Retail Observer

RETAILOBSERVER.COM APRIL 2014 62 R ecently there have been a lot of discussions on Chat USA about employee caused damage and inventory shrinkage. This is an area where most service centers look at the "cost" of the damage or shrinkage incorrectly thereby missing the real expense. So what is the actual cost of these circumstances? Isn't the cost just the expense it takes to remedy the situation? Not really- and here's why: Let us assume that you know your CODB and have calculated your profit margin for your business at 10%. This means that for every repair that you do based upon a specific volume and average labor cost that you will profit 10% on every job. This also means that your expenses after rent, payroll, fuel, insurance, utilities, taxes, etc. are 90%. Now let's take a scenario where an employee accidentally damages a product in the process of service. A real world example is the top cover of a washer or dryer falls and accidentally gets dented or scratched in the process of service. I will take a Samsung front load washer model WF210ANW/XAA. The price for this part varies between $120 and $150 depending upon from which distributor you order the part. We will go with $130 for this example. Let's also estimate the shipping of this part to be an additional $20 just to make sure we are covered. So the cost is $150 right? WRONG! Astute business owners will also recognize the cost of sending a technician back to the home to install the part. This includes the technician's labor cost, the fuel expense, vehicle costs (maintenance, tires, insurance expense, etc.) and we better not forget about the lost productivity for the time in repairing the damage. So we need to calculate our truck roll expense and add that to the cost as well. We also need to add the cost of your staff's time in researching, ordering and receiving the part too. We should not forget about the customer's perception and the possible loss of future revenue from this customer or loss of any referrals. I am going to say that $100 of these additional expenses would not be out of line in this scenario (and is probably pretty liberal). So now we know the true cost is actually $250, right? We can make that up in just a few jobs so that is not that bad… WRONG AGAIN! Why? Remember back at the beginning we calculated our CODB making 10% profit. Damage and shrinkage needs to be deducted directly from the profit- not included in the overall expense of the business. This means that the damage "cost" of $250 will actually take $2,500 of additional work to just break even at the 10% profit margin. Whoa! That is quite a chunk of change. Inventory shrinkage needs to be calculated the same way as well. The cost of the part, the staff's time in ordering and receiving the part, the shelf space it uses, and even the taxes on the inventory need to be calculated. A drain pump for a washer may be $50 or more once we add all of these expenses. Under the previous scenario at a 10% profit margin, the service center will need to do $500 just to make up for the loss of a drain pump. Now what if your profit margin were lower? It is pretty painful when you think about it. I recommend that every company keep track of these types of expenses and educate your employees about the actual costs and what it means for your company and profitability. If you are having a problem in this area with your company, I suggest that you include these costs as a direct reflection on any bonuses, raises or profit sharing as an incentive for your staff to do better. RO John E. Wilkins Jr. CSM/MST/CSR/A+ The Repair Pros, Salt Lake City, UT S E R V I C E D E P A R T M E N T WHAT IS THE REAL COST OF EMPLOYEE DAMAGE OR INVENTORY SHRINKAGE

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