[This post is by Don Kennedy]

There is a retail spot near my house where I watched many businesses come and go over the years. One business was, yet another, specialty burger place struggling to stay afloat. The owner had a fairly well-paying job on the side that was helping meet the expenses of this restaurant. Near the end, the owner told me that he was struggling to find more ways to cut costs. His vision was to squeeze a few extra dollars profit out of a small revenue number. Most everyone knows that increasing profit is the end goal but there is no clear formula to achieve that. 

Cutting costs seems like a sure thing, but how? Does lowering hourly salary for workers achieve better results, or aggravate turnover and the quality of the worker? Maybe increasing wages entices more productive workers and saves in recruitment or training costs. In the burger joint case, it seemed that the only way to get more income was to increase revenue. Raising prices might work or might reduce the number of customers. Lowering prices should increase numbers of units sold, but will it be enough to make up for the lower revenue per unit? Advertising should increase revenue, but again, will profits be enough to cover the ads? This owner did not have sufficiently deep pockets to find out.

The most recent tenant was a person who started out selling refinished furniture out of her garage. She was almost making enough profit to pay herself a minimum wage, $1600 per month. There is a common adage that one should go big or go home. The concept of economies of scale implies that boosting sales will result in savings in raw material bulk costs, reduce the impact of overhead costs per unit, and create organic growth through word of mouth. The artist realized that selling from one’s garage makes customer awareness very difficult. She correctly surmised that a storefront would attract customers simply from foot traffic. Setting up shop in this retail spot was effective at increasing sales. Two months into operations at the new location, sales and gross profits both doubled. Now that she was making $3200 per month, but then there was the new cost of $3000 rent and only $200 left to pay herself. I see a For Lease sign in the window of the spot once again.

Success in business is complex without any simple formulas to follow. Good concepts often fail due to a lack of understanding of the basic principles.

About Don Kennedy

Dr. Donald Kennedy, Ph.D., P.Eng., IntPE, CPEM, FASEM is a long time contributor to the Practice Periodical. After spending a few decades in the world of heavy industrial construction and operations, Dr. Kennedy finds himself approaching a one year work anniversary in the world of ERP driven operations and assembly line style manufacturing.