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Estimate Cost Savings to Sell Others on the Value of Operational Improvements

By SueCanyon | September 11, 2007

I often find myself in a public setting in the company of an unfamiliar business owner. Whenever I get these opportunities I ask them what is the one business question they struggle with the most? I recently had the pleasure of sitting on a flight for two hours next to a woman whose family owns a chain of restaurants, and she asked me this ─ “How do I convince the owners of other restaurants like mine to combine our buying power so we can reduce our costs?”

The answer is very similar to the answers of other questions I am asked. For instance, “How can I convince the owner of my company that we should buy that piece of equipment?” or “How can I get my employees to understand why it’s so important to follow this procedure?”

In a cost-reduction scenario, the answer to why you should or shouldn’t do a thing, and to whether you are able to convince someone to do something or not, always lies in the numbers. I never prejudge a cost reduction decision. Each situation must stand on its own merits. But the mistake most people make when they require support from someone else to implement an improvement is that they don’t scale it enough.

In the restaurant example, she had calculated that she and the other owners might save 4 cents per hamburger patty and 2 cents per order of fries if all the restaurants ordered from the same vendor. Six cents in savings per burger just doesn’t seem very exciting.

But when you multiply the 6 cents by the number of burgers sold in a hamburger stand for a year, the savings becomes a much larger number. The savings that could be realized from lower ketchup costs and salt, french-fry oil and milkshake mix, napkins and plastic utensils were not calculated because the savings per meal was too small to ‘be of any consequence’. However, if you added together all of the savings and multiplied them by the number of meals produced per year, and per five stores, the savings becomes large enough to get someone’s attention.

Then one must consider the marketing value in the consistency of foods and materials in all of the restaurants because they enjoyed the same name. Will the customers be happier to shop at all the stores more often when there is a consistency of product? The very large burger chains all say, “Yes!”

On the other hand, will the quality of the foods that the group chooses cause customers to go elsewhere? So you’ll want to be mindful of that possibility. The lower cost of buying greater quantities may allow you to buy a higher quality or better tasting product than you are today, and entice even more customers.

The cost of economies of scale having to do with the ordering process must also be considered. There could be a substantial savings in human resources cost. In the current model, vendors must deal with multiple purchasing agents, multiple purchase orders, and multiple delivery orders. If you were to consolidate the ordering into one purchasing agent, a group of four owners might save the cost of three employees.

At the same time, vendors would have fewer orders to fill, the orders would be larger, and they could be coordinated on the same delivery trucks, encouraging the vendor to reduce the cost of the products even further.

As you add all of these savings together, and multiply them out for a year, you see that a single owner with three stores might save as much as $60,000 to $100,000. That will get anyone’s attention.

I was once hired by the owner of a manufacturing firm expressly to convince his employees that he couldn’t afford a $25,000 piece of equipment that they had been nagging him to buy. In trying to prove the owner right, I asked many questions about the cost, maintenance, and purpose of the equipment. I asked more questions about how it would benefit the client and his employees. I put the cost of the equipment and all of the other factors into a ‘return on investment’ model, along with the cost of financing (he truly could not afford to pay for it out of cash flow).

The model suggested that the client would save $75,000 in the first year, and more in subsequent years, if he leased the equipment for five years. Spending $25,000 (plus leasing costs) over a five-year period to save $75,000 or more each of those five years was a no-brainer to the client who immediately called the manufacturer. Within a week, he bought the equipment, because it was the right thing to do. (For more on ROI, see the Profit Power Action Pack Lessons at http://www.profitpowerpack.com/.)

In a similar way, when you can describe the implementation of a new procedure in terms of dollars, or determine the cost of employees ignoring a procedure, you can usually get their attention. Remember, your employees want to know their score and want to beat it. If you give them a goal, then measure the results of the new procedure, and broadcast those results, your employees will be less likely to ignore your requests.

If, in the investigation of the cost reduction, you should find that the change would actually cost you more, other improvements will be easier to implement in the future when you publish the results of the current study. It will show your employees that you listened to them. Employees are motivated to continue to be involved in process improvements when you acknowledge their wisdom each time it is appropriate.

To your success!

© Business is Booming! llc

Topics: For Your Employees, General | No Comments »

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