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Economies of Scale


2/1/2003
By Kris Walker

Does size equal profits? Want fries with your Mega Burger? Never confuse 'activity' for 'productivity' on the path to profitability.
 

As recently reported in Counterman, the trend in our industry is towards fewer, larger auto parts stores. Take a look at this month's Super Stores on page 45 and you'll see what I'm talking about.

But think about the advantages of being big. It's all about "economies of scale" - when average cost is reduced as quantity produced increases. Even though the trend is toward fewer larger stores, maybe everyone should focus on developing more increasingly profitable stores - regardless of store size. The three routes to profit are, and will always be, increased sales, increased margins and reduced expenses. At least that's what we've been told. Perhaps the fourth route to profit should be increased productivity, which in effect is taking advantage of the economies of scale. If you have four countermen handling 75 tickets each per day, could three countermen do 100 tickets each per day? It's the same amount of tickets, just a different amount of productivity.

At times we confuse 'activity' for 'productivity,' and when we do that, we sacrifice profitability. Industry and company statistics have been developed to measure productivity - sales per full-time equivalent, wages per margin dollar, wholesale sales per delivery vehicle - can be directly correlated to store profitability. And what happens in a growing store? Maybe the store that started out with three counterman who were each handling 75 tickets per day suddenly grew to 100 tickets per counterman per day. And guess what, that's the same profitability as before with a lot more activity!

Of course this is an over simplification of the theory. If you've been following so far, we would be taking advantage of certain economies of scale such as the fixed expenses - rent, lights, etc., as the volume went up. But the point is, employee wages are the largest expense entry on the income statement. This is where the opportunity for the greatest productivity gain can be realized.

The secret that the big guys don't want the rest of us to know is that if we all ran our businesses the same way every time, we could reasonably predict the results. Go down to the local mega-burger joint and apply for a job. They don't say, "If it's okay. with you, we'd like you to wear this Mega Burger hat." Instead they say, "If you would like to work at Mega Burger, you will wear this Mega Burger hat." What's the result? The customers know who's on the Mega Burger team. Mega Burger management would also tell new hires to ask every customer if they would like to mega-size their meal. What's the result? You get the same number of meals but with larger tickets. The employees are more productive, and the store takes advantage of larger economies of scale.

"Yeah, but this is an auto parts store," you say. "What can I do? I have a fast-paced, action-packed business. The phones are ringing, customers are walking in and out the door. There are orders, deliveries and returns, employees, lunches and breaks. It can be chaos!"

Well within that chaos is the structure and discipline that creates the productivity that leads to the economies of scale. This results in increased profitability. Sometimes it's not easy to see. Maybe you need somebody not currently employed in your company to watch what's going on and tell you what they see.

Most everything we do has the potential for improvement. I was listening to a radio interview of the national champion quarterback from Ohio State, and the question was asked, "You've reached the top, is it difficult now to set goals?" And the response was, "No. There's always room for improvement." Just as the nation's best college football team can improve in some facet of its game, we can improve our business too.

A systematic review of every function within our store is reasonable. How do we handle delivery dispatch, and how can it be improved? How do we handle returns, and can it be improved? How do we handle our special-order procedure, and how can it be improved? Is the product in the store arranged to facilitate stocking, picking and sales, and can it be improved? Is our sales process reducing our need to hotshot consumable items that are more efficiently delivered as part of a stock order, and how can that be improved? These are the types of things that make us better.

We look at everything we do and ask, "How can we do it better?" And then we say, 'Now that we do it better, we should do it like that every time - until we find a way to do it better."

It's been said, "It's not the size of the dog in the fight, it's the size of the fight in the dog." Combine a mega-sized thought process with the competitive advantage you have that can't be duplicated - you and your people - and you can't be beat.















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