Many family businesses today are increasing cash flow and profits by centralization of key functions together with profit-center based accounting. At first, these two concepts may seem contradictory. In practice, however, they work smoothly together for optimal performance.
Wholesale Operations – Within wholesale operations, the greatest efficiencies from centralization come from customer order fulfillment, dispatching, and warehousing. Centralizing these three functions allows a company to have its most competent people handling the most important functions of the business.
As evidence, a company that attended a Meridian event recently reported over $75,000 in first year savings from centralizing just the order function. Customers phone in their orders, where the order is taken by a professional order-taker.
The staff in the order department are thoroughly trained professionals in customer service. In addition, they know how to cross-sell and maximize customer purchases, thereby increasing company profitability.
Centralized dispatch may raise a few eyebrows. Traditional thinking says that only a local dispatcher can intimately know the routes, trucks, customers, drivers, etc. Economics, however, dictate centralized dispatch. Centralized dispatch allows for uniform truck maintenance and economies of scale with vendors for both maintenance and purchases. By making the drivers all accountable to one entity, there is less chance of disparity of treatment based upon location.
A centralized dispatch, with immediate knowledge of customer orders as they come in, translates into optimum efficiency and great customer service.
Another benefit to centralized dispatch is the opportunity for enhanced driver efficiency. Savvy family businesses keep critical data on driver performance. With centralized dispatch, keeping driver efficiency data on the entire staff allows a company to easily identify top-performing drivers as well as those who are lagging group norms. By making efficiency data internally available to all employees, peer pressure helps raise performance levels.
Centralizing warehousing and ordering can also pay off large dividends. Coupled with centralized dispatch, inventory levels can be kept at optimally lean levels. With purchasing centralized, there is the other benefit of economies of scale from volume and/or bulk purchases.
Retail/Store Operations – In the retail sector, centralization of purchasing, warehousing and pricing are the greatest keys to increased profitability.
Centralized purchasing agents can usually obtain better pricing due to volume. Volume discounts and special promotions can be managed effectively to meet company goals.
Without centralized purchasing, retail managers are often swayed by sweet-talking vendors who may or may not have good deals. This is not to say that localized promotions are not effective. Certainly store managers know their customers buying needs the best. These needs, however, should be filtered through a centralized order area.
Centralized warehousing can also pay off big dividends, allowing a company to take advantage of bulk buying opportunities. You may also find that you can save significantly by using one drop point from your major vendors and then delivering to your own locations.
The third area of centralization is pricing. Commonly known as a price book, when pricing decisions are centralized, margins typically increase. When pricing is left to local personnel, the tendency is to price too low.
As these critical functions are centralized, a company must also have a game-plan for allocating costs back out to the profit centers. Profit center accounting lets you see the bottom line of each area or location in your operation. It is critical to know that each area is profitable, and that high profit activities do not mask the losers.
To know the true impact of centralization, you must allocate the costs of all the centralized functions back out to all of the profit centers. The distribution of costs may be done through administrative cost allocation or through an actual internal billing within departments. For instance, the cost of the retail purchasing function can be invoiced to the individual store locations based upon a percentage of purchases.
Centralization is not always popular, especially to those employees who lose power or even jobs, but it has proven time and time again to be successful. And we measure that success by the dollar amount of increased profits and cash flow.
