When sales levels stay constant, raising prices or cutting costs are the only ways to improve profitability.
Today’s competitive market presents few opportunities for increasing price. Cost cutting gives more scope, but where should it start. Simply staring at profit and loss results gives few clues. Businesses need to know which costs are too high in relation to their own operation or in comparison to similar outfits, but as Innovention’s experience shows such data is not always to hand.
Some time ago, a major laundry group wanted a report on a plant where profits had dropped considerably over the past year although the figures showed that costs had stayed constant while sales volume had actually risen by 10%. This is a common conundrum.
The investigation took three days and involved extensive analysis. It found that the sales ratio of two similar products had shifted significantly. The two items had also been costed in such a way as to give substantially different margins. The shift to the under-priced product had led to the downturn in performance. Both trends had escaped the management’s notice.
Processing costs
In practice, finding out the processing costs for each individual piece of laundry is extremely difficult. Keeping track of the same piece’s price, when it is being sold to a multitude of customers is even harder.
The relationship between the cost, selling price and number of pieces is the key to understanding the year-end profit and loss results.
Shortly after making this report, I received a call from hospital laundry consultant David Jenner who had been coping with similar problems, though from a different angle.
We decided to collaborate and the Benchmarker project was the eventual result. The first stage was to calculate the relationships between articles, staff, machinery, services, transport and other factors involved in processing a specific piece of linen under given circumstances. A complex database would be needed to cope with all variables.
The aim was to develop a software tool that managers could use, regardless of their computer literacy. Benchmarker can be used in a number of ways.
Piece-work
The cost of processing each individual piece in a laundry varies enormously. An article’s weight makes a significant contribution to its processing cost. Heavier pieces will need more water, energy and chemicals to process. Weight will also affect processing numbers.
In a rental contract, the purchase cost and the number of times that an item can be washed must be taken into account, much more so than in a laundering-only contract.
Benchmarker also analyses the cost and income for the total number of each item. I have found that the more small pieces processed, the better the profit.
The profitability of individual articles varies enormously and this combined with a range of tariffs, leads to surprising results.
However, overheads, can be allocated in different ways:by number; weight (a preferred option); or by the income from each item.
Benchmarker’s overall profit and loss calculations will closely match those produced by the company’s accounts. However, the program will also show the source and can reveal the viability, or otherwise of each customer account, and also of individual articles. The program will show whether poor results are caused by under-pricing, low productivity, or linen losses, or even from providing too high a service level in relation to the revenue. Such data can be used in negotiations. Monitoring accounts on a regular basis can help to reduce or remove poor performers.
Productivity
Staff salaries are one of the major costs of running a laundry. Increasing hourly work rates can reduce the cost of production. Having established the plant’s optimum output, monitoring individual machines will reveal strengths and weaknesses.
An ambitious plant manager can compare these output figures with those of the competition and set up procedures to improve productivity.
Most laundries will recognise the need to change in order to improve performance. Assessing the likely effects of proposed changes is a simple matter of entering or removing the number of pieces involved from the database and adjusting parameters to reflect the new circumstances. In the past estimating prices has been little better than gambling on the hope that better volume would bring better results.
Such “what if” analyses can be saved, reviewed and modified without affecting ongoing monitoring of current data.
Benchmarker is a useful planning tool, but can also be used to track results on an ongoing basis. It can be used for recording the daily dispatches to each customer, producing itemised invoices if necessary, and can report on productivity and profitability.
Setting up the system requires time and patience, but once done, the plant will have comprehensive data which can be used to set stategies for survival rather than suffer defeat.