Increasing sales often takes months and requires the capital to buy more cars and pay for new marketing efforts. Fortunately, there is a quicker way to higher profits.
You can be as profitable as you once were by lowering your costs. The beauty of increasing profits by cutting expenses is that you can take actions today and see better cash flow and profit numbers within a few weeks. Having achieved better cash flow and profits, you can then use the surplus to buy more cars and get the inventory to drive higher sales.
Let’s talk a little about lowering your costs by changing your compensation structure to pay for performance. I have helped dozens of yards go from hourly to incentive-based compensation. Some recoup the cost of hiring me in less than one week. Switching to pay for performance is one of the fastest ways to lower costs, improve productivity, and increase profits.
In past articles I discussed pay for performance for sales people and dismantlers. Let’s see how it works for parts pullers and order fulfillment people.
This is one of the more challenging areas for pay for performance because of the many kinds of parts that get pulled and the differences in the job descriptions of the people who pull them and fulfill orders. Despite these issues, many yards successfully use pay for performance for parts pullers and order fulfillers.
The first step is to spend a few weeks gathering data about how much work each of these employees is doing. When you look at data on individual productivity, you are going to find some surprises. You will really find out who your star performers are and who is just punching a time card.
You need to really think about the jobs your people do and break down the tasks into buckets. By looking at your better performers, you can get an idea of what the right number of a certain kind of parts pulled or orders fulfilled should be. You should set optimum performance for each bucket.
Next you should assign a dollar value to that bucket based on performance at the optimum level. Then go back and calculate what each of your employees would have made had pay for performance been in place.
Your numbers are right when your worst performers are complaining and your stars are excited about what their weekly check would have been. Expect belly aching from the laggards, but don’t let it bother you because they need to speed up or move on.
The real gains from pay for performance will come when you hire from outside and you get a person who is on fire to earn as much as possible and unaware of the magic number to be a star. The new person finds ways to go even faster and everyone else doing the same job has to reset the bar. The end result is a team exceeding what it believed was its peak performance.
How much more productive will your parts pullers or order fulfillers be? Expect at least a 30% gain.
So what if your people get done early? You can let them go home early or issue them a P.O. for other work at as number of hours that seems fair. Be sure to let them know that the hourly rate they make is based upon how productive they are as a parts puller or order fulfiller. So if they are making $15 an hour pulling parts or filling orders, they get $15 per hour to sweep the warehouse or to do any other side work you give them.
How motivated will they be to push their hourly as high as they can? Very.
When I did pay for performance in my yard, I based vacation pay on an employee’s average hourly earnings for the previous 8 weeks. The stars shined and the laggards left without me having to let them go. The employees that stayed thrived on being in full control of their paychecks, and I lowered my costs and became much, much more profitable.
Your most successful competitors have already implemented pay for performance. You should too, especially if your labor expenses are above 20% of total parts sales. Next month, we will take a look at how pay for performance works for delivery drivers.
Remember only you can make business great!
Ron Sturgeon, founder of Mr. Mission Possible small business consulting, combines over 35 years of entrepreneurship with an extensive resume in consulting, speaking, and business writing.
A business owner since age 17, Ron sold his chain of salvage yards to Ford Motor Company in 1999, and his innovations in database-driven direct marketing have been profiled in Inc. Magazine. After the repurchase of Greenleaf Auto Recyclers from Ford and sale to Schnitzer Industries, Ron is now owner of the DFW Elite Auto suite of businesses and a successful real estate investor.
As a consultant, Ron shares his expertise in strategic planning, capitalization, compensation, growing market share, and more in his signature plain-spoken style, providing field-proven, and high-profit best practices well ahead of the business news curve.
Ron is a web expert, but he is also an expert in helping all types of small businesses become more successful and more profitable. He has helped owners in industries from restaurants to law firms with a wide variety of business issues, including sales, promotion, production, financial measures, business strategy, and planning for startups.
To inquire about pay for performance compensation plan consulting or keynote speaking, contact Ron by calling 817-834-3625, by emailing rons@MrMissionPossible.com, by mailing 5940 Eden, Haltom City, TX 76117, or online at Mr. Mission Possible.