3 Ways to Strategically Reduce Costs and Enhance Profitability
For all retailers, a challenge in the current recession is how to maintain profitability by reducing costs in the face of declining overall sales and price pressures — all without sacrificing the customer experience. Although challenging, effective cost reductions can be achieved.
Companies should start by gaining a new understanding of costs and profitability at both a granular level (SKU) and throughout all their key business dimensions: vendor, customer segment, product category, channel, distribution center, etc. Marketers intrinsically understand the need for quality data and analytics to drive strategy and execution. The same need exists when examining how to strategically reduce costs and enhance profitability. Here are three tips to help you get started on this process:
1. Product profitability. Strategic cost reduction begins with a shift in mind-set, getting away from simply revenue and gross margin to true net profit of products inclusive of all costs related to marketing, delivery, service, returns, etc. Once this is available, you can make intelligent decisions regarding marketing strategies, SKU rationalization, product mix, supply chain processes, pricing, aligning assortments with customer value and other things. A multichannel retailer recently used such insight to prune nonessential, unprofitable SKUs and drive more than $25 million per month in net profit.
2. Benchmarking/process improvement. With the right level of insight into process costs, marketers can understand where to drive operational efficiency and process improvements. Drive down actual expenses to a “cost per” or unit cost level with a common methodology. Variances then can be identified between different facilities, staff, catalogs, etc., identifying clear best practices that can be applied throughout the organization. Another multiple channel retailer used such insight to reduce costs in underperforming facilities by more than $50 million on an annual basis.
3. Vendor negotiations. Marketers who generate detailed granular P&Ls for their vendors are better prepared when their merchandisers “sit at the table.” Although nobody is looking to make price concessions in this economy, a comprehensive P&L often can uncover the classic win-win. Vendors and customers can collaborate to uncover wasteful processes, sourcing decisions, eliminate unnecessary “nonvalue add” services, modify terms and conditions, and ultimately optimize the relationship for both parties. One company that pursued a vendor review strategy drove more than $20 million in immediate savings through an informed discussion with key suppliers.
Nobody knows how long the current recession may last. Now more than ever, know your key cost and profitability drivers. Armed with such a weapon, you can survive, thrive and emerge from the current downturn stronger than ever.
Jerome Patterson is the chief marketing officer of Acorn Systems, a Houston-based provider of profit improvement solutions for retailers. Reach him at jpatterson@acornsys.com.
