Energy Matters

A local hotel owner, spying a deal, purchased an air makeup unit, at auction, for the restaurant in his hotel. The unit had been salvaged from a community club, but was in excellent working order and the price was a mere fraction of what he would have paid for a new unit. Unfortunately, he lost a great deal of money on the transaction.

First, the unit was sized far too large for his operation (10,000+ sq. ft for the community club, 240 square feet for his kitchen, 800 sq. ft. for the secondary room, his dining room. Second, he directed the output directly at the wall where his thermostat was located, meaning that the temperature setting did not reflect the room temperature.

Third. He had his air conditioning unit set separately from his furnace, with the heat set to engage at 20C (68F) and his air conditioning set to start at the same temperature. Consequently, both ran simultaneously.

Fourth, his cold air draw was behind his grille, so cold air was drawn over the heating unit, requiring more energy to operate the stove while creating hot and cold spots for cooking. With the size of the air makeup unit, the breeze was substantial.

Three simple solutions reduced his energy costs by over $1,900 per month: adjusting the thermostat properly, relocating the thermostats to a non-direct wall where there was representative air movement and installing a smaller pulley on one end of the drive-to-fan link on the makeup unit to slow it down.

Usually, it is the simple solution that saves the most money, but those are the solutions that are most often overlooked in developing an energy conservation program.

In the same manner, business owners often neglect preventative maintenance programs, assuming that they are a cost rather than an investment. But preventative maintenance programs cut operating costs, cut capital cost for equipment replacement and reduce down time that results in poorer quality or lost sales. Like the old Fram filter advertisements, “you can pay me now, or pay me later.”

Energy conservation and energy management programs should be simple to implement and easy to maintain. However, almost any program to conserve will pay for itself almost immediately and should be one of your business’s top priorities. 

Asset Tracking -- A Critical Part of Business Operations

A key part of the MOI Inventory is the practice of asset tracking. This includes all assets: inventory, supplies, tools, equipment and even employees and customers. Each is an essential asset of your business. Although we often view assets as hard goods, even Canada Revenue Agency and IRS consider that there is a business value to personal services and goodwill – the reputation that is accrued during business evolution. A degradation or loss of any of the soft or hard assets impacts on business profitability, making the need to track those items and services critical to business success.

As an illustration, imagine that your key customer relations employee has a bad day and, in dealing with one of your new clients, acts in a manner that leads that customer to decide that he will no longer deal with your firm. Given that it is much easier to keep a customer than find one, your business suffers a long-term loss. Perhaps a new product that you have introduced experiences a series of failures. Even if you are not the manufacturer, but merely a retailer, your reputation and your relationship with that customer is jeopardized, unless you have a consistent warranty and/or service policy. Maybe an employee in the field demonstrates inferior skills. Unless you have a consistent practice of training, follow-up and retraining, you will place your company’s reputation at risk. These examples of soft goods and service issues show the need to implement a system of monitoring that allows you to respond to and pre-empt problems that may arise.

The SAP system used by many larger corporations attempts to integrate all aspects of the business operation. The MOI Inventory, on  the other hand, serves the purpose of identifying issues, allowing the small business operator to respond as budget, time and preferences allow. Tracking, though, is the vital first step. Once concerns are identified, you may choose your individual response.

Tracking enables you to evaluate consumption patterns across the entire business spectrum. Need to know whether your employees are operating efficiently and effectively, or whether your labour costs are not properly recovered in your end price charged to your customers? Track performance, pay, down time and so on, using a tailored spreadsheet or simple personnel software. Need to know if supplies are being used in the proper manner, or if supply cost is too high? Track consumption and yield per supply item. Want to know and control product performance? Implement a Mini/Max system and conduct regular counts. Need to know if your tools are finding their way into your employees’ garages? Track and control each item and develop a system of accountability.  Is equipment used appropriately? Your preventive maintenance schedule will reveal issues.  How about customer loyalty? A variety of programs can be devised to monitor, either passively or overtly, your clients. Tracking is the integral element in each solution.

Rental and leasing operations often are vulnerable to loss, most frequently because of lessee default. By keeping accurate records of your rental clients and their business or personal history, you will be in a better position to recover those assets. More importantly, obtaining the best information prior to renting or leasing serves to make clients aware of your diligence and thus decrease the likelihood of default or conversion. Similarly, any time your assets are allowed offsite, you expose yourself to greater risk which, in turn, demands greater pre-emptive vigilance.

The process of tracking may seem tedious and not worth the effort, but a good tracking program, integrated into your general operation, can be both inexpensive and efficient.  Using the MOI Inventory, many businesses report an increase of profitability ranging from .75% to over 4%, while costs of implementation and maintenance generally fall below .25%. This simple cost versus benefit statistic reveals a significant reality: using tracking systems does not cost. It is an investment.

MOI: Motive (Method), Opportunity & Indicators to Prevent Business Shrinkage

Since more than 55% of thefts are ego-driven (a theft of something that enhances one’s ego or that serves a personal desire), it is appropriate that the best acronym for a strategy to detect and deter theft is MOI – the French word for “me.” However, almost all thefts and frauds, as well as inadvertent losses and shrinkage, can be monitored more effectively using a modified MOI Inventory.

MOI Inventories examine the three essential elements of any intentional loss: motive, opportunity and indicators. Losses and shrinkage other than theft and fraud also can be tracked using an Opportunity and Indicator spreadsheet. “Motive” becomes “Method” in the revised MOI Inventory. These include accidental shrinkage and failures in administrative or operational systems.

Loss occurs when a combination of the three – motive (or methods), opportunity, indicators -- reaches a critical mass. Critical mass results from reaching a threshold level of opportunity and motive, in specific. Little opportunity but very high motive, little motive but very high opportunity, average amounts of each, or any variety of those combinations will result in loss. An abundance of indicators also reveals that critical mass has or is being reached.

More than a decade ago, I was conducting a seminar on loss in a very tightly-knit community. As an illustration of the MOI principles, I placed a five-dollar bill on the front podium, one on the back table next to the coffee and snacks and one on the floor just outside the conference room door. By the end of the session all three bills were still there. However, in the eleven prior seminars across the province, I had lost every one of the bills placed outside the door, six of the ones placed on the rear table and none of the ones placed on the podiums, even though the podium was left unattended occasionally during each two-to-three-hour program. All of the bills had a telephone number written on them. To me, that illustrated opportunity at work, and motive. In sixteen instances, the two had reached critical mass.

Where the five-dollar bill lay outside the door, there was extreme opportunity and, while the amount was relatively small, the risk in taking the money was negligible. Critical mass was achieved mostly through opportunity. At the rear table, opportunity was moderate, but sufficient enough for some to take the cash. At the front, there was almost no opportunity and motive would have needed to be extreme for theft to occur. However, in the closed community, even the risk outside the door was high, if anyone had happened to pass by when the bill was being taken.

By reducing opportunity, even in the face of relatively strong motive, theft can be averted. By understanding individual motive and defending against it, opportunity can remain fairly strong and theft will be less likely to occur.

Indicators simply show where theft likely will occur, or where it has. These “tracks” will reveal the most available opportunities for deviant behaviour. Thus, by understanding motive, recognizing the indicators and responding to opportunity, loss can be reduced or eliminated in almost every environment.

But what of loss that occurs inadvertently, through administrative error, miscalculations and oversight? These, too, can be mitigated by attention to opportunity first, then by examining indicators or tracks and, finally, by looking at the methodology involved in production, distribution, presentation, development and delivery of goods or services. Within such methodology analyses are determination of yields, supply lines, market, money handling and various other aspects of operations.

Shrinkage is the cause of two-thirds of business failures (CFIB), with market conditions contributing the largest impact to the remaining one-third. Shrinkage is preventable. Shrinkage also is detectable. Thus, the use of the MOI Inventory is a vital strategy to help ensure that your business remains viable. However, most business managers and owners focus more on the marketing, rather than on the more tedious details of operations. In order to provide any business with the greatest probability that it will be successful, more emphasis needs to be placed on these technical aspects. MOI may well be the most viable of the tools available to do so.

Mini-max Inventory Management

Inventory tracking and sales tracking form the starting point for any good inventory control program.   Without knowing how much of any menu item you sold in a given week, or how much inventory you have consumed in that period, you will not know what your instantaneous food cost is, whether you are maintaining portion control, whether you are experiencing shrinkage, or whether you should adapt your menu.  By tracking sales, you can see where some menu items are dying, others are gaining in popularity.  By tracking sales, you can predict, year-over-year or week-over-week, what your sales might be in the upcoming period.  By predicting your sales, you can project your inventory needs. As a general rule, restaurants should conduct physical counts of inventory every month but preferably every week, and even daily on key items.  Without exception, restaurants should record the quantity of sales on every menu item, each day, and, if reasonable, during each peak period within the day.

However, tracking inventory is not just a task for restaurateurs and retailers. Every product-oriented business carries supplies, raw materials, finished goods and/or works-in-progress. These, too, should be monitored on a regular basis, and the most effective system of evaluation is the mini-max system.  

Mini/Max systems achieved a high level of popularity in chain department stores during the late 1970s.  By indexing prior period sales, factoring in an allowance for sales spikes, and multiplying that period’s demands by 2.5 times (allowing for double the order period and ½ to allow for emergency situations such as weather, shipment delays and supply shortages), the maximum inventory on hand is determined.  Using 1.5 times the period’s requirement, the store would know the minimum level to which that stock should fall before reordering to the 2.5 times level.  This was, in short, a minimum to maximum inventory ordering method that took subjectivity out of ordering, and the tendency to be overly cautious or overly optimistic.  Generally it works. However, if idiosyncratic demands of a local market are not considered in the national chain’s calculations, huge inventory spikes or shortages may result.  If there are anticipated peak demands (e.g. summer seasonal items or sale items), and mini-max order levels are not adjusted to reflect these needs, sales suffer.  In food service, as in any business, that simply is not acceptable.

Mini-max systems need to reflect the unique nature of each business and the particular demands of each market. They need to reflect potential supply line issues and waning demand or obsolescence. They should be fluid schemes, and responsive to emerging opportunity or problems.

A good mini-max system can provide the appropriate level of controls for any ordering program, but must be built into a thorough strategy of inventory management in order to be of greatest value.

Employee Collusion

In less than three months, the video department of a large Canadian grocery store had an inventory shrinkage of over $140,000, on sales of just over $400,000. That’s a 35% loss. Yet, there had not been one apprehension of any shoplifters in that period, due to heightened electronic article surveillance use. As well, close monitoring of shipments through the receiving doors and of bookkeeping in the office eliminated those two spots as sources of the loss. Then, one of the regional loss prevention officers noticed an oddity: there were several $1.47 and $1.49 sales in a two-week period, midway through the 3-month section. And, in every case, those odd sale amounts occurred during the shift of one employee. They began to monitor him closely.

Nothing happened for two months, until the employee again felt comfortable that he was not being watched.  Then, he sold a television to a young man, ringing up the sale. But the customer offered up only a ten dollar bill for the purchase, which was worth nearly $1,500. The team of investigators waited until the customer left the store, then apprehended him discretely. Another investigator continued to watch the employee. Within the hour, another young client purchased a laptop, a gaming console and software. Total value was $2,300. Again, only two fives were tendered. Now they had a pattern. The second customer was arrested, and the employee remained on duty while the LPOs waited for the police to arrive. In the meantime, they interviewed the “customers.” Both willingly talked, telling of the chain of purchases that they and four others had been making at the store. They repeated their confession to the police. Even though the employee later denied it, he was charged and convicted of eighteen counts of fraud. Only $22,000 of the almost $150,000 was recovered. That was the impact of collusion.

Collusion between staff and customers can be problematic in any operation, from retail to manufacturing, from office to service from warehousing to transportation. But it is only one arm of a many-limbed problem, with collusion between bookkeepers and suppliers being one of the most common sources of theft and fraud. Back-door loss often occurs when delivery driver and receiver/shipper choose to cooperate to commit theft or fraud. Sales reps and floor managers, employees and forepersons, bookkeeper and cashier, merchandiser/stocker and receiver or supply company office staff and receiving company back door employees also are common combinations.

Collusion also is one of the most difficult forms of theft or fraud to detect and deter, as well. Simple cameras or basic control systems frequently are not enough.  At the same time, catching such collusion does not guarantee conviction, as it may be difficult to show that the employee knew he or she was causing a loss, if an arrest is based on only one incident.

To reduce collusion, regular monitoring & surveillance, knowing each employee individually, established policies and consistent  controls are essential. Collusion can be reduced, but it is almost impossible to eliminate. Your best choice is to keep the opportunity for loss to a minimum, by being a hands-on owner or manager.

Inventory Yields

If we look at inventory management as only physical stock management, we may be ignoring the best available control over loss of profits in our business. Inventory control applies as well to supply and materials management as it does to stock, and almost as well to human resource management.

Restaurant inventory management provides the simplest example. Yields of burger patties, buns, and even pickles, ketchup, lettuce and onions are obvious targets for inventory management. But beyond the hamburger itself, we should look at yields of such items as napkins, takeout containers and wraps and even yields of natural gas consumption to run our grills and fryers. They all vary, depending on the items being prepared and sold, and vary depending on management of our rush and off-peak demand loads.  Even grill stones can be managed, by monitoring sales and yields.

Yields often vary in food service outlets based on demand. However, the same yields analysis can reveal how items in production and manufacturing settings can be affected by fluctuating demand and “portion” control.  Yields on welding rods, grinding discs, jigs, etc. are vital to effective pricing and determination of margins and markups.

Hand in hand with use of yields analyses is regular, accurate use of waste (spoilage, damage) and return/refund sheets. Factoring in these negative forces on our yields will show us how to tweak product development, handling & sales to minimize waste and returns. With trendy or perishable items, monitoring patterns of sales, in conjunction with patterns of yields will provide valuable clues as to when to delete an item, adjust pricing or modify production to maintain profits for that item. For example, if you sell an item that needs diesel fuel in the manufacturing process, wild variations in price also will affect your profit, and you should be able, at a glance, to determine when you need to shift away from that item or find more cost-effective solutions for production. Other items may have strong seasonal impacts, particularly in the agriculture or food service industries.

Yields analyses will reveal the most effective pricing strategy, as well, and will show you, even before you put an item into production or on sale, whether that item is likely to be profitable, or at what level you need to sell in order to be sustainable. This means that yields analyses should form a key part of any business planning or feasibility studies.

Employee Leakage: Unintentional Loss

While employee theft gets the lion’s share of attention in business circles, and supplier/shipper fraud comes a close second, retailers point to shoplifting as the primary cause of shrinkage. Yet, all three combined barely equal, if not fall short of the losses in business due to inadvertent shrinkage.

The term “leakage” is more apt, because the losses may be a slow, methodical trickle, but they seep away day after day, year after year, unnoticed. Theft tends to be seen more often than fraud, but many stories have made the news about fraud, particularly in non-profit businesses and the financial sector. Leakage, on the other hand, is like a sieve, with tiny hole after hole allowing the profits to drain away.

Leakage occurs in almost every facet of a business.

The receiving door often is the most frequent source of loss, even when the receiving door problems infiltrate into the back office. Of all problems, failure to accurately count incoming and outgoing stock, supplies and materials is the most common. Tracking of damaged, returned or incorrect/inadequate goods is next. In food service, quality control problems are seen more often at the stock room than on the sales floor. In machining and fabricating environments, misuse of supplies or raw goods is a major issue, but quantity and quality controls are essential to control damage and inferior input/output of goods.  Stock handling and rotation also contribute to back door problems.

Receiving door problems that migrate to the office include mispriced goods, back orders, wholesale pricing problems and stale-dated or low-grade receipts. Simply losing paperwork adds another significant headache to managing inventory.

In the sales office or on the sales floor, myriad opportunities for leakage occur. Poor scanning and incorrect pricing issues lead the way in retail settings, while portion control and poor preparation & handling are top problem areas in restaurants. Failure to follow up on orders out often leads to customer service issues with quantities and quality. In the rush to capitalize on a sle, price quotes often do not reflect cost issues.

Throughout the operation, soft cost controls and operating expense issues drain profits. Energy costs are most obvious, followed by banking/credit issues and management  of supplies not directly linked to production. Maintenance of equipment (or the lack thereof) cost businesses in premature wear but, more critically, can create huge problems when malfunctioning equipment stalls a production run.

In any business, leakage easily can cost 3-5% of revenues. In most cases, that is the difference between profitability and bankruptcy. Yet, the investment to implement simple systems generally is less than ¼ of any recovery, so there is negligible risk to investing in a good operating system evaluation of your business.