National Clothesline

appy New Year, and welcome to 2003! In many respects this year will mirror the past few years for most drycleaners. The majority of cleaners have seen their piece volume decrease and profits decline even more. About a third of the cleaners have no decrease in piece volume and many in this percentile have experienced an increase in their piece count without decreasing prices.

Even more exciting than piece volume increases are the owners who have increased their profits despite the fact that their piece volume went down. How can this be? They did this by good management, and good management begins with knowledge.

Successfully running a business is much more than putting people and equipment to work. It requires putting knowledge to work. When they return from a meeting, my management group members want the type of practical education that they can put to work in their businesses immediately. Right now, they have improved the efficiencies of their companies to the point that profits are not driven by pure piece volume.

These owners have gone past Management 101 and understand how to measure the efficiency of their plant. In other words, they (like you, my readers) have the intellectual capacity to work with more than just whole numbers. They can work with decimals and convert those decimals into percentages. Hmmmm, and we’re not even close to rocket science, not yet.

In the book, The Managing of Organizations, author Bertram M. Gross describes calculating basic input-output relations as a partial or incomplete productivity or efficiency ratio.

For drycleaners, output is or should be pieces and input is time (usually hours). Thus, when you know that a unit (which can be an individual or team) puts out x number of pieces in x amount of time, you can calculate your “partial” productivity or efficiency ratio.

Example

Your drycleaning finishing department, consisting of three pressers, works a total of 20 hours today (two pressers working seven hours and one presser working six hours), and they produce 500 pieces. Your productivity ratio is 500 pieces divided by 20 hours equals 25 pieces per hour.

In the drycleaning industry, this ratio is commonly referred to as pieces per operator hour (PPOH). This is necessary information, but it is incomplete information.

As stated by the author, “The usefulness of any partial ratio is limited… and may lead to serious misunderstandings. The limitations of labor-output ratios immediately suggest looking at capital-output ratios instead.”

To successfully manage your drycleaning business, you must know the value of the output as it relates to the cost of the input. If all you know is PPOH, you will never know if the wages you pay are too high and you will never know if the prices you charge are too low for you to make money… NEVER.

Understanding your value productivity ratio gives you the ability to determine whether or not you can afford to increase employees’ wages when they ask you for a raise. Understanding this ratio will also tell you whether or not your prices are too low.

Let’s say your shirt department produces x number of shirts per hour — all shirt employees, all operations. Pick a number; —†25 PPOH, 30 PPOH.

We’ll use 30 PPOH. At 30 PPOH, are your labor costs in line with the industry standard for that department? If your shirt department went from producing 25 PPOH to 30 PPOH should you give those people a raise? Can you afford to give them a raise?

Can anyone answer these questions correctly, given only the PPOH? No, they cannot. One cannot make good management decisions without pertinent information.

Furthermore, let’s say your input unit, which in this case consists of all the people washing, pressing, inspecting, touching-up, assembling and bagging, is producing at the maximum. What do you do when you think they need a raise? How much of an increase do you give them? How do you figure out how much more the company can afford to pay them?

Do you take the simplistic approach of just looking at PPOH? I certainly hope not! This is a no-brainer.

There are three facts that you must know when figuring labor costs:

1. The prices you charge.

2. The wages you pay.

3. The output of your employees.

Any one or two of these factors by themselves are worthless.

We are getting closer to rocket science now.

Take your total number of incoming shirts and multiply it by your average price per shirt. Do this for last week.

Now, take your total shirt department payroll costs for that week. Use gross wages before adding the company share of FICA, FUTA, PUCA, etc.

Next, divide total shirt payroll by total shirt dollar sales. The number will come out as decimal — “.???”. This is your shirt department labor costs as a percentage of shirt department sales.

A few years ago the industry labor cost standard for the shirt laundry department was 25 percent of shirt laundry sales.

Using labor cost percent is the only universal way to measure productivity or efficiency. This holds true no matter where you are located in the world, regardless of the prevailing wages and prices in the area.

The drycleaners in my management groups have been increasing the quality of their shirts, improving the output of their employees and increasing wages. They are doing this while driving their shirt/laundry labor cost down to 20 percent of shirt laundry sales.

Most importantly, they have done this by managing their businesses by the numbers — the correct/complete numbers.

A few years ago the industry labor standard for the drycleaning department was 18 percent of drycleaning sales. Today, the drycleaners I work with are achieving drycleaning labor costs of 15 to 16 percent of drycleaning sales.

Once again, they have improved their quality and productivity and the wages of their employees. This accomplishment is only possible by knowing and understanding your value productivity ratios.

Now for the rocket science. For example, your shirt departments’ productive labor costs are 20 percent of shirt sales and your drycleaning departments’ labor costs are 16 percent of drycleaning sales.

Next question, what are your companies total productive labor costs? Calculating this requires additional information. You must know how much of your dollar sales are generated by shirts and how much by drycleaning sales.

Example

Total sales = $400,000.

Shirt sales = $100,000.

Drycleaning sales $300,000.

Multiply .20 x 100,000 = 20,000, then multiply .16 x 300,000 = 48,000.

Total Productive Labor = 20,000 + 48,000 = 68,000.

68,000 divided by 400,000 = 17 percent.

Thus, your productive labor costs are 17 percent of total sales. This does not include your Customer Service Labor Costs.

Now, realistically, can you achieve these numbers consistently throughout the year? The answer is a resounding YES.

On December 5, 2002 the Labor Department reported that productivity in the US grew at an annual rate of 5.6 percent. Productivity is output per hour worked. This statistic is not measured in PPOH — it is measured in hours and dollars.

Of course, there are ways to increase your PPOH without increasing productivity. You could pay your employees for 40 hours a week no matter how much they produce per hour. By doing that, your variable costs stay fixed and you won’t have to waste all that time figuring out how many hours your employees work every week.

The biggest problem with putting production people on salary is that you have to drive them all day, every day to get the work done. In this scenario, your payroll does not change when your volumes go up or down.

The only thing that changes are your labor costs. When your volume goes down, your labor costs go up as a percentage of sales. Not only do your labor costs go up as a percentage of sales, your labor costs per piece also increase. Therefore, production people on salary is not good management!

As you all know, running and managing a successful business is a lot of hard work. The good news is, if it were easy everyone would be successful!

I would like to take a moment to thank all of you who read this column. Your input, questions and comments give me many good ideas for my writing. I truly enjoy hearing from you. I’d also like to thank my management group members for the thoughtful and honest testimonials they provided for my advertising campaign over the last year. To all of you — a Happy, Healthy and Prosperous 2003!

In the game of business the more you know the better you can play the game.

Alan Robson is a private consultant dealing with the specialized needs of the drycleaning industry. Contact him by telephone at (941) 408-8819 or send e-mail to him at: alan@bizbuilderonline.com or visit the Biz Builder web site: www.bizbuilderonline.com.