Monday, November 19, 2007

Strategy for Managing Cost

Since cost is the most important tool that drives businesses to success, the strategy for managing cost is also important for business to succeed especially for giant retailer like Wal-Mart. Business’s performance can be defined by the success of minimizing cost due to retailer already have to compete in lower prices to attract customers. Cost is categorized into two types which are fixed cost and variable cost. For Wal-Mart, fixed cost includes rent, property tax, payroll, utilities, inventory, and administration cost which do not change by the sale level of the store. As business grows bigger, some fixed costs such as bureaucracy has increased and difficult to avoid or reduce. By regularly review periodical financial reports, Wal-Mart’s leaders and associates always work their best to find new alternatives, approaches, or chances to reduce some costs and increase sales. At Wal-Mart managing cost include many approaches such as budgeting payroll, saving on business travel, eliminating unnecessary cost, and investing in technology.

One of the most important approaches that Wal-Mart used to manage cost is to budget payroll. Budgeting payroll is useful for store managers to keep trace the payroll cost, review cost by department, and compare the actual cost to the plan. This budget will allow store managers to balance between hiring employees and the available fund. The successful managers must keep the payroll cost below the budget; however, if the cost is exceeding the budget they have to immediately find solutions to reduce the cost. A good example of this approach was the case in of Larry English who was the store manager #18 in Newport, Arkansas in 1970. With only 8% to the sales of payroll budget for his store, Larry had exceeded the budget by 0.1% and the problem was pointed out by his district manager, Don Whitaker. As a solution, Don had ordered the transfer of his store’s new assistant to another store in Poplar Bluff, Missouri due to the lack of Larry’s capability to manage his money. That financial punishment was a new lesson for Larry that had helped him succeeded in controlling his people with the money he had. As the result he had successfully opened many new stores in a giant size such as store #278 in Shrevepot in the size of 80,000 square foot and the store #512 in El Paso with the size of 110,000 square foot (Fishman, 2006). Besides transferring employees, the zero-dollar-overtime budget is also another solution to control payroll cost. After working on regular hours, people are already exhausted and less alertness; thus, it does not worth for Wal-Mart to pay extra one-and-a-half for exhausted workers to get regular job done.

Not only budgeting payroll cost, Wal-Mart also control on business travel cost. Not like the other company, Wal-Mart always finds the best possible way of saving even on business travel. Instead of booking first-class flight, Sam and all executive managers’ flight is always coach class on a commercial airline. Moreover, those who are on business travel will have their meal reimbursed only in regular restaurants not a high-class restaurant. Besides flight and meal, Wal-Mart also saves on the hotel room. With one of the most impressive policies at Wal-Mart is called two-to-a-room which requires all associates who travel on business to share the hotel room and usually one manager and one associate have to stay in the room (Bergdahl, 2006).

Another approach to control cost is called elimination approach which will eliminate all unnecessary costs. Unnecessary cost is unnoticeable cost that already occurred but customers are not willing to pay for it such as box in/out cost, moving cost, or recycling cost. Fortunately, Wal-Mart have noticed on these costs and in the early 1990s and it had started to eliminate these costs by corporate with the manufacturers of these products. For example, the revolution of elimination box from powder fresh and unscented products. Mathematically, this little change helps customers save millions of dollars each year. Supposed that only one nickel saving per container of deodorant, multiply by two hundreds millions of adult citizen in the US, the answer will be ten millions of dollars saving (Fishman, 2006).

Lastly, technology investment is also a great approach that Wal-Mart used to minimize cost. According to Wal-Mart’s history, the first technology investment was for computer system which was Sam’s idea. It seemed that this investment worth too much but the returns of the investment was greatness. The computers’ capabilities have great effect on business management such as provide on-time information for all levels of managers. With technology, the company had fasten the data processing time, improved customer services, reduced cost for gathering data from all divisions. Besides invested in information system, Wal-Mart also invested in electric power supplies which greatly save on utilities cost; for example, solar power investment. Wal-Mart has conducted many experiments on different types of new energy provider such as wind power, and solar power by building the first experimental store in Colorado. The result from that experiment proved that Wal-Mart had reduced the energy expense by %. From that experiment, Wal-Mart had decided to sign a ten-year contract to three large-scale solar power providers which are BP Solar, SunEdison, and PoweLight. The solar power energy will be installed on 22 sites of Wal-Mart in California and Hawaii (Wal-Mart Launches, 2007). Besides using new energy source to reduce the utilities cost, Wal-Mart also installed the new lighting system called GE instead of fluorescent lighting, which will save up to 66% on utilities cost. Moreover, Wal-Mart also equipped the stores with new technology devices such as sawtooth roof, radiant-heat snow-melt, evaporative cooling, and light-powered infrared sink. Each device has its own special function and characteristic which will greatly reduce the utilities cost. The new sawtooth roof will help the company saving on lighting cost because the new roof will allow more natural light into the shopping areas which will reduce the use of electricity. The radiant-heat snow-melt, which is a built-in heater pipe under the concrete across the sidewalks, will help company save on melting snow cost. The new cooling system will use less energy than the standard refrigerated air-conditioning system to keep the store in a comfortable temperature during the hottest days of the summer. The new sink will use less water than a traditional sink and function without electric power because the system relies on the restroom lighting which charges to a battery system (Wal-Mart Continues Green Initiative, 2005). Additionally, Wal-Mart also invested in technology to reduce inventory cost. For example, the Radio Frequency Identification-RFID will benefit both suppliers and retailers in order to control the flow of products from shipping to in-store displaying (Soderquist, 2005).
All in all, with these great approaches such as budgeting payroll, saving on business travel, eliminating unnecessary costs, and investing in various aspects of technology will help Wal-Mart to succeed its goal of minimizing cost with an efficiency of business operation.

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