48. A Catalytic Financial Survey Ratio

As I was doing prep work for a speech to the Health Industry Distributors Association (HIDA), I noticed something interesting in their Members’ Financial Survey. The survey showed a three-year trend for gross margin dollars per full-time equivalent employee (FTEE), or service value productivity per employee.

Though channels do vary, for HIDA distributors the average gross margin dollar figure per FTEE for the last three years has been about $135K/FTEE. However, in 2015 the best performer in each of three sub-groups showed 16%, 60% and 90% higher gross margin per FTEE than the average.

Imagine what your business could do if service productivity was 50% above the average. You might be able to provide premium job-pay, job security, career growth and you would have growth-capital profits to reinvest. The best stakeholders would besiege you.

What about the “Hire Cheap, Work Hard” approach?

This old-school approach may work for a few months, but not in the long term. This is the path to a commodity hell, weak return rut. But, financial surveys for distributors mislead the herd. 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, guess what? The high performing distributors, those with the best return on total assets (ROTA), typically have low PPRs. So, has the industry been drawing the wrong conclusion, that people are a cost center and winners cut costs better?

A Catalytic Financial Survey Ratio: Costco’s alternative route to the lowest PPR 

For years, Costco has paid employees about 140% of the total compensation paid by Walmart/Sam’s (WMT). Both sell commodities at a 13% margin. WMT/Sam’s is eight times bigger, presumably with more buying power. But, Costco also:

  • Hires people with a stronger work ethic
  • Has annual turnover of 6% vs. WMT’s 30% (big hidden cost savings)
  • Cross trains associates to execute more service processes better
  • 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/FTEE of $10,625 vs. WMT’s $7,428
  • Beats WMT on financial return
  • And, has a PPR that is 90% of WMT’s!

So, ignore the herd wisdom: pay a fair wage to provide good service for all customers. This catalytic financial survey ratio reveals what is really profitable. Otherwise, you will be selling commodities for a price, with chronic poor returns, and driving the best stakeholders away.

Action steps

To grow your gross margin dollars/FTEE, you must enlist everyone to work together smarter rather than harder. Then, you can execute together on customer-centric, service value strategies. Here’s how to get started:

  • Google: merrifield + GM$s/FTEE + nichonomics
  • Watch this 6-minute video from my Cost To Serve course