Issue link: http://read.dmtmag.com/i/117833
Profit Improvement Report Bending the Payroll Cost Curve Growing payroll expenses at a rate equal to that of sales growth is one of the prime barriers to distributor profitability. By Dr. Albert D. Bates The phrase ���bending the cost curve��� is widely used today, largely with regard to health care. That is, as a society there is a need to slow the growth of the cost of providing health care services. Bending the cost curve is also a useful concept for distributors, but it needs to be expanded. Distributors, such as AED members, need to think in terms of bending the entire payroll cost curve, not just the health care component. Simply put, the poor management of payroll costs is second only to inadequate gross margin as a barrier to achieving desired levels of profitability. At the same time, payroll is not just an expense item like, say, utilities. Payroll costs represent the employees who provide the services that allow the firm to generate adequate sales. Slashing and burning with regard to payroll is, at best, a counterproductive activity. The real task is to lower payroll costs relative to sales without diminishing any aspect of customer service. This report examines the nature of the payroll challenge. It will do so from two important perspectives: n The Long-Term Payroll Challenge ��� A discussion of the experience of distributors, including AED members, in controlling payroll over time. n Actually Bending the Curve ��� Some specific suggestions for improving payroll performance while maintaining employee esprit de corps. The Long-Term Payroll Challenge The central reality in distribution is that over time, payroll has remained an almost constant percent of sales. The Profit Planning Group has a financial database of more than 50 lines of trade in distribution. For many of those associations, information goes back 20-30 years. Adjusting for economic conditions, payroll costs are virtually unchanged from 20 years ago. That is, in a moderate-growth period 20 years ago, payroll was about the same percent of revenue as it is in a moderategrowth period today. AED members are not exempt from this reality. There are three factors at work to undermine the inability of firms to lower payroll as a percent of sales: Workload Growth, Productivity Reliance, and Sales-Based Planning. Each of these has its own implications. Workload Growth. As firms continually increase their sales, there is a need for more warehouse employees, more drivers, more credit analysts and the like. This is a benign inevitability that offers little potential for meaningful cost control. Productivity Reliance. Distributors have steadily increased productivity, especially on the operations side of their businesses. Indeed, key productivity measures, such as sales per employee, have experienced impressive growth. The reality is that productivity improvements are a necessary but not totally sufficient means of controlling payroll costs. If investments in technology are not made, payroll costs will probably rise as a percent of sales. At the same time, improved productivity does not translate into lower payroll costs relative to sales. Expansions of the services provided seem to offset productivity gains. Sales-Based Planning. The real culprit is the planning 44 | www.cedmag.com | Construction Equipment Distribution | April 2013 44_Bates_Profit_Feature_KP.indd 44 3/25/13 12:25 PM