures to remove the problem. Any rebates or discounts given to customers because of low quality should also be kept in record.
- General costs such as heat and electricity should be noted down for every month, shift and department.
Now let’s discuss about the possibility of cutting down costs in each specific area.
Cutting Down Labor Cost
Costs related to labor are normally the one’s playing a toll on the business’ infrastructure. However, the best thing about these costs is that they are easiest to take care of. But if your cost reduction policy doesn’t follow a well-defined plan, chances are that your business would suffer a greatly on productivity, quality with some notable stock losses. Therefore, if you are looking to make your cost cutting process in labor successful then you should invest some time into careful planning and then implementing it gradually so that you can achieve success in cutting down costs without having to compromise on the quality or productivity of your business.
To deeply understand the cost cycle in labor, consider the shift and section and the correlation between direct labor costs and volume.
As a rule of the thumb, if there is a difference of 10-15% of lower cost between employed workers and contractual labor, then with increased training costs and compromises on quality can lead to greater costs in the long run. So if you are considering turning everyone into a contractor, it won’t be a good idea for your business. The best way to cut costs is to take most of services from your staff and if there are still some hours that are not worked on, you can pay your permanent employees for overworking. Setting up some targets and then analyzing who meets them most efficiently is a good way to fish out the top talent within your business. You can also increase efficiency while keeping your costs controlled by motivating the top performers to relate their experience to everyone else.
Being open to workers from different backgrounds and ages also helps in developing an efficient, productive workplace. If you are open to hiring, men/women, young boys/girls and elderly, chances are that your labor force would be extremely flexible, yet productive and cost-friendly. This way, you can also easily point out which crew is least productive and address the issues by providing suitable training.
Tailoring Distribution Cost
As a distributor, if you have outsourced your transport, you must have negotiated at rates that can help you save some extra bucks. But beyond that, how can you possibly control your distribution expenses that seem to have stepped on the pedestal? Consider the following ways:
- The size of your order. The greater the size of order, the less will be distribution costs. Consider ways that would encourage your customers to consolidate orders. If your customer is ordering on a daily basis, think of ways that he starts ordering two or three times a week so that your shipment costs are controlled.
- Destination of the order. You might have some customers based at locations that might be costing you too much on your shipment. In such cases you could either consolidate the order or pitch in new customers so that you can ship over a greater volume and control your costs.
- The level of service being offered. Are your distribution partners charging for your services which you are offering to your customers free of cost? A free service for high volume orders is suitable, however, if you are delivering for small orders, make sure you get paid for your service.
Toning Down Cost Related To Stock Loss
A very difficult analysis to make, but worthy of all the pain.
In case your warehouse is non-automated, then product misplacement can often be an issue. Segregating high quality stock from low-value products, or looking for products that are quick moving can fix the problem; however, addressing the root cause is far more important. For this you should scan the products so that are moved to their appropriate positions. Make sure that you train your staff not to put away any stock unless its barcode has been scanned. If some stock has been misplaced or is difficult to find again and again, then look for the person who last touched the stock and the shift when it was last seen. To avoid this kind of incidence again, start re-training and properly educate your staff on how to handle stock.
Controlling Packaging Cost
In order to control the costs related to packaging it is important that you consider the following points:
- What parameters are you following when shipping your orders?
- Have you trained your staff so that they are aware that which products need to packed in what kind of material and where should they ultimately head?
- Do you pack your products based on type, size and weight or your packaging is consistent across all types of products?
- Is it possible for you to ship large products such as trolleys without packing them?
- Is your packaging useful for your customers? Can it be recycled or reused by them or is simply thrown away?
- Are all your products overpacked? Do you really need to overpack them?
- What material are you using to produce your packaging? Try using plastic or Styrofoam and opt for greener options.
Cutting Down Low Production Cost
Though this point is related to point one, it can sometimes get so big at times that there is a separate section for this. Low production levels can lead to lower motivation, quality and employee satisfaction. You should analyze the performance of each employee separately and then figure out which employee is on the top and which one is on the bottom based on his performance level. Now figure out the reason why some employees are performing extremely well while others are just at par. Is it the work environment, inefficient training, or simply the speed of work?
Some staff may not be lazy, but they move extremely cautiously, in an attempt to avoid mistakes. Then there might be some workers who are slow movers and they may not be suitable for a fast-paced work role. In order to make most out of your employees’ productivity, you can team the best performers with those who are at the bottom and one or two mediocre performing employees. This would motivate performers who are not doing their best to meet the standards. You should also be mindful that the nature of work suits the employee’s temperament. If you think that the employee is good at skills that are not required for this particular job, try shifting him into another department and replace him with an employee that can easily meet work goals.
Analyzing Low Quality Cost
Low quality comes with a heavy price. It doesn’t merely affect productivity or customer satisfaction but also the revenue graph. There should be constant evaluation of quality indicators and should be often discussed with staff on a regular basis. And if you think that you only require 5 minutes of your day to fix these issues, you are wrong. Stock put at wrong place, items dispatched for delivery/items not dispatched errors, require quite some time to get fixed.
You need to assign a worker to constantly evaluate the quality of your products. If quality is not consistent, it’s best to know the root cause and work towards providing a consistent experience.
Managing General Costs
Though your electricity, heating and water costs may not be making a major portion of your total costs, managing these general expenses is the easiest to do. Taking measures that help you cut down environmental impact will help you take care of your carbon taxes.
Your operations run because of electricity. However, you can get to know the times when consumption of electricity is maximum. You should begin by reading your meter frequently so that you have enough data to realize when consumption is the most. Some countries have dedicated organizations that provide light detectors that help in turning off lights when they are not in use. Some of these companies also offer discounts for companies with huge electric consumption.
If you wash your trucks and fleets onsite, opt for recycled water rather than using fresh supply.
Cost cutting is not a one-day process. It can take quite some time and requires a lot of serious planning. You cannot get controlled costs by hiring all contractors or pitching in more employees.
- Consider all your options like fluctuating your volume, overpaying current employees or hiring for a specified period.
- Analyze how much your customers are being charged for distribution in comparison to how much you are being charged. It’s best to encourage customers to order a higher quantity less frequently.
- Sometimes you cannot take out time to cut down costs from low quality, production and general expenses. However, if you do, you will see encouraging results, enabling you to spend the spare money in areas that would bring in greater yield.