Can you handle the truth?
BY RICH SCHMITT
Management specialist
On a recent trip, I was giving a wholesale company’s owner some examples illustrating the gap between the typical top-management team’s view of the business and how it really operated in the trenches. The owner reflected for a moment and asked, “I wonder if that sort of thing is happening in my company?” I jokingly replied that unless he was really unusual, I expected that his situation was like Jack Nicolson’s line in the movie A Few Good Men, where he screams “You can’t handle the truth!”
Some of you might not want to read this column as it may make you uncomfortable, or it may keep you awake nights as you think about it. Some of you may already realize that you don’t want to know the truth. An owner once confided that he had given up surprise visits to his branches. It just depressed him see the reality of his branch operations. When he saw stupid things happening, he felt obligated to take action, to reprimand someone or to occasionally fire someone. He said he was embarrassed to say that, over the years, he had lost his stomach for the process. Now he either announced his visits or had someone leak the timing of his “surprise” visit to the branch. That gave the branch plenty of time to tidy up so his visits always portrayed the pleasant and civilized fantasy-land that he wanted to pretend was the norm in his company. (In this case, the assignment was a turn-around and part of the solution was to find and hire a president who did have the drive to fix the company’s problems.)
But for those of you who still have the fire to get better, I want to describe a few of the truths that we have observed over the years. You can then determine if they apply to your company or not. I know these examples will not apply to every single wholesaler out there, but they are occurring in many of your companies.
Your company is (probably) not treating your people the way you would want them treated -- First and foremost, I believe, and my experience has been, that most people, at all levels, come to work every day to do a good job. With that said, some companies beat this “do-a-good-job” attitude out of their people with stupid games, procedures and processes that leave them wondering why they even bothered to care. Some companies feel obligated to create a lowest-common denominator environment that caters to the worst performers, not the best. They operate more like a pre-school than a high-performance professional organization. In these companies there is little distinction between the way top performers are treated and the way the bottom-feeders are treated. When the family members are at the bottom of the list, it makes the situation even worse.
Solution -- Make sure that you treat your team like adults and also expect them to perform like adults. For a reminder of how it looks from the trenches just read a couple of Dilbert cartoons. It is my understanding that much of the fodder for Scott Adams’ cartoons comes from actual letters to the artist. Managers have the obligation to create good procedures and processes, then ensure that people understand what to do and why. They must also create a fair playing field that rewards performance not promises.
Your company’s “open-communication” and “open-door” policies are (probably) a figment of your imagination -- Many top managers are sincere about this but do not create an environment where open communication can occur. Others talk the talk while squelching any real communication to and from the trenches. Some managers are threatened by any communication to them and become angry when communication goes around them. I have heard that people were told that they were not to bring up any problems in an “all-hands” meeting with the owner. A branch manager might never say, “Don’t talk to the boss,” but he might say, “We don’t need to bother Mr. Smith (the boss) with our branch’s problems.” People get the message pretty quickly.
Solution -- Spend time in the trenches listening to and talking to your team. Talk to people one-on-one where they can be candid without fear of reprisal. (Certainly you must not divulge any information that they deem to be confidential.) There is no substitute for going out into the field to talk with your team...I mean to listen to your team.
Regarding your strategy or mission statement, your team (probably) doesn’t understand it -- In numerous consulting assignments, I have asked about the company’s mission statement or credo to see if there is any connection between the ivory tower perspective and the ground-level view of the company. One of my favorite responses from a branch employee was, “I think it has to do with steakholders (sic) but in our department we didn’t actually get any of the steak. Maybe some of the other branches did but we didn’t. We do have hot dog days though.” Your meticulously crafted mission statement probably doesn’t help your team do their jobs and probably proves to them how out of touch top management really is.
Solution -- Create mission statements that are simple and easy to understand. People cannot implement what they cannot understand. And each department should have specifics regarding how the company’s direction will be supported by their department. When people understand how they, personally, fit into the picture it enables them to contribute more fully.
People are (probably) stealing from you -- This is a troubling fact for all of us. Many of us start with the correct notion that most people are honest and trustworthy. We get lulled into a state of bliss that often prevents us from detecting some of these problems until they have materially hurt the company. I have seen the devastating impact of this excessive trust played out more times than you might imagine. In each case, simple procedures could have caught the thief early in the game and prevented substantial damage to the company. Theft seems to come in three areas: product, money and time.
Your solutions might include --
- Use shoppers. For those who are unfamiliar with shoppers, there are companies who offer a service wherein they send a trained individual into your company who operates as a customer or, in some situations, as an employee. This individual is trained to observe your operation and to report back to you on a variety of different topics ranging from how they were treated, the condition of the facility, how certain types of transactions were handled and especially whether cash-type transactions were handled per the company’s procedures. One client told me that he had used shoppers in the past but hadn’t continued that practice in recent years. I asked why and he admitted that he didn’t have the stomach for the information that he received in the report. He said, at best, there were policies and procedures that were flawed or not being followed. These required work to resolve. At worst, he had to let people go since he just found it difficult to work with people who were stealing from him. Especially, those long-term employees who he, rightfully, assumed had been stealing from him for many years. I told him that I found it difficult when these corporate thieves were not prosecuted to the fullest extent of the law.
- Take time to really control your highly negotiable inventory. Some products are almost like cash since they can quickly and easily be converted into cash. Whenever possible, these items should be tightly controlled. Further, every inventory anomaly must be investigated to determine whether it involves theft. When thieves know that inventory discrepancies will be investigated, they may think twice about stealing from you. When your company simply adjusts the on-hand count, you become a sitting duck for major product theft.
- Consider GPS devices and GPS phones for your drivers and outside sales team. Thus far, as I question wholesalers who have installed in-truck GPS devices, every wholesaler has experienced improved delivery efficiency. The use of GPS phones for the outside sales team has been more difficult in terms of resistance, but the wholesalers who did implement it have discovered problems ranging from poor work habits to full-time salespeople who were actually out of state or working a second job. Now the magic of electronics helps us to answer questions that once required a private detective.
Some of your people are (probably) coming to work under the influence -- Substance abuse is a problem in our world and thus our industry. I am not a prude and am certainly not making any moral judgments, but you must understand that you probably have a substance abuse problem in your company. This problem is reducing productivity, creating internal and external service issues and, in some cases, is the root-cause of the theft that is occurring. I think companies have a special obligation to their good employees that includes their not having to endure the issues created by a co-worker who is under the influence. The company also has an obligation to ensure that their drivers (forklifts, trucks, cars) are not operating under the influence, thus putting other employees, customers and the general public at risk.
Solution -- Implement a pre-employment drug-testing program to reduce the number of abusers that you hire. Then install a properly administered, ongoing drug-testing program that involves all employees, including the top management and owners. (Including top management and the owners reduces complaints regarding the fairness of the program.) Your labor attorney should approve any program but, to my knowledge, both pre-employment and ongoing programs can be implemented in all states.
Your people are (probably) treating your customers badly -- An owner was playing back a conversation that he had recently with a customer, “No ma’am, we do not intend to treat customers like that. No ma’am, we do not want to operate our business in that way. No ma’am, I do not do that. I believe you are confusing me with Oedipus.”
Solution -- Take the time to talk to customers who are having problems. Often, the customers that owners visit are groomed by your team so you have a pleasant visit. The real insight, though, is often gained in listening to the gut-grabbing stories that a customer with problems will tell you. The simple approach is to do follow-up calls with customers who are having problems. You will learn a great deal and the customer is almost always impressed that you called.
When customers call your company they are (probably) not handled properly -- In an effort to reduce costs some wholesalers have installed high-tech phone systems that act more like a barrier than an enabler of sales. Others continue to have their phone answered by real people but fail to train them in the basic elements of proper phone etiquette.
Action -- Call each of your locations at various times during the day to see if the phones are answered promptly, clearly and in a friendly manner. I suggest that you record the conversations as a training tool. (Of course your area may have regulations about recording conversations that must be followed.) Pose as a customer and see how professionally your order gets taken. (Be sure to turn off your caller id unless you are one of those people who can’t handle the truth.)
Your managers are (probably) practicing mushroom farming techniques on your people -- That is, managers are keeping them in the dark and feeding them manure. Many times, your management team will be subscribing to the view that knowledge is power. Often the insight and direction discussed in your management meetings is not filtering down to the rest of the team.
Solution -- In every management meeting, explicitly list the information that is to be communicated to the rest of the organization and by when it should be communicated. You should also explicitly list any information that is not to be shared. Then you must take the time to talk with people at all levels to determine if information is flowing or being blocked. When a manager tells you that he doesn’t have time to communicate with his people, consider whether that person has time to be a manager.
Your people (probably) don’t understand gross margin -- They don’t know what it is. They don’t know how to calculate it. They don’t understand why they should care. Over the past 120 days, I have given another 250 people our five-question gross margin test and the situation continues to be alarming. People in our industry do not, I repeat, do not understand the difference between gross margin and markup. This lack of understanding dumps enormous amounts of your profit through simple calculation errors. Here’s one of the many ways that it happens. A salesperson or counterperson asks the manager how to price a product to a customer. The manager says, “Put 28% on it.” Assuming that the manager understands gross margin, his intent was that the product be priced at 28% gross margin. The salesperson, not understanding that there is a difference, might use a 28% markup and, in the process, he dumps a whopping six points of margin in the handoff. (Maybe handoff is the wrong term. Fumble seems more appropriate.)
You might be thinking that your guys use the trusty computer system and that it understands gross margin. Most computer systems allow both markup and gross margin-type pricing. When your people don’t understand the difference, it’s likely that most of the time they will use markup.
A couple other assumptions may be flawed:
- Managers understand gross margin. The recent testing indicates that managers are only slightly better than salespeople and counterpeople in understanding gross margin.
- Computer systems calculate gross margin correctly. There are still computer systems that have flaws in the way they calculate or report gross margin. Remember, these systems are written by programmers who might also think gross margin and markup are the same.
Solution -- Make sure that everyone with any price-reducing authority understands gross margin. (I have stopped calling it price-setting authority until I find that there are instances when pricing is increased as well as decreased.) Double-check your computer system in insure it is correct. For a copy of the gross margin test and a reprint discussing gross margin calculation, e-mail me at Rich@go-spi.com.
Your people are (probably) giving away a staggering slice of your profits -- Pricing is, for my money, the number one concern for our industry. Price objections resulting in price concessions have become the norm, not the exception, for many companies. The sales team at all levels has lost confidence in the company’s normal pricing and immediately responds to every pricing discussion with a reduction -- often dumping five or 10 points of margin in the process. Further, this auto-pilot style concession reaffirms the need for ongoing price objections in the customer’s mind and ensures that there will be more price objections in the future.
It is even worse when a price concession is made without an objection by the customer. That happens when one of the sales team notices a low cost or high gross margin and then automatically reduces the price anticipating a price objection from the customer. He doesn’t even consider that the price might actually be quite competitive and that the low cost or high margin is because your company is buying better.
In recent weeks, several wholesalers have told me their costs are going down on some commodity products. They changed the cost in their system but left the price where it was since the market price had not changed. Some individuals in their sales teams noticed the higher gross margin percentage and manually dropped the price even though the system price was already competitive.
Solution -- Get a pricing person in place to ensure that your computer pricing is competitive every day, all the time. Remove cost and gross margin from your computer screens where it can be used against you. Or train your people to understand gross margin, inventory carrying costs, price sensitivity and price negotiation so they can make intelligent decisions with the information. For more on pricing, e-mail me at Rich@go-spi.com.
I know this has been a tough-minded, maybe even harsh, column, but to remain profitable in the coming times you will be required to face the reality of your situation, search for the truth and then demonstrate that you can, in fact, handle the truth.
Rich Schmitt is president of Schmitt Consulting Group Inc., a management consulting firm focused on improving the profitability of distribution and manufacturing clients. Rich is also the co-owner of Schmitt ProfitTools Inc. (SPI), a business producing print, CD-ROM, web and palm-based catalogs as well as pricing management and analysis software for wholesalers.