I was doing some prep work for a speech for the Health Industry Distributors Association (HIDA) when an item on their Members’ Financial Survey jumped out at me. Atypically, the survey had a set of numbers showing the three-year trend for gross margin dollars per full-time equivalent employee (FTEE). It got me thinking about the following.
What’s a Good Level to Grow Gross Margin Dollars per FTEE?
It varies depending on the channel, but among HIDA distributors the average for the last three years has been about $135K gross margin/FTEE. However, the best performer in each of three sub-groups in 2015 was 16%, 60%, and 90% higher than the average.
Think about what you could afford with service productivity 50% above average. Perhaps premium job-pay, job security, career growth, and growth capital profits to reinvest. The best stakeholders would besiege you.
Doesn’t “Hire Cheap, Work Hard” Improve Profits, too?
In the short term maybe, but in the long term this outdated approach is the path to a commodity hell, weak return rut. Most financial surveys for distributors are misleading. Back in the 1980s a new ratio, dubbed the personnel productivity ratio (PPR), went viral. The formula is:
PPR = Total Payroll Costs / Total Gross Margin Dollars
And, many of the best return on total asset distributors, or high performers, typically have a low PPR. The conclusion is that people are a cost center and winners are better at cutting costs.
Costco’s Alternative Route to a Low PPR
For years, Costco has paid employees about 140% of the total compensation paid by Walmart/Sam’s Club. Both sell commodities at a 13% margin, and Walmart/Sam’s is eight times bigger, with presumably more buying power. But, Costco also:
- Hires higher caliber folks with a strong work ethic
- Has annual turnover of 6% versus Walmart’s 30% (big hidden cost savings)
- Cross-trains associates to execute more service processes well
- Gets 157% of the gross margin dollars/FTEE of Walmart, with higher customer satisfaction scores
- Pays 140 points of the 157 leaving 17 more points for higher profits
- Has recent profit dollars per FTEE of $10,625 versus Walmart’s $7,428
- Beats Walmart on financial return
- Has a PPR that is 90% of Walmart’s!
So, ignore the herd’s wisdom and pay a fair wage to have good service for all customers. If not, you will be selling commodities for a price with chronic poor returns while driving the best stakeholders away.
Enlist everyone to work together smarter (rather than harder) to grow gross margin dollars/FTEE. Then, execute together on customer-centric, service-value strategies. How? Here are some resources:
- Google: Merrifield + GM$s/FTEE + nichonomics
- Watch this 6-minute video from my cost-to-serve course