Boost profits while cutting costs

There’s life beyond the quick fix of closing stores and reducing headcounts. According to Jerome Patterson, CMO of Acorn Systems, a Houston-based provider of profitability and cost-management solutions, fine-tuning internal processes can cut costs and directly enhance profitability.

He offers retailers three strategies for boosting profits while cutting costs:

Understand true product profitability. Rationalize SKUs, re-price and align assortments with customer value, negotiate better terms with vendors and collaboratively eliminate wasteful processes in the supply chain. The goal is to attain true product profitability at the item level.

“Cost-saving strategies must begin with a fundamental shift in thinking — away from simply revenue and gross margin to a true understanding of net profit at the item level, allowing the build-up to other levels of merchandise or location hierarchy,” said Patterson.

Revenue may not grow, yet profitability can, he added. Market leaders employing these strategies have recognized 5% to 15% of revenue in true profit improvement.

Create standards. Set internal benchmarks, comparing stores and distribution centers to identify best practices. One major big-box retailer analyzed process costs and staffing levels for every retail location, said Patterson. The retailer was able to identify stores operating with lower costs, pinpoint their efficient methods and apply them throughout the chain, allowing the “multiplier effect” to drive real benefits in reduced costs — at this retailer, more than $50 million in cost savings have already been identified.

?Negotiate with vendors. Analyze your vendor relationships at a granular level and based on true profitability. “Many market leaders have uncovered a win-win once this level of insight is generated, uncovering collaborative opportunities to eliminate wasteful processes, terms and conditions, sourcing decisions, etc., and optimize the relationship for both parties,” noted  Patterson.

“While each retailer undoubtedly faces unique challenges and opportunities, there are strategies that can be employed across the retail industry to trim the fat and build up the muscle,” said Patterson. “Now that Americans are tightening their purse strings, special emphasis should be placed on looking within the organization and managing profitability through strategic cost cutting.”

One grocery retailer renegotiated with key suppliers to drive benefits for both parties and delivered more than $30 million in annual savings.