CC4Fnews

Our Newsletter is titled "Cost Control for Food News" but as I was recently reminded in an article by James Mason "cost control" is only one of several tactics you need to constantly employ to be successful in business.  Jason identified eight critical points to watch for, we'll be pulling some of our favorites from Jason's list and adding a few from the Seven Strategies for Better Margin Management by Advenous to come up the Sins of Margin Management you'll want to avoid.  We'll be introducing them in bite-sized chunks over the next few newsletters.

 

From: Consultant's corner
James Mason/917 Consulting

"IN TODAY'S uncertain economy, companies are devoting considerable attention to cost cutting. However, by comparison, very little time and effort is spent on improving pricing and margin management practices. Indeed, many managers have not learned the skills to price their products effectively and manage their margins."

The First Sin of Margin Management: Failure to Prevent Price Leakage

The Sin: PRICE LEAKAGE
Price leakage is largely a result of inadequate price and margin management tools. In many organizations, there is not a systematic and simple approach for viewing price leakages, such as freight and warehousing costs, returns, corrections, claims, unearned discounts or rebates.

What to do: Recognize Cost to Serve when pricing. - You buy a product at $1.00, you sell it at $1.25 and you've "made" a quarter then at the end of the year you get your P&L and find out you've actually lost money.  The difference is "Cost to Serve" the combination of fixed and variable costs that it takes to run your business and service your customers.

Advanous offers the following perspective, check with your salespeople and see which of the following impressions they have about how a "standard" order from a customer goes

Is fulfilling and order like this?

1) An order is taken from the customer.
2) The order sent to the warehouse.
3) The warehouse ships the order to the customer.
4) The sales representative receives commission.

Or like this?

1) Investments: warehouse, inventory, infrastructure, personnel
2) Vendor/product line decisions
3) Product ordered from vendor
4) Product received into warehouse
5) Product checked for accuracy of shipment
6) Product staged for shelf placement
7) Product put on shelf
8) Product stored on shelf (carry costs)
9) Vendor invoice received
10) Vendor invoice processed
11) Outdates, shrinkage, damaged goods
12) Reconciliation of errors from vendor (shipment and/or invoice)
13) Sales rep training/investment
14) Cold calls to prospective customers
15) Relationship building with customers
16) Rep takes order from customer
17) Rep calls order to warehouse
18) Customer service enters order into system
19) System produces pick ticket
20) Order picked
21) Order checked
22) Order packed
23) Order staged for shipment
24) Order shipped
25) Invoice to customer
26) Reconciliation of errors to customer (shipment and/or invoice)
27) Invoiced payment collected
28) Sales commission paid

How to do it? - One way to ensure that your salespeople and customer service reps take cost-to-serve into account and prevent price leakage is to include a "salesman pad" into your cost.    By taking these costs into account before you set pricing you will find a truer representation of your profitability.  We'll be looking at how to setup a basic Salesman pad next week as well as the utilization of multiple cost structures for food business.

Multiple cost structures are used to keep the costs used for sales management separate from the accounting or true costs of your business.  Using the right food accounting and sales management system can go a long way towards putting your business on the right path but you need to decide on the "pad" you'll be applying to your products based on your expertise and experience.

 

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