The Role of People Importance in HVACR
Our brand of wholesale distribution has to be one of the most people-intensive business models in existence. Sure, we have warehouses, inventory, customer credit, computers and company fleets of cars, trucks and lord knows what else, but people are the driving force of our model. Think about it: For every dollar of gross margin generated, something like 58 cents goes toward paying our folks. To put it into perspective, this is four-and-one-half times our occupancy expense and three times our other operating costs. It’s a big deal; getting bigger.
News pundits point to lowering unemployment numbers, nearing those of pre-recession days. However, these don’t tell the full story. I believe the pool of high-quality folks required to impact our businesses has been fully absorbed. It’s the law of supply and demand. Since midway through the year, I have seen salary demands for new recruits on the rise. High-skill and technically qualified folks especially are demanding more money. For example, the starting wage for new engineers straight out of college has reached $60,000.
The business model doesn’t allow a lot of leeway for raising the cost of employees. We can’t afford to raise our percentage spent on people above the 60 percent point and remain in business. There is little we as a business can do about the escalation of salaries, benefits or health insurance. So, productivity gains are no longer just nice to have, they are a necessity to survival.
For the next few minutes, let’s explore some of the best practices used by others to build productivity within your organization.
Experienced people tend to be more productive
Research into hundreds of distributor organizations points to evidence that experienced people are more productive in their roles. They know the systems, short cuts and processes required to adequately carry out their job. In addition, experienced folks often have a deep industry background including customer contacts and the supplier people working behind the scenes whom you can call upon in a pinch to solve issues.
Retaining experienced hands is critical to productivity with the following caveat; they must possess the right work ethic and professional skills, and they must be in the right position. Hiring errors left to simmer within the organization don’t improve productivity. For the sake of our discussion, we’ll assume the last big recession gave you the opportunity to purge them from your organization. Hopefully, other poorly performing employees are on solid improvement plans or on their way out the door.
Whether they mention it or not, assume your team is under scrutiny from headhunters. Other companies armed with a handful of dollars are probing your defenses. Fortunately, money isn’t the massive driver many of us believe it to be. Assuming your pay scales are reasonably sound and have kept up with the industry norms, the real drivers fall into issues of job satisfaction, proper tools to do their job, room for growth and a feeling of appreciation.
After conducting exit interviews with more than 100 employees who were on their way out, I am shocked and surprised to find the vast majority indicate they have not had an adequate review of their performance for years. Their managers point to ongoing informal conversations with the employee, but the folks leaving don’t see it that way. What’s missing? A plan for the employee to grow within the company. A formal recognition of success with customers. A show of appreciation for years of service. Their managers use the excuse that putting together a proper review is time consuming and difficult, yet they overlook the issues of finding and training a new replacement.
A few old-school distributor owners have even commented that reviews just open the door to higher employee salaries because after a good review, employees expect a raise. In today’s environment, I suspect a new hire with similar skills might demand greater compensation than the existing employee, not to mention associated costs of lost productivity.
Front-line managers make a difference
According to work done by the Gallup organization first detailed in First, Break all the Rules, employees join companies but quit because of bad managers. Realizing the management structure of many distributors appears flat on paper with everyone reporting to just a few people, many of these front-line managers may not even have a manager title. We might call them something like warehouse lead, inside sales supervisor, senior buyer, or perhaps they carry no real title but direct the work of others. To a lot of your workers, they are the “go-to” person and reflect the day-to-day voice of the company. And, they have no training.
What kind of training might be required? First and foremost, they should have a keen awareness that their words and actions reflect on the company. An off-the-cuff comment from them carries more weight than they imagine because other employees believe them to have an inside track on information. For example, the front-line guy may quip that business is down, and that means pay increases will be impossible to come by. Even though the high-performing employee overhearing the comment was destined for a promotion and a raise, the offhand mention opens the door for an untimely exit.
Front-line managers need to understand how to handle conflict. Emotional outbursts, bullying and relatively common employee disputes create havoc with morale. In the typical situation, job satisfaction drives downward, opening the doors to loss of productivity and potentially the loss of an experienced worker. In a few catastrophic cases, an unhealthy or hostile work environment creates an expensive legal situation where the company shells out tens of thousands of dollars and tarnishes its reputation.
With proper coaching, the front-line manager assists in developing employee reviews. They understand when and how to add information to the employees’ job file. Issues with tardiness, work-space cleanup and other matters are properly routed to high authorities along with properly documented updates on overall progress.
Every manager must have skills for the future
Distributors do well with product training. I am constantly amazed at how many product-centric technical details warehouse workers, accounting staff and other nonselling team members actually possess. However, as a group, we often stumble in other skills-based training topics. Sales training gets lots of ink, but today let’s focus on the managerial side of the equation.
Some management skills are general in nature. I believe everyone needs to be proficient in their use of the personal computer; and I’m not just talking about how to turn it on. Research indicates many managers struggle with simple tasks such as how to organize files in their system for easy retrieval. Important documents are lost or temporarily misplaced, resulting in downtime while you search or recreate them.
Email archives in our industry are often messy and hard to maneuver through. Billions of emails carry information that you sent and received throughout distributor land. Some of this is important stuff. Dealings with customers, suppliers and others within the organization rely on proper storage with the ability to find the information at a later date. You can’t do this with 11,000 items randomly hanging in your inbox.
Finally, I can’t conceive of any manager not being proficient at building and manipulating a spreadsheet. Analytics provides a powerful tool. Enterprise resource planning systems seldom serve up much of the data required to make better decisions. The ability to project and measure this information is critical for the future.
Specialized training is required for every department
Let’s take a few moments to review some of the training that may be lacking in your own organization. We’ll take a couple of departments and provide you with a checklist of the training required.
Warehouse – Most warehouse managers in our industry have never received any kind of training, either formal or otherwise, on the science of warehouses. A quick tour of the industry points to warehouse managers who have never set foot in the warehouse of another organization. A walk through the warehouse operation of a food or sundry products wholesaler will give even the best HVACR distributor a sense of inadequacy. Here are some of the things to think about:
• Have you designed the warehouse for efficiency in picking and putting away products?
• Are locations assigned to products so a new worker will have an easy time locating the right part in a sea of unfamiliar choices?
• Can your company do wave picks when picking multiple orders at the same time?
• Do you use barcoding to minimize errors in shipping?
• Do you conduct a proper cycle count or do you leave it to “when the time allows”? Is there a procedure for identifying lost or misplaced items?
By the way, the latest studies indicate our warehouses are three to seven times less efficient than modern central distribution centers; no telling how less efficient than Amazon’s warehouse. The cost of warehouse workers represents approximately one-tenth of the total people cost. When was the last time you took a look at the job descriptions and training required for warehouse workers?
Purchasing – This group touches everything coming through your organization. The majority of the time, the purchasing group controls the amount of inventory in stock. They impact terms and conditions and play a big role in controlling incoming freight costs. As with the warehouse manager, it is rare to find a purchasing manager with experience in another industry. Because the purchasing manager has such an impact on the bottom line, we recommend answering the following questions:
• How do you ensure that your organization gets the best possible price on products purchased?
• What is the GMROI (sometimes called turns and earns) of each product line you carry in stock? If you don’t understand the implication of this calculation, this would be something to explore.
• How do you calculate the value of a preseason discount versus buying the product normally?
• With what methodology do you track stock that has been in inventory for more than 180 or 365 days without a sale?
• What is the cost of stock freight for each product line, and how can you reduce this number?
• Do you understand the nongross margin value of each of your suppliers?
• Do you review and evaluate supplier performance using the HARDI Supply Chain Scorecard?
Tying this up and heading down the road…
We spent most of our time thinking about improving the manager’s ability to maneuver in a changing environment. Skills at the front-line management level open the doors for determining the right training for the whole team. Improved productivity requires skills training, but it’s not a one-size-fits-all world. Productivity in the warehouse requires a different skill set than productivity in the back office. Productivity at the counter differs from productivity in purchasing. Skill training must be closely matched to the individual employee.
Finally, we have some training points for the managers of your counter, sales team and accounting group. They are yours for the asking. Shoot me an email and I will forward you the list.