I often find myself in a public setting in the company of an unfamiliar business owner. Whenever I get these opportunities, I ask, “What is the one business question you 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. Her question was, “How do I convince the owners of other restaurants like mine to combine our buying power so we can reduce our costs?”
My answer was similar to my answers to other questions I get 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?”
These questions are all motivated by cost-reduction goals. The answer to (1) why you should or shouldn’t do a thing and (2) whether or not you are able to convince someone to do something 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 high enough to attract notice.
The Restaurant
In the restaurant example, the woman 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 order just doesn’t seem very exciting. But when you multiply the 6 cents by the number of burgers sold in each restaurant for a year, the savings becomes a much larger number.
The savings that could be realized from lower costs for ketchup, salt, french-fry oil, milkshake mix, napkins, and plastic utensils weren’t calculated because the savings per meal was too small to ‘be of any consequence’. However, if all of the savings were added together, multiplied by the number of meals produced per year, the savings becomes large enough to get most anyone’s attention.
Yet, will the lower cost of the foods that the group chooses result in a lower quality product, causing the customers to go elsewhere? It’s a possibility you’ll want to be mindful of. On the other hand, maybe you use the savings from consolidated orders to buy a higher quality product and go after more revenue instead. The lower cost of buying greater quantities may allow you to buy a higher quality or better tasting product for the same price that you’re currently paying and entice even more customers to purchase your products.
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, multiple delivery orders, and complex logistics. 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 by a year’s worth of meals, you see that it might be possible for five restaurants to be able to save thousands of dollars per year. That should be enough to get anyone’s attention.
The Equipment
In another case, 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. I asked many questions about the cost, maintenance, and purpose of the equipment. I asked more questions about how it would benefit the client, his employees, and product quality. 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. (The owner truly could not pay for it out of existing 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 then immediately called the manufacturer. Within a week, he bought the equipment because the numbers said it was the right thing to do.
A New Procedure
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 often get their attention. Almost every employee wants to know their ‘score’ – i.e., how well they perform on the job – and they want to beat that score. If you give them a goal, measure the results of the new procedure, and broadcast those results, your employees will be less likely to ignore your requests.
If, in your investigation of a potential cost-reduction measure, you 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 your current study. It will show your employees that you’re listening. Employees are motivated to continue to be involved in process improvements when you acknowledge their positive contributions.
What is your one business question? Ask me here, and I promise I’ll respond.
If you’re interested in learning more about return on investment, cost reduction, employee behavior, and much more, I encourage you to visit Profit Power Series and Anatomy of Business. If you would like my assistance to implement business improvements or strategies in your business, contact me via Business Forensics.
To your success!