Areas of Cost Savings in Retail Operations - Assignment Example

Areas of cost savings in Retail Operations and the impact of such savings on results In today’s competitive business environment, companies need to keep a lean cost structure to ensure their competitiveness. Even if the company does not operate on “economical option” and “low price” position in the market, all companies should work hard in minimising costs through addressing areas of inefficiencies and waste in the operations. From business to businesses, the areas where potential for cost reductions are present differs. For example, in a manufacturing company the production plant and its efficiency levels are the key areas. In retail business main areas of cost savings can be identified in shop floor management as well as inventory management. One of the key areas, which cost savings, can be made in retailing operations involve the management of overhead costs associated with the outlets. These include electricity and rent. In order to provide the customers with an enjoyable shopping experience, it is important that the shop floor is maintained with proper lighting and air conditioning or heating to suit the climate. However, a retail operation should aim at customer traffic optimization. This can be done through analysing the times at which most customers are coming to the shop and the times, which the customer traffic is low. For example, if the outlet is open from 8.00 am to 8.00 pm, depending on the type of merchandise being sold, the customer traffic to the shop will vary. For retailers such as bakeries, the morning, lunch and evening traffic is high but in between the time is free. However such stores need to open early. In contrast, if retailers such as B&Q are considered, the nature of their merchandise is such that customers are unlikely to visit at early hours or late in the evening. However, keeping the outlets open during the weekend will improve sales as the need for B&Q merchandise such as Do It Yourself material and equipment will be needed during free time in weekends. Therefore, if the shop traffic is low during early hours from 8.00 am to 9.00 am and during 6.00 p.m. to 8.00 p.m., the cost of keeping the outlets open during that time will have costs which exceed the profits from sales made during that time slots. By changing the operating hours from current 8 am- 8pm, to 9.00 am to 6 pm, the company will be saving on the electricity bills being incurred for these three hours which yield low levels of sales. Another area, which allows for cost savings is the wages and salaries of retail staff. By changing the operating hours of the outlets, the staff can be placed on one shift of 9 hours per day. The number of staff can be adjusted and the outlet can open on weekends for the same operating hours as weekdays. The staff costs can be reduced as no overtime needs to be paid and no double shifts are required. By extending operating hours during the weekend to match the weekdays, the outlets can also gain from increased sales. Savings are also possible in effective inventory management. Here, the shop floor staff should ensure that movement of goods are monitored and fast moving items are ordered in higher quantities while slow moving items are phased out or ordered at a minimum level. Efficient inventory control also includes minimising pilferages and damaged. By reducing such losses, which cost the company, savings can be made. If slow moving products are stocked high, the company capital is tied up and this too cost the company money in terms of cost of capital as interest, which can be earned or paid on burrowed funds. Another key expense, which should be looked at, is the rent factor. Here more than reducing the cost, what can be done is better utilisation of the floor space so that cost of revenue as a percentage of sales revenue is kept low. To do this, outlet personnel should plan the lay out effectively without unduly wasting the floor space. As every square foot incurres a cost, the area should be utilised according to fast moving goods being stocked more. High margin fast moving items should be given priority by placing them in better vicinity. In retail operations, the purchasing of goods or procurement should also be done with intentions of cost savings. Good negotiations and procurement skills will allow a shop to have suppliers who provide products at competitive prices and at good credit terms. Some suppliers can be asked to deliver to outlet itself so the cost of transport can be saved. Retail outlets also incur substantial costs in promotions and merchandising. These costs can be reduced substantially by forming alliances with suppliers and negotiating fully funded or partially sponsored promotional activities and merchandising material. Controlling administrative costs such as communication bills will also allow businesses to save costs though not very substantially. The outlet personnel should refrain from making personnel calls and abusing the facilities available such as fax and telephones. Most of the communications with head office and suppliers should be done via email to ensure low costs. Stationary should be used sparingly and without misuse per private activities. While these amounts to significantly low savings compared to other areas, the overall attitude towards cost savings should not be restricted to key areas but should spread across all levels of staff and across all areas of operation. The impact of these cost savings can be two-fold. Some of the measures such as controlling administrative costs will impact of lowering costs. Other activities such as adjusting the operating hours and managing inventory so that fast moving goods are given priority in shelf space and in stocking volumes will reduce costs and increase sales, thus impacting favorably on the profits. When operating hours are shifted so that the outlets are opened at the time when visiting customers are high, and during weekends, the company can gain from improved sales while reducing costs as electricity and wages which were being incurred in non productive hours. In the same manner, when fast moving goods with high margins are well stocked while slow moving goods are phased out or kept to minimum, the sales revenue levels can improve while cost of holding slow moving goods for a long time will be reduced. If the company is investing its own money in purchasing goods, which are slow moving, then the cost to the company is the opportunity cost of putting that money in a bank account and earning interest. If the company is purchasing stocks with money, which it has burrowed from bank as a loan, then the cost of holding slow moving stock is the interest on loan the company is paying. In other areas such as making better use of the wage and rent bill of the company, the productivity can be increased with the same number of staff when the outlet’s operating hours are changed. If the new & shortened working hours bring in same of higher levels of sales with the same number of staff, then the productivity per man hour increase in terms of sales revenue per man hour. At the same time, if being opened in weekends will increase the sales volumes, with the same number of staff, this will also reduce costs as a percentage of sales, increasing the profit margins. If the company was paying overtime payments for extra hours than 9 hours per day or using staff on shift basis, then the additional costs of OT and double shift will be reduced considerably, improving profitability. In is important to ensure that cost cutting exercises do not affect customer satisfaction or the quality of service, which will harm the company adversely than the benefits gained through cost reductions. It is therefore crucial that the impacts of cost cutting activities are evaluated on their pros and cons. The benefits gained should outweigh the losses, which may result in. What is also important to note is that cost cutting exercises should be discussed and undertaken as team exercise and should not be forced down on the staff as it will affect the workforce moral. If cost cutting exercises are linked to gain sharing plans when a percentage of savings are distributed among the staff, the effectiveness of the schemes may improve substantially as the staff involvement and commitment will be enhanced. Read More