Cost cutting: The lean machine

The sound of axes being wielded can be heard in retail businesses across the board. Retailers are a cost-conscious breed by nature, but as sales continue to slide extensive cost-reduction programmes are in full force. However, that doesn’t mean this is a time for panic. Blindly slashing costs with no regard for its impact on customers is a dangerous game.

Furthermore, while many retailers are already focusing on the obvious savings such as labour costs, travel and expenses, they are overlooking a host of other areas of the business in which millions of wasted pounds are slipping through their fingers. As Deloitte head of retail consulting Ian Geddes says: “Retailers are taking a fairly functional view to where the cost savings are. Often, they don’t go far enough, deep enough or quick enough.”

Claire’s Accessories chief operating officer for Europe Paul Mildenstein believes retailers’ cost-cutting measures need to be “deeper and sustainable”. He adds: “The days of simply introducing compulsory double-sided photocopying are long gone. Senior management need to identify an audacious goal that requires people to demonstrate a real step change in behaviour.”

Here Retail Week suggests ways retailers can make their businesses leaner and recoup some of the wasted – and much needed cash – that is pouring down the drain. After all, in the present climate, they need every penny they can lay their hands on.

Create a cost-reduction culture
There is no point wracking your brains at head office to find ways to make your business run more leanly unless everyone else in the company is aware of the pressure the business is under. At Staples for instance, profit and loss figures are widely circulated around the business so that everyone is aware of current trading.

Finance director Claire Blunt says: “It’s about clarity. It’s critical that there are the right people getting the right information and acting on it.” Staples also ensures its entire board communicates regularly with general managers and that they spend maximum time in stores, talking to employees throughout the business.

Blunt says: “You can never under-communicate. Creating awareness throughout the business is very difficult and you have to consistently drive that message, but it really does make a difference.”

She adds that cost cutting also requires consistency – it’s no good making cuts at store level but not at head office, because it won’t result in the buy-in of the entire workforce.

Amend delivery times
Retailers often set up their logistics platforms for timed deliveries to stores, ensuring they arrive at quieter times. They can then time a delivery to fit in with the presence of any extra staff needed to handle the additional workload created. However, timed deliveries come with a premium cost attached to them.

At Claire’s Accessories, a cost-cutting measure suggested by its store managers was to receive stock deliveries at any time. Chief operating officer Paul Mildenstein says it does mean that if deliveries arrive at busy times it can interrupt service, “but that is where staff have helped us to smooth out replenishment by restocking in quick tranches when the store has down time, rather than bring in extra staff just for deliveries”.
Mildenstein says the cost savings are about£40 a store per delivery day. It might not be applicable for stores in shopping centres, which often stipulate timed deliveries to avoid all the trucks arriving at once, but it is certainly feasible elsewhere.

Improve price promotions
There is significant scope to ensure retailers’ promotional budgets are more wisely spent, so they get the same sales uplifts from a lower spend or generate a higher sales uplift by spending the same. Invariably, retailers run promotions on gut instinct. Sometimes this works, sometimes it doesn’t – particularly if they buy extra stock to support the promotion but end up with a heap of unsold inventory.

There is a lot to be said for using a more scientific approach, particularly given that cut-price product offers are a top priority for consumers at the moment. Deloitte head of retail consulting Ian Geddes explains: “You need to look back at historical trends to say: ‘By taking X down in price, we got X back in return’.” Often, price promotions tend to be a knee-jerk reaction to offload excess stock. But, says Geddes: “Right now retailers need to make sure they have a good fact base of what promotions they have used, the lessons learnt and some view of the qualification of results.”

Stop wasting time
Retail businesses are notoriously unwieldy, leading to endless hours of wasted time as the numerous departments from merchandising to logistics to IT attempt (and invariably fail) to communicate with each other. The problem, says Alix Partners director Dan Murphy, is that wasted time is never viewed as a real cost to the business. “In my view, it’s one of the two biggest costs – the biggest being markdowns.”

Murphy estimates that as much as 30 to 40 per cent of people’s time is spent dealing with internal friction. He advises retail chief executives to “go down through the layers of the business and stop listening to those who are telling them what they want to hear”. He adds: “They need to sit in those departments and find out exactly what is getting in the way of helping people do their jobs. If you’re a business turning over£100 million and your wages and salary costs are£18 million, if you save 20 per cent in wasted time that’s a saving of£4 million.”

Analyse online information flow
Bricks-and-mortar retailers that have branched out with the launch of a transactional web site are notorious for having gaping holes in the efficiency of their information systems. Many have simply bolted on systems for their online operations. Christian Robinson, managing director of e-tailer Firebox, says: “I’ve spoken to retailers with some really dreadful examples. In order to get details from the web system to the warehouse system some have actually had to pay people to manually type in even basic data such as address details.”

Retailers need to look at how information can flow seamlessly from the customer right through to the warehouse. Robinson adds: “Improved internal processes not only reduce costs in the near term because there will be fewer customer phone calls or e-mails chasing their order and fewer mistakes, but they also potentially increase revenue because customers recommend your service.” At Firebox, Robinson says its record time between receipt of order and the order physically departing is 15 minutes.

Reduce waste
The green agenda isn’t just about boosting your reputation for corporate social responsibility; there are major savings to be made by focusing on cutting wastage. One of the many areas where there is a huge amount of excess is transient packaging used to deliver goods to stores. With landfill taxes at£32 a ton and set to rise in April, wastage is costly. Retailers need to liaise with suppliers to work out where packaging could be reduced.

From there, providing the materials are properly separated, recycling companies will often pay the retailer up to£120 a ton – depending on the material – to collect the waste. WSP Environmental senior consultant Louise Wood says one fashion retailer it has worked with previously sent 800 tons of excess transient packaging to landfill each year. By tackling the problem they estimate it has saved between£80,000 to£120,000 a year. “There are certainly still a number of retailers that have very high volume of waste packaging and there are countless opportunities to reduce and eliminate that,” says Wood.

Change the way products are shipped
Usually, different products are stacked on separate pallets, picked in the distribution centre then sorted for the shopfloor by store staff. Asda is doing things differently. With its seasonal categories, picking begins in the Far East – where labour is cheaper – and products are loaded onto pallets according to how they are merchandised in stores.

General merchandising director Martin Leeming explains: “We work out exactly what is going into an area of the store – say Christmas trees, lights, and so on – and put them on a pallet together. That goes straight to the distribution centre without picking, so on the same day it’s receipted it can go straight out to the store and straight onto the shopfloor.” This leads to “substantial savings” on handling time and frees up storage space.
He adds: “It is complex – you’ve got to decide way in advance what is going where in the store and you need 100 per cent accuracy in the Far East, and once you’ve decided, you can’t change anything.” But, he says, the savings are worth it. “We can all work harder, but you’ve got to work smarter.”

Analyse recruitment spend
Obtaining precise figures for recruitment agency spend within large retail organisations is very difficult. Because countless people across the business are working with agencies it means increased expenditure on administration and a reduced opportunity to reduce that spend. De Poel consulting managing director Jonathan Simmonds explains: “People at head office may think they’ve got a big handle on it, but it tends to cross so many different parts of the business.” Local depots also work with many local agencies, which makes the costs even more difficult to ascertain. Moreover, agencies often increase their prices because they are asked to supply extra staff at the last minute. As Simmonds says: “There is no robust management information.”

Retailers need to start by renegotiating and standardising both pay and charge rates before staff placements start and set specific rules for overtime charges. Potential cost savings are significant, says Simmonds. Co-op, for instance, was able to save 5 per cent of its annual£4 million agency spend by following these steps.