Cutting cost is better than cutting people

We are in the recession. Consumer spending is decreasing and many experts expect bad times to last for at least next 12 months. Naturally, companies are looking for the ways to reduce burn and many of them are cutting staff. I want to argue that there is a better way to survive the stormy times and letting people go undermines your perspectives.

1. Numbers
Let`s say your G&A is 9 % of sales (pretty high but not uncommon). By letting go 50 % of your team you save 3-4 % of sales. The downsides of a layoff are well known - morale, reduced productivity, loss of expertise and relationships, especially if you cut your vendor management team.

Is there another place you can save more than 4 % of sales??? Oh, yeah, plenty. Ship cost reduction, price optimization and better Out of Stock management to name a few. Each of these initiatives may reduce your costs by 5 % of sales or more.

2. Alternatives in detail
  1. Ship cost reduction. Depending on your product portfolio - ship cost benchmark is 10-14 % of sales. If you are above that number - delta is your opportunity.
  2. Sales price optimization. Most retailers I worked or spoke with have a disconnect between actual costs and sales prices. They all use estimated COGS and Shipping Cost that are frequently far off from the actual numbers. Bridging this gap and making sure at least your top products are priced competitively (yet earning enough margin) can increase your sales 5-10X and at least 3X your total margin.
  3. Reduce cancellations. I`m surprised to see 8-10 % cancellations across the companies. Single biggest reason - Out of Stock (OOS). A simple analysis shows that 10-15 vendors are responsible for vast majority of the cancellations. Assign a "cancellations manager". Have him or her look at the numbers daily and contact these 10 vendors to get accurate back in stock dates or call back the customers and suggest substitutions.
Each of these projects can be done internally with a little guidance from a consultant. You keep your talents busy, show them you care and achieve your objectives without sacrificing your future growth. And if consultant works on the performance fee basis (as I do) - it costs you nothing to try.

If you are actively looking for ways to reduce costs - consider my experience and give me a call. I`d be happy to share with you the best practices and help if needed.

Have fun even in these stormy days!

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Blogger deborahparker said...

Very good post, I must say. When recession strikes most companies and agencies start cutting manpower which is totally wrong. Instead they can be in business by simply doing your suggested things.

June 29, 2012 at 12:52 AM  
Anonymous s.prakash said...

I do agree.

Always companies tend to cut manpower in the process of cost cutting. But they are ignoring the point that they are loosing the time and money they have invested on them.

January 8, 2014 at 10:31 PM  
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