The saying "It takes money to make money." has a less popular version that goes "You must incur costs to cut costs." Distributors and processors often see this in the form of equipment, software, hardware and IT expenses. This week we revisit how the budget decisions you make sets the stage for the effectiveness of technology in your company.
Understand Spending to Reduce Costs | |||
A food company plans a business strategy as a road map to success. However, a good strategy does not guarantee success. A requisite for successful implementation is the presence of business processes suited to the goals of the strategy. In today’s automated world, these business processes rely on business systems. Back in Issue 13 of our newsletter our guest author Olin Thompson defined three distinct business strategies to match the business goals of: Survival, Improvement, or Competitive Growth. One of the questions you need to ask yourself today is: "Am I looking looking for cost savings to survive, to improve, or for a competitive advantage." Based on your response Olin provided the following ideas on the annual investment you can expect to make in technology to meet your goals. Data from Kara Romano, Senior Research Analyst for the food industry at AMR from the IFDA (International Foodservice Distribution Association) provide us with the industry average technology spending for food processors and food distributors following each strategy in the graph below.
How can I use this knowledge to save costs? By looking at your technology spending as a percentage of revenue you can quickly determine whether you are paying a premium for manual labor or for technological solutions. If you find yourself far to one side or the other it is a sure bet there are cost savings hiding in your company. Let's make a generalization and say that a 15 million dollar distributor spends $2,000 on technology annually. Odds are pretty good he wouldn't have any form of automated order entry, and due to his size he's probably paying at least one if not two extra salaries to make up for it. Let's say the Loaded labor cost is $50,000 less the amount not spent on technology $16,000 ($18,000-$2,000) shows us he's paying an annual premium of $34,000 for manual labor. Now take a look at your own company. DANGER DANGER: Remember from last week that sunk costs should not be considered when making a business decision. Do not compromise your business by keeping technology that does not work for your because of emotional cost baggage. The numbers we are talking about above are annual spending budgets and should not include the costs previously spent on a technology. Example: Investments in Excel Spreadsheets, Peachtree, QuickBooks, etc which may have been at the balance point for invoicing when your business was smaller are sunk costs.
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