AN APPRAISAL OF DEPARTMENT STORE EXPENSE MANAGEMENT PROBLEMS, CONCEPTS, AND PRACTICES

DISSERTATION

Presented in Partla 1 Fulfillment of the Requirements for the Degree Doctor of Philosophy In the Graduate School of the Ohio State University

by

CHARLr-S WILLIA rt EMORY, P.S. in E.A., M.P.A 4 » The 0nio State University

1951

Approved by: TAbLE Cl CONTENTS

Chapter Pa^e

I INTRODUCTION ...... 1 II STATIC VARIATIONS IN DEPARTS NT STORE EXPENSE ...... 11

III DYNAMIC VARIATIONS IN DEPARTMENT STORE EXPENSE ...... Ub IV EXPANSE MANAGEMENT PRACTICES IN DEPARTMENT STORES ...... 79 V POSTWAR INNOVATIONS IN EXPEwSE MANAGEMENT ...... 13 5 VI AN APPROACH TO EPVECTIVE EXPENSE MANAGEMENT ...... U| 0 VII APPROACHES TO PhObLEMS OI1 EXPENSE REDUCTION ...... ltl VIII MEASUREMENT TECHNIQUES IN THE MANAOEMHNT OF DEPARTMENT STORE EXPENSES ...... P07

IX DEVELOPMENT OF A FLEXIPLE EXPENSE-VOLUME RELATIONSHIP ...... P37

X SUMMARY AND CONCLUSIONS ...... 309

BIBLIOGRAPHY ...... 333 APPENDIX A ...... 33^ APPENDIX E ...... 336

APPENDIX C ...... 339

11

8 9 2 5 0 1 LIST OK TABLES

Table No* Pa^e

1 Expense as a Per Cent cf Net Sales for 21+ Department Stores With Sales of $20 to $50 Millions in 191+9* by Natural and Functional Classifications, United States, 191+9 ...... 15

2 Expense Hatio To Net Seles for Depart­ ment Stores of Different Sales Volume, in 6 Selected Years, 1936 to 1 Ql_«9 ...... 17

3 Relative Size of Expense Ratio Com­ parisons between Adjacent Store Sales Volume Groups Within Given City Size Groups, and between Ad acent City Size Groups within Give Sales Volume Groups, United States, 191+0, 191+3, 191+6 an<3 191+9 ...... 20

1+ Computation of Estate Costs Per Square Foot of Space for Stores in Different City Size Groups Within. Selected Sales Volume Groups, 191+7...... 2i+

B Per Cent of Main Store Soles and Selected Sales and Expense Data for Different Merchandise Lines, for Stores with Various Sales Volumes, United States, 19i+b ...... ?9

6 Expense Ratios to Sales for Total Expense and for Five Functional Classifications for Department Stores of Various Sales Volume Groups, United States, 191+6-191+9...... 32

7 Expense Ratios and Differences etween Expense Ratios of Adjacent Volume Groups, for Selected Expense Items, for Stores with Sales from $1 Million to ever Millions, United States, 19l+b to l^Q... 37

ill Table No. Pape

8 Average Annual c>ales pen Employee, per Salesclerk, per Square Foot of Space, and per Square B'oot of SelHnp Space, for Department Stores of Different Size, United States, 191+0, 19L|5, l?Jjb, and 13[)9 ...... i; 0

9 Total Expense Ratios, Cyclical Adjust­ ment, and Adjusted Total Expense and Functional Expenses for Selected Volume Groups of Department Stores, United States, 1929 to 191+9...... 51

10 Compensation of Personnel, and the Use and Efficiency of Utilization of Person­ nel and Space, in Selected Groups of Department Stores, United States, 1929 to I9I+.9...... 50

11 Factors and Considerations in Determin­ ing the Amount to be budgeted for Selected Payroll and Nonpayroll Expenses, 50 U, S, Department Stores with estimated Annual Sales of More than $.10 Will ion, 1 9 5 1 ...... 89

12 Method by Which Selected Payroll and Ncnpsyroll Expenses are Controlled in 93 U.S. Department Stores with Estimated Annual Sales of More than 4>10 Millions, 19 SI...... 90

13 Work Areas Where Four Selected Efficiency Improvement Techniques Have Been Used in 55 U.S. Department Stores with Esti­ mated Annual Sales of More than b'10 Millions, 1951...... °7

ll+ Existence of Specific "Progress I veH Expense Management Characteristics in Two Selected Groups of Department Stores with Estimated Annual Sales Over .^10 Million, 1951...... 113

15 Areas Where Three Selected Research Techniques Have been Used in 13 U.S. Depart­ ment Stores with Estimated Annual Sales of More Than .$10 Million, 1951...... 130

1 v LIST OF ILLUSTRATIONS

Figure No. P r ’B

1 Total Operating Expense RatJ os, and Cyclically Adjusted Total expense Ratios with Computed Secular Trend, for Selected Volume Groups of Depart­ ment Stores, United States, 1929 to I9J49...... s2

2 Cyclically Adjusted Functional expense Ratios with Computed Secular Trends, for Selected Volume Groups of Depart­ ment Stores, United States, 1929 to 191*9...... 3 Cyclically Adjusted b.ypense Ratios with Computed Secular Trends, for Selected Volume Groups of Department Stores, United States, 1929 to 19ip9...... 97

I4. Nonsecular Patterns of the Major Natural Expenses in Selected Volume Groups of Department Stores, United States, 1929 to 1949...... 6d

9 "Present" Method of Securing Information from the Bride's File In a Silver Depart­ ment...... I?!

6 "Proposed" Method of Securing Information from the Bride’s File in a Silver Depart­ ment ...... 173

7 "Present" Method of Recording and Filing a Carpet and Rug Service Claim...... 1 7 !-j

H "Proposed" Method of Recording and Filing a Carpet and Rug Service Claim...... 17^

9 Activity Analysis of Wrapping Goods After Sale in a Department Store...... 17*)

10 Daily Production Record of an Accounts Receivable Biller...... 22^

v Figure No. P^ge

11 Time Study Sheet Showing Timings of Transcription of Information to a Sales Check...... 22^

12 A Standard Practices bulletin for Writing a Green Sales Check in the P.S.S. Housewares Phone Room...... 22b

13 Productivity Charts as Used in One Department Store ...... 237

1/4. Quality Control Chart Showing the Number of Errors Per 100 Orders...... 2J+2

13 Indexes of Total Expense and Net S;les for All Department Stores with Sales of at Least $1 Million, Reporting to the Harvard Graduate School of business dur­ ing years 1939“19U9 ...... 26^

16 A Breakeven Chart for a Leading U.S. Department Store, 19lj.b...... 2t>3

17 Adjustment Department Payroll ana Total Claims Processed with a Line of Relationship Fitted by Inspection, for a Leading U.S. Department Store...... 27I4.

18 Excerpts from Detail Expense budget Sheet for an Adjustment Department 27 b

19 Excerpts From An Expense Control Schedule of Monthly Expense Allowance at Varying Workloads, for the Adjust­ ment Department...... 277

20 Budget Forecast and Analysis Report.... 279

21 Variable Budget, Production, and Help Report...... 2ol

22 Bi-Weekly Payroll and Net Sales of a Women's Apparel and Accessories Division of a Leading U.S. Department Store 2o5

vi Figure No. Pa ge

23 Exo erpts From Expense Pudget Data Sheet for the Women's Shoe Salon. 2H5

2U Wee kly Output in Work Units, and Do lars of Payroll in a Sales Aud itlng Department of a Leading U. Department Store, 1930*.... P9b

23 Results of a 29 Month Industrial Engineering Program in the Clerical Service Department of the Credit Division of a Department Store..... 3 2d

vii CHAPTER I

INTRODUCTION

The problems of marketing costs have generally re­ ceived less attention from students than have many other aspects of distribution. In retailing, in particular, tnere has been a singular neglect of expense problems. This study represents an effort to add to the fund of knowledge concerning the problems of expense and its management as found in department stores. Encouragement from store executives and scholars alike, together with a firm con­ viction that a study of the problems of high costs must come at a specific institution level, have stimulated the investigation.

Importance of Expense Management- Expense management is an important and challenging problem in marketing. It is not, however, the sole consideration in a study of dis­ tribution costs. Basic to an overall analysis of marketing costs are such Important aspects as the selection of dis­ tribution channels, determination of functions to be per­ formed and by whom they can be performed most economically, general problems of marketing methods, and others, but among distribution coat problems, that of the analysis and

Improvement of marketing efficiency from an operational

1 2 point of view is one of the most pressing. It is important that the screen of inefficient internal operation be pierced in order to make the evaluation of other less obvious pro­ blems more approachable* To a significant degree, the Im­ provement in expense management concept and technique is a prerequisite to a more scientific attack on the other prou- lems in overall distribution efficiency*

High Coats in Marketing- High costs in marketing have received much attention in recent years, both in the form of attacks on the efficiency of the distributive system and defenses of this system. The attacks generally have follow­ ed the claim that an inordinate share of the consumer's dollar goes to middlemen. In one famous study of distri­ bution costs It was concluded that, in 1929* goods with a retail price of $65*6 billion were marketed with a distribution cost of $3^*5 billion.^ This expenditure of

59 P®r cent of the retail dollar was held to be excessive.

Without considering the accuracy of the estimate of 59 per cent, it Is generally conceded that the overall cost of marketing absorbs about 50 Per cent or more of the selling price of consumer goods.

Those who defend marketing costs against these criticisms point out that: I------P. W. Stewart and J. P. Dewhurst, Does Pistrlbutlon Cost Too Much?. (New York. The Twentieth Century Pund,1939”). p. i w r 3

1* The distributive processes are falsely accused when It Is claimed that marketing offers little in the way of worthwhile utilities to consumers* Examples of time, place, and possession utilities are cited to show that marketing is truly productive in an economic sense*

2. Much of the "high cost of marketing" is actually in the form of camouflaged production costs. The scale, method, and specializations in manufactur­ ing, while achieving spectacular production results, have placed an added burden on the distributive system* Increasing economies in mass production foster increasing difficulties in marketing*

5* "There is a fundamental difference between production and distribution which is often over­ looked* Production, in many industries, lends Itself easily to economies because of wide latitudes offered for mechanization and the use of capital"...» "Distribution, on the other hand, is very largely a matter of personal service* Labor looms large and machine methods have distinct limitations. For this reason it is much easier to reduce production costs than marketing cost."^

1^* Marketing costs are equal or higher than pro­ duction costs, but this does not prove that marketing costs are too high. Only when there is r significant potential for reduction are costs too high*

Retailing Coats and Marketing Costs- It is estimated that, in 1939* the cost of marketing goods in this country was about $^9*U billion* Approximately i+l*5 per cent represented retailing costs. The ^8*5 P®r cent included wholesale middlemen's costs, manufacturers' marketing costs.

N, H. Engle, "Distribution Coat Analysis by Commodities," Proceedings of the Ninth Boston Conference on Distribu­ tion. 1937. rRetail Board ot tra

3 transportation coats, and others. An even higher propor­ tion of total marketing costs was absorbed in the retail­ ing of selected products sold in department stores. For example, retailers' margins for women's dresses varied from 36 to 77 per cent of the total distribution cost, depending primarily on the price line. Tne retailers' marg­ in on women's shoes was about 60 per cent of distribution cost, while on electric appliances it amounted to 57 P©** cent when sold through wholesalers and 77 P©^ cent when sold directly from manufacturer to retailer.^ These high commodity costs suggest that department stores are high-cost institutions.

From the data below it Is apparent that department stores ranked among the high-cost store types in 1939*

The comparison is even less favorable when operating results of larger department stores are compSred to other store types.

3 P. D. Converse, "The Total Cost of Marketing," Journal of Marketing. Vol. X, No. 4, (April. 194*>)f P* 4 Computed by Professor R. S. Alexander from material presented by the Twentieth Century Fund In Does Distri­ bution Cost Too Much, and by the Federal TFade Commission in a report on Distribution Methods and Costs (19144)* S®® c * F* Phillips led.). Marketing by BSnuTacturers, (Chicago, Richard D. Irwin, Inc., 195i ), P. l£>. 5

TYPE OF STORE EXPENSE AS A PER CENT OF NET SALES^

Jewelry Furniture Appliance Department Shoe Women*a Ready-To-Wear Men's Clothing Drug Hardware Limited Price Variety Filling Station Groceries and Meat Motor Vehicle

While a volume of leas than $150 thousand is not typical

of department stores In general, this size classification

is used here for greater comparability with the other

stores* The more common concept pictures a department

store as a multi-story emporium with annual sales In the millions* Indeed, the definition of a department store suggests volume:

"A retail store which handles a wide variety of lines of goods, such as women's ready-to-wear and accessories, men's and boys' wear, piece goods, small wares and house furnishings, and which la organized into separate departments for purposes of promotion, service, and control*"®

Department Stores with sales less than $150,000 in 1939 from M. P* McNair, Operating Results of Department and Specialty Stores In 19351 Harvard tJniversity, Bureau of Business Research Bulletin No. Ill, p. 10* All others from Dun and Bradstreet, Inc., Standard Ratios for Retailing. 1940# pp. 5-fe.

^ Definition recommended by the Definitions Committee of the American Marketing Association. See Journal of Marketing. Vol. XIII No. 2, October, 1948, p. 207. 6

In the Census of Retail Distribution, 1939, stores were not classified as department stores unless they had sales of

$100 thousand or more.

In this study, major consideration Is given to expense problems In the larger department stores. Several reasons nay be advanced for this delimitation:

1, Reduction of Institutional scope enables a more penetrating and a more concrete study to be undertaken,

2 , Department stores of larger size are (as will be shown In Chapter II) of a high-cost retail type.

3, More Information Is available concerning costs in large department stores than for smaller stores or for stores of other types,

I)., Large stores offer more opportunity for specialized control techniques than do smaller stores.

The large department store is a unique Institution and its selection for study somewhat limits the general appli­ cability of the conclusions drawn. Results from an analysis of Its operations will often have only a partial application in nonretail distributive institutions. Many of the techniques and approaches also have limited sig­ nificance elsewhere in retailing because of the wide disparity in size between the large department store and the typical retail store.

Mature of the Department Store Expense Problem- Prom a social point of view a business organization has only one primary Justification for existence, that of service 7 to the consumers who avail themselves of the utilities offered. Of course from the entrepreneurial standpoint there must be an adequate return for capital and effort*

Attempts to meet both of these requirements simultaneously results in expense, margin, and profit problems. Of these, gross margin is usually the most stable. With gross margin approximately fixed (at least over a short- 7 run period), expense and profit vary inversely. It is easy to see, therefore, why high expenses are of such great concern to store managements. The entire problem is made more difficult by the inflexibility of many cost elements*

Sales, on the other hand, often are relatively erratic*

For example, department stores reporting to the Harvard

University Bureau of Business Research experienced a I4..5 per cent sales decline from 194^ to 1949• Failure to reduce expense to the same degree resulted in an Increased expense ratio to sales* The higher expense ratio plus a small decline in gross margin caused a drop of J4.I per p cent In operating profits.

It is understandable why store managements might adopt a negative attitude toward expense in general. In ------7 From an accounting point of view this statement is not technically correct. Other Income, Other Expense, and Income Tax all affect the expense-profit relationship. 8 F. L. Foster, Jr., Operating Ratios of Department and Specialty Stores in 1949T (Cambridge 7™barvari Univer­ sity, Bureau of Business Research, 1950), Bulletin No. 152. P. 4. 8 many cages attempts have been made to beat expenses down*

To do this, management might cut costs across the board by an arbitrary amount. While it may not be an appropriate action it is sometimes recommended on the theory that,

"it takes strong medicine to cure strong ills."

Maintenance of costs at a minimum absolute level is one Important aspect of cost problems. It must be modified, however, to consider the efficient discharge of functions.

A small expenditure, per se. has no virtue unless It is

coupled with a maximization of return for the outlay. Under many conditions an Increase in expense might serve the cause of profitability better than a decrease in expense.

The problems of expense reduction are best considered as of a given point in time and a determined set of con­ ditions .

A second expense problem relates to conditions of a more dynamic nature. Having once determined the most effective pattern of expenditure under a given condition, it is then necessary to maintain this balance in an en­ vironment of constant change. Increased flexibility In expenditure pattern is necessary in order adequately to adjust to varying sales, price, and cost conditions.

Profits or losses due to inflexibly low or inflexibly high expense obscures merchandising effectiveness. A reduced expense ratio to sales in a period of rising sales volume 9

Is not a realistic measure of merchandising effectiveness. Frequently it is the inflexibility of costs that accounts for this favorable showing. By the same token, in per­ iods of falling sales a poor profit showing may mean cost inflexibility more than poor merchandising. In either case it would be more desirable to have a cost pattern that gives a maximum adjustment to changing conditions.

Approach to Expense Problems - The approach used In this investigation Involves four major considerations:

1. What are the costs in department stores? How do they vary? Why do they vary as they do?

2 . How are expense problems handled in leading stores? What is their approach? How do they budget and control costs?

3. What new developments are to be found in expense reduction, budgeting, and control?

ij.. How effective are these new developments? What further improvements can be made? What new approaches hold promise for improve­ ment in expense management? How may these be developed and applied?

Methodology- The material presented in the following chapters comes from analysis and computations of existing data, surveys, depth Interviews, and personal studies of store operations. The material concerning department store expenses, presented in Chapters II and III, is primarily from a statistical analysis of published depart­ ment store operating statistics. In Chapters IV and V is found a discussion and evaluation of present expense 10 management practices and approaches. This Information was secured by two mail surveys of leading department stores

throughout the country, and by depth interviews with execu­

tives from ten large department stores. Chapter VI con­

tains a statement of what is believed to be a sound and progressive concept of expense management. Case studies

collected from a number of stores and extensive observa­

tions in a leading southeastern United States department store form the foundation for Chapters VII, VIII, and IX*

Intensive depth interviews with store executives and management engineers were also utilized as a source of materials for these chapters on the problems and tech­ niques of progressive expense management*

In evaluating tee methodology and data several limitations may be pointed out. Being basically a survey of an entire field, the nature and scope of the study Is

too broad to permit intensive research into any one partic­ ular aspect. It Is not intended that the data presented

# be considered "typical" of all U. S. department stores.

The necessary limitations of scope and cost, together with

the scattered geographic distribution of large stores militate against using a greater number of institutions

In the study. Mailed surveys can only partially take the

place of Interviews and observations and are, at best, only

a substitute for a more personalized approach* CHAPTER II

STATIC VARIATIONS IN DEPARTMENT STORE EXPENSE

Expanse can be considered from either a static or dynamic viewpoint. Problems of static variation exist as of one point in tlrn, while those that are dynamic grow out of changes from one time to another. The problems and characteristics of static variations will be discussed in this chapter, with analysis of dynamics being reserved for Chapter III.

A presentation of expense statistics is limited by the classiflcation system employed. While no uniform system of expense classification is used In department stores, that advocated by the National Retail Dry Goods Association

(NRDGA) has received widespread acceptance. The classifica­ tions employed by the Harvard Graduate School of Business,

In Its published reports of department store operating sta­ tistics, are quite slsillar to those of NRDGA. Major differ­ ences concern the treatment of rental and related costs.

Interest, and professional services expense.^

P.L. Foster, J r . , Operating Results of Department and Speclalty Stores in 19ii9. TCambridge* harvard University. GraduateSchoolo?~business, 1950) Bureau of Business Research Bulletin No. 132* pp.65-66. These revisions, by the Harvard Graduate School, are made primarily to achieve maximum comparability between results from stores that own their real estate and those that lease. Harvard statistics include an imputed interest cost for the investment In customer's accounts receivable, while NRDGA figures do not. Tenanoy costs of buying offices are treated as a real estate cost by the NRDGA and as a professional services cost by the Harvard Bureau* 11 12

Mature of Department Store Expense - In Table 1 Is presented a summarization of 19 4 9 expense ratios for depart­ ment stores wltn sale* of from $20 to $50 million. In that year the common expense ratio for this group vas 33*3 per cent of net sales.2 Analysis of this ratio reveals that more

than one half of the total expense vas for payroll, while about 9^ Per cent vas accounted for by eight of fifteen natural expense classifications.^ Distribution among the functional expense groups vas more equal.

The selling and delivery function absorbed one third of the total expense In 1 9 4 9 * Most of this went for payroll, although coats of supplies and the purchase of delivery services were also Important. Of selling payroll, almost two thirds vent to employ salespeople. The remainder vas for cashiers, wrappers, models, demonstrators, instructors, and the like.

Administration and general store expense vas the next largest functional classification, absorbing 7*4 Per cent of net sales. This functional group was actually more of a 2------Ibid.. p. 64. A "common*1 figure is a representative re- ault selected for each individual Item, partly by means of computed averages and partly by judgesient. Ideally. it la the figure around which the percentages from all of the Individual reports in a group tend to concentrate. It is usually determined by either the Interquartile range or the median. 3 The natural classification of expense is in terms of the souroe of expense, as contrasted to the functional class­ ification which Is in terms of the store activities for which the expense is incurred. TABU 1

liponoo u a Far Oaat of Nit Sal M f«*“ 2 J» Oipai o f | 2 0 t o $ $ 0 l a 1 9 k 9 , b 7 Matur, Claaolfloatloao, BBitod Statoo,

Adtortiaiag a a d So F d a o t i o * Foanroll Boal Xotato Taaoo Xatoroot S n p p l t o o For*

Adataiotratloo & Ooaaral Storo *•«? h 3 9 t 1 .0 # Orodlt, Aooooottag, aad Aooooato Stool Tahlo 1 .5 5 % .lb* froitlTt and otkar Ooaaral S toro 1 .1*0 1 .0 0 X 1 .0 5 * . 0 5

Oaoopaaoj 2 .8 #. « > l i i S -2 K i i f i Ojporntlng and Boooofcooplag l i r a ! A a Flxtaroo aad Iqpipaont .Oil* .1 7 * ■oat, IAfbt, oaf Foaar .0 * . 0 7 0 Bool Xotato Ooota 2 .6 5 %

Publicity -M 2 ^ Saloo Fronotlon aad 1 4 n > t i n l n g .M 2 .5 0 * .2 3 * Diaplay . 3 0 . 2 7

Baying Bamkandl ting 2 i 2 £ ■arofcandioa Mnaagonoat and toying 3 .3 5 JJ .0 3 * B o o alTiag a a d Martr^ri* .•id .0 5 *

Soiling aadi Dolirarj y

TOTA j. £5 ^ $-y>> 1 .0 5 $ 1 .2 3 * 1 .9 5 * l.

Soorooi fa u. Fcstor. •*«, 5 * a a d Spatialty Stor Bv#iTi«oa r^aoar^h, rulICoti»"J$ 7 Jbao 1 9 ^ 5 7 K S loo IS, IP, 2 0 13

TABU 1

w tme 24 Dspartaast tW r*i with 8«1m • Is 194?, \tj Batwral aai F el— til m ± U A ttatM, 19M

trcvwl «nd nrofMwlMMl Swrrloa COMWQZll— tapaira wad StnlM and | m 11m h n h m f Ihiliiiiflaf owUow InrarmM Total l t £ 2 .435 7.405 .145 .285 •155 .305 2.205 .05 .94 .26 .475 5*205 .435 1.0gg *015 6.105 ; « t o e f 0 5 5 1485 *015 .70 .07 .37 .50 2.65

*505 i S S •M 3.655 .235 .05* *045 •025 3.255 .27 .a t •60

.025 UkS .245 4.655 .035 .05* .345 .245 4.005 .055 .oa •65 .075 ^ 11.305 ■ * S lo.u ok i .06 .«uc • .o e .075 *015 1.30 1.755 1.05* 1.64# •635 1.105 .655 33.305

»«d BfeslaJLtj SU rti la 1949, larrard Q Uvwdtf, Bwrwaw if S !1m IB, 19 , 20, 21, aa« 22. 1U c*tctiall for many expenses that did not fit conveniently into other expense classifications. Included were the execu­ tive office costs, primarily payroll of executives with store-wide responsibilities, and the costs of superintend­ ency. personnel, and general store activities. Super-

Intendency costs included payroll for telephone operators, purchasing department, protection department, certain executives, and for employees engaged in many customer service activities* Personnel department payroll was In­ cluded in "other administrative and general store expense. "

The tax classification included state and city income tax. and all taxes on payroll and property other than furniture, fixtures, buildings, and land. Interest charges represented imputed interest on the Investment in merchandise and customers' accounts* Unclassified expense consisted primarily of pensions (more than one half), donations, policy adjustments, memberships, and dues*

The occupancy function took 6*1 cents of each net sales dollar, with close to one half gf this going for real estate costs*^ Payroll for cleaners, watchmen, mechanics, and elevator operators was the second most important expense*

U ------"Real estate costs" included rentals, taxes, and insur­ ance paid on leased real estate plus depreciation on leasehold improvements and leasehold valuation* In addition, it inoluded taxes, interest, insurance, and depreciation on owned real estate* 15

Repair** depreciation, and utility costa ware alao important.

In buying and merchandialng the coat for payroll acoounted for more than four flftha of the total expense incurred in the performance of thia function. It want for marchandlae managers, buyers and their assistants, compari­ son shoppers, stylists, clericals, and employees engaged in receiving and marking activities. Other major natural ex­ penses were travel and central marketing buying services*

Close to four cents of each net sales dollar went to support publicity activities. While space coats were about two thirds of the total functional cost, payroll and supplies outlays were also important. The payroll was for copy­ writers, artists, executives, and other advertising and display employees.

PROBLEMS OF STATIC COST EVALUATION

Any attempt to evaluate operating costs in an objective manner must begin with the determination of a scale by which the costs may be Judged. Briefly stated, a cost may be con­ sidered excessive if:

1. The resulting utility does not warrant the expend­ iture; in such case some other alternative solution may be more profitable.

2. Some other institution can perform the same function more efficiently or at a lower cost.

3. The function oan be performed more efficiently than it la being performed at present by the same store, department, or personnel. l 6

Whether a given utility 1 b sufficient to warrant an expend­ iture Is a problem of analysing specific alternatives In a particular situation* Problems of this type are not of major concern in this study*

Analysis of expense problems in terms of costs of performance by various institutions can be of several types*

One* the study of the relative efficiencies of different

Institution types (e.g*, vhether the wholesaler can perform a given function more economically than the retailer)* is beyond the scope of this study. The problem of relative efficiencies in different institution types is complicated by a number of variables* Existence of many types of goods with different costs of handling siakes comparison difficult*

The sise of the typical department store operation* with many cost problems that do not occur in other retail types* and the nature of the services performed make comparison even more dlffloult and less meaningful* Because of this lack of comparable me as, no consideration is given here of the dlfferenees in expense among the various types of retail institutions*

Whether various stores in the same general field of retailing have different costs of operation is of signifi­ cance* An approach to this problem can be made by an analysis of available published information* From the data in Table 2* for example* it can be seen that there is a substantial difference between coats in small department TABLE 2

Ratio to Mot Salas far Dspartaant Starts of DLfftrsnt Salta Volos, la 8 Salactad laart, 1938 to 19k9

Ranktd Start Salta Tnli— Groups*

Im t 1 2 3 k 5 6 7 8 9 10

193* 32.6% 3lu 1* 3k.0# 35.5# 35.1# 36,2# 36. k# 37.6# 38.7# 37.8# 1»3? 32.5 32.9 32.9 3k. 5 33.7 35.2 35.1 36.6 37.3 36.9 19h0 32.3 32.1* 33.0 33.9 35.0 3k. 7 3k.3 35.5 36.k 36. k 19kl 30.0 30.8 30.9 33.0 32.1* 33.2 33.1 3k.O 35.1 3k. 7

191*6 21.2 20.5 23.3 21*. 9 25.5 27.1 26.0 27.5 28.8 26.6 191*7 22.0 23.1* 27.0 26.0 28.5 28.5 30.7 30.8 30.1 191*8 25.0 2 k. a 26.5 29.7 29.65 30.2 32.0 31.6 30.9 191*9 28.1 27-? ?*•? ?*•? J1.9 }2.7f »•? * Start Volant Group# art rtnktd in ordar of Increasing sis# btcanat of lack of unifcnlty in olaaa linita fro* ytar to ytar.

Souroa: Ctoarating Rasulta of Dapartnant and Sntcialty Starts, 8 Salaottd »ars, karrard Chiraraity, Bortau of maintaa Rtttaroh, Bnllatina Ho. 109, 111, 113, 115, 126, 128, 130, and 132. 18 stores and those In larger stores* Generally speaking, the greater the store volume* the higher the expense ratio*

While the larger stores may have been marketing less effi­

ciently than their smaller counterparts* this does not necessarily follow* Among possible explanations for this

greater expense ratio are the facts that:

1* Different environmental factors may tend to accompany stores of different else. These factors* primarily of a city slse nature* may be major causes of the expense differences*

2* The functions performed by stores of various sixes stay not be the same* This can mean that some stores (e.g*, the larger ones) may be per­ forming certain functions that stores of other sixes leave to other institutions* This may be due* also* to a difference in the lines of mer­ chandise carried by different sixe stores* or to a difference in the amount and quality of customer services offered by stores of various sixes*

3# The sixe of the store fosters a higher expense than is true of the smaller slse stores* Thus* the diseconomies of slse of operation may be evidenced*

Most of this chapter will be concerned with the considera­

tion of these three possibilities*

Whether a function can be performed store economically

in a given institution or institution type can be answered

only after a detailed study of a specific problem* Excess­

ive costs of this type are most susceptible to managerial

control and will be given extensive consideration in later

chapters * 19 EFFECT OF ENVIRONMENT ON EXPENSE RATIOS

There Is ample evidence, from personal observation, to establish the fact that larger stores are located in larger cities* Statistical studies have also made it clear that expense ratios. In general, are higher In larger cities*

One student demonstrated this clearly In an analysis, by slse of city, of operating statistics for department stores* The conclusion from this study vast

"There Is a pronounced and Important tendency for the expense percentage to be lover In the smaller cities than in the larger cities for stores of similar slse--the progressive variation from small cities to large Is sharply defined for stores vith sales of $1 million or more*"5

A susnary of expense ratio relationships betveen stores of similar slse in cities of different size Is presented, for selected prevar, vartime, and postvar years, in Table 3*

While In any one year or slse group the sample is rather small, the regularity of pattern and similarity of results lend support to the hypothesis that larger cities and high­ er expense ratios are correlated* Over most of the years, hovever, the statistical Information has been reported only for stores vith sales of $1 million or more* For these groups Information has been restricted to total expense and the most Important natural expense groups* 5------Elisabeth A* Burnham, "The Department Store in Its Community,” Harvard Business Revlev* July, 1 9 4 ° . P* 457* TABLE 3

Relative Slse of Expense Ratio Comparisons batman Adjacent Star# Salaa Voluse Groups Within Qiran City Siaa Qroupe, and Batman Adjacent City Sisa Qroupa Within OiTan Salaa Volume Qroupa, flhited State*, 191*0, 191*3, 191*6, and 19l*9

Expense Store Siaa Ralatiooahipa City Site Ralatlonahipa

Imrger Larger Larger Larger No. Stores with Stores with No. Cities vith Cities with Adjacent Loser Ex­ Sana as or Adjacent Loser Ex­ Same as or Year Comparisons panses Higher Ex­ Comparisons panses Higher Ex­ panses penses

Total Store 26 15 11 22 19l*0* 17 9 i if T 10 191*3 6 1* 2 6 1 5 191*6 9 7 2 10 3 7 191*9 9 6 3 10 2 8

Payroll JO u ±Z 2k ii % 191*0* 17 7 10 1^ 7 8 191*3 6 1 5 6 2 1* 191*6 9 1* 5 9 3 6 191*9 9 5 i* 10 3 7

Real Estate 26 ±2 10 22 191*0* 10 7 8 T 11 191*3 6 5 1 6 l 5 191*6 9 6 3 9 l 8 191*9 9 7 2 10 1* 6 TABLE 3 (Continued)

ErpeD** Store Slse Relationships Citj Site Ralatl^^p*

Larger Larger Larger Larger No. Stores with Stores with No. Cities with Cities with Adjacent Lower Ex­ Saae as or Adjaoest Lower Ex­ Seas as or Tsar Caparisons penses Higher Ex­ Coaperieooe penses Higher Ex­ pense* .... penses

Advertising 1 2 & ift k as 1 9 1 *0 * n II § 1 a 1 9 U 3 6 a 2 6 1 5 1 9 1 * 6 9 6 3 9 1 8 1 9 1 * 9 9 8 1 1 0 1 9

Delivery 2 £ k 1 1 i l 2 g 1 9 1 *0 * 2 T 7 0 7 19U9 9 2 7 1 0 2 8

Net Qain 1£ 9 ! £ £ 9 1 9 1 *0 * f t J 5 ft fi 191*3 6 2 a 6 6 0 1 9 1 * 6 9 3 6 1 0 7 3 _ 19U9 — I -___ 1 8 1 0 8 2

* Includes data for Stores with Salas of $150 thousand or wore. In all other years, data art for stores with salts of $1 aUlion or wore.

Source r Appendix A, Tables II to Til 22

Payroll Expense- While there la a tendency for stores

In the larger cltlee to have a higher payroll expense ratio, this pattern la more discernible in the postwar years. In

I9I+9 the difference In payroll ratio between stores In the largest cities and those in the smallest cities (In a given store slse group) accounted for as much as 35 P#r cent of the difference In total expense ratios between the two city slse groups. Higher wage rates are often given In explana­ tion of higher expense ratios in the larger cities. An analysis of department store employment and payroll statis­ tics from the 1939 Census of Retail Distribution supports this hypothesis. The average annual payroll per employee varied dlreotly with the slse of city In the following

U » n . r . 6

AVERAGE ANNUAL CITY POPULATION PAYROLL PER EMPLOYEE

1001 1 0 6 8 5 0 0 ,0 0 0 - 9 9 9 , 9 9 9 1165 1 , 0 0 0 , 0 0 0 or more 1 2 5 9 Another factor which might have supported the higher payroll ratios in the larger cities Is the difference In competitive position for the same else store in different slse cities. In a small city a relatively large store is the leader and, by virtue of Its slse and position, can

The computation of these averages is shown In Table 1 of Appendix A, 23 sat the competitive pattern and maximize its efficiency of operations. In a larger city this same size store is in an inferior competitive position. Many costs of services and functions are divisible only Into relatively large units, but must be maintained, even if not fully utilized, in order to compete with the larger stores. This situation is most likely to occur in a store with an inferior competitive position*

Real Estate Costs- In three fourths of the "adjacent city size group" comparisons, stores in larger cities had as great or greater real estate expense ratios than stores in the next smaller oltles* In 19^9* real estate costs accounted for as much as d2 per cent of the difference in total expense between the smallest and largest city size groups in a given store volume olass. At least two hypoth­ eses may be advanced in explanation of the tendency for these costs to be higher for larger oltles. It may be that space utilization, in terms of sales per space unit, was less efficient in the larger cities. On the other hand, space costs in the larger cities, in terms of costs per space unit, may have been proportionately higher than were sales in these cities.

There are only Had.ted data available concerning the

Interrelationship of store sizes, city sizes, and sales per square foot* An analysis of these data for the most recent year in which statistics are given is presented in Table i;. TABI£ 1*

Computation of Real Batata Coata Per Square Foot of Space far Stares in Different City Site Qrcapa within Selected Salea Values Groups, 19U7

(City ai»e and net aalea in thousands)

Salea Typical Salea per Estimated Beal Eatate Real Eatate Beal Estate Vol»— City Hat Square Foot Space in Expense Dollar Coata Per Slse Salea of Space Square Feet Ratio Coata Square Foot

$1 to $2 Killian 15 to 25 $ 1,300 11*1*. 50 29,213 2.605 $ 33,900 $1.15 25 to 50 1,300 39.00 33,333 1.95 25,350 .76 50 to 100 1,1*50 * * 3.20 e *

$2 to $5 Killian 25 to 50 I 2,500 $31*. 00 73,503 1.705 $ 1*2,500 $ .58 50 to 100 2,600 38.00 66,1*21 1.80 1*6,600 .66 100 to 250 3,1*00 1*0.00 85,000 2.70 91,800 1.06

♦5 to |10 Kimono 50 to 100 $ 5,700 $1*5.00 126,667 1.705 $ 96,900 $ .76 100 to 250 7,000 5o.oo Ui0,000 2.50 175,000 1.25 250 to 5oo 5,900 5o.oo 118,000 2.50 11*7,500 1.25 TA£I£ It (Continued)

(City liae end net sales In tfaouaanda)

Salea Typical Salea per Estimated Real Eatate Real Estate Real Eatate Volune City Net Square Foot Space in Expense Dollar Coata Per Size Salea of Spaoe Square Feet Ratio Coata Square Foot

$10 to $20 Million 100 to 250 $12,500 $1*3.00 290,697 3.20% $1*00,000 $1.38 250 to 500 12,500 1*0.00 312,500 2.30 267,500 .92 500 to 1,000 1)4,000 14*. oo 318,181 2.70 278,000 1.19

$20 to $50 Million 250 to 500 $27,000 $1*3.50 620,690 1.95* $526,500 $ .85 5oo to 1,000 35,500 39.00 910,256 1.75 621,250 .69

* Not available

Source i U. P. McNair, Operating Results of Department and Specialty Stores in 191*7, Harvard University, Bureau of Business Research, No. i2fs, p . n r — In all comparisons of stores In adjacent city size groups, there Is a direct correlation between sales per square foot and expense ratios. Therefore, high real estate ex­ pense ratios were not due to lower sales per square foot of space. A computation of real eatate costs per square foot does show that higher real estate expense ratios accompanied higher costs per square foot of space. From the limited data available It would appear that the major determinant was higher space costa. A store In a larger city paid proportionately more for space than It received In sales, as compared to the same size store In a smaller city.

Advertising- There was also a direct correlation between size of city and amount of advertising expense ratio. The greater ratio of advertising costs to sales was primarily a function of media circulation. Ordinarily about

75 Per cent or more of a department store's advertising ex­ pense Is for newspaper space. Since newspaper advertising rates are based chiefly on circulation, a space unit In larger city newspapers costs more than In smaller city papers. The smaller store in the larger city, already In a less favorable competitive position, could not reduce the amount of space purchased without risking a further loss In competitive position. If anything, the smaller store in a larger city should probably have used a proportionately greater quantity of space In order to overcome some of its other competitive disadvantages. 27

Delivery- Information for the year a 191+0 and 19i|9 shows that there was also a higher delivery expense ratio in larger cities,? This could have been due to a higher proportion of delivered to total transactions In the larger cities, or to the higher costs per delivery In larger cities.

It would appear that both of these probably exerted some In­ fluence, although It Is impossible to measure this from the available data,

Sussnary- The size of city in which a store is located has a discernible effect on the expense ratio that a store can maintain. Stores in larger oltles tend to have larger expense ratios. This difference is more clearly distin­ guished for stores with annual sales of more than $1 million, and consists, to a large degree, of differences in payroll, advertising, and real estate costs. In 19U9 these three expenses accounted for from 59 to 79 per cent (depending on the store voluae group studied) of the total expense differences in a volume group,

VARIATIONS IN FUNCTIONS PERFORMED

A variation in the performance of a function may take several forms. Important among these are:

7------This information la not comparable to that given for the other specific expenses since "delivery* Is a aub- functional expense classification cutting across natural expense lines. For example. In 19U-9* about I4.0 per cent of delivery costs went for payroll. 2b

1 . The nature of the lines of merchandise carried may vary with store slse In such a way that the cost of the larger stores may be greater*

2 . The larger stores may perform functions that the smaller stores pass on or back to some other agency or Institution*

3. The services and the scope of services offered by the larger stores may also be a cause of the high­ er expense ratios*

DIFFERENT LINES OF MERCHANDISE HANDLED

Data in Table 5 show that. In 19M^» there was a sub­ stantial variation in the distribution of merchandise types

In the sales pattern of stores of different size* Similar data for other years show somewhat the same pattern. In gen­ eral, the larger stores sold a greater share of total sales

In small wares, toilet goods, notions, and home furnishings*

The smaller stores sold a proportionately larger share in piece goods, ready-to-wear, and ready-to-wear accessories*

Such a substantial variation In makeup of sales pattern can be a significant cause for an expense ratio difference*

For example, home furnishings departments required a much larger share of selling space per dollar of sales than did any of the other merchandise cldaslflcations• More non­ selling space is ordinarily required for home furnishings storage than for other merchandise* Space costs, however, are often allocated on a graduated scale with consideration for the location of the space* because of this, some support can be found for the contention that selling space costs are TABLE 5

Per Cent of Mein Store Seles end Selected Seles end Ex pense Dete for Lines, for Stores with Various Seles Volu aes, United St*

(1) (2) 0 ) 0.) (?) (6) _.4_7J Store Sales Volume (in Millions) Per Ce Merchandise $.5 to $1 to $2 to $5 to $10 to $20 to $50 or Area Lines $1.0 $2 $5 $10 $20 $50 More Store At

Piece Goods and Donestics 11.0$ 12.0% 8.8% 8.5% 7.7% 6.7% 6.5% 6 Stall Wares, Toilet Goods, et cetera 7.0 7.5 9.0 9.6 9.8 11.8 10.5 b Wonens' Apparel 29.0 26.5 23.0 22.0 21.0 21.0 17.5 17 Ready-to-Wear Accessories 28.0 23.5 23.0 22.0 20.0 19.5 17.5 It Hone Furnishings 10.0 13.0 19.0 18.6 23.5 22.5 28.3 35 Hens' and Boys* Clothing and Furnishings 9.0 13.0 9.5 10.8 10.0 10.5 11.0 8 Other 6.0 U.5 7.7 8.5 8.0 8.0 8.7 7

Total Main Store 100.0$ 100.0% mo% 100.0% 100.0% 100.0% 300.0% 100

* Weighted Average of advertising, delivery, end seles payroll.

Source: Dete In coloans (1) - (7) from M. P. McNair, Operating Res ults of Departin' Bureau of Business Research Bulletin No. 130, p. 35V Date in columns (£) Operating Results in 19U8» National Retail Dry Goods Assoc iation, 19h9, pi TABLE 5

jlected Sales and Ex pens* Data far Different Merchandise ) Various Salas Volu aes, Unitad States, 19U8

0 . (5).. (6) in______in______i2i______m a m i(in Millions) Per Cent Selling Sales per ■sighted* to 810 to $20 to 850 or Area of Main Square Foot of Expense 10 820 85o More Store Selling Selling Space Ratios Area

a.5* 7.7$ 6.7% 6.5$ 6.6$ 8 91.50 6.5$

9.6 9.8 11.8 10.5 6.1 110.50 10.2 2.0 21.0 21.0 17.5 17.1 77.eo 9.0

2.0 20.0 19.5 17.5 16.2 110.30 9.e 8.6 23.5 22.5 28.3 35.5 51.7 11.0

o.e 10.0 10.5 11.0 8.7 103.70 9.2 8.5 8.0 8.0 8.7 7.6 67.3 11.0 0.0$ 100.0$ 100.0$ 300.0$ 100.0$ id sales payroll. fcHair, Operating Res alts of Department and Specialty Stores In 19U6. Harvard University, fo. 130, p. 35. Dete in coltaans (8) - (£o) free Departmental Merchandising and itall Dry Goods Assoc lation, 19U9, pp. 52-55. 3U o lower for home furnishings. No overall conclusion can be reschad as to tha relative space cost of home furnishings because of the lack of specific data. In published data from the National Retail Dr; Goods

Association, entitled Merchandising and Operating Results. expense was allocated to departments for advertising, sales salaries, and delivery. A weighted average of these three expenses is shown in Table 5 . The two expense groups with the highest weighted average were home furnishings, and small wares, toilet goods, and notions. These lines also predominated in the larger stores. While the Importance of merchandise line differences can not be accurately gauged, it is apparent that several lines with high selling costs were more important in larger stores than in the smaller ones.

PERFORMANCE OF DIFFERENT FUNCTIONS

Another cause for high expense ratios in larger stores may be that they perform functions that smaller stores pass back to some other institution. A functional breakdown of expense, by slse of store. Is presented for the postwar years 8------The amount of rent allocated to some of the top floors of department stores may run as little as from one third to one fifteenth of the amount charged to the stain floor* Home furnishings are eoauaonly sold on the upper selling floors of a multistory building. For further information see. P. H. Nystrom. Retail Store Operation. (New York. The Ronald Press Company. 1937J, p. 5 0 0 * 51

In Table 6 . Functional statistical data are available only ! for stores with annual sales of mo^e than $1 million.

Administrative. Qeneral Storii, and Occupancy- While

the relationship Is somewhat errat Lc, there is a general

tendency for administrative and ge neial store expense ratios

to vary Inversely with sales volum s• There la no alstln-

gulshable pattern between occupanc y ratios and sales volume,

A detailed study of subfunctional and natural expenses

classified under these functions f^lls to show any differ­

ence that might be construed as a consistent Increase due

to the assumption of functions.

Publicity- Publicity expens e ratios tend tc Increase

from the ssmller store sizes to th e $ 1 0 to $ 2 0 million

volume group. Expense ratios for t he two largest volume

groups have been smaller for the y ears studied. While the

reason for this variation is not olear. it is not likely to

be the result of an increased aasu|mptlon of functions by the

moderately large stores.

Buying and Merchandising- 1 n all four years the buying

and merchandising expense was lows st In the largest volume

store group. With the exception o f this group, however,

there was a strong tendency for larger stores to have a

higher buying and merchandising expense ratio. There are

no data available for stores with sales of less than $1

million to show to what degree the buying expense ratio

varied, at that level, with sales volume. The major causes TABLE 6

Expense Ratios to Sales for Total Expense and for Five Func tional Classify Department Stores of Various Sales Volume Qroupa, United State*, 19U<

Tear Total Adminis­ Occupancy Publicity Buying and Sales Volume Expense trative Expense Expense Merchandising Group Expense Expense (in millions} 19U6 $ 1 to $ 2 27.10% 6.80% U.85% 3.U5% 3.90% 2 to It 26.00 6.U0 U.Uo 3.05 3.80 1* to 10 27.50 6.20 U.95 3.55 U.10 10 to 20 28.60 6.20 U.95 U.oo U.30 20 to US 28.80 6.55 U. 70 3.30 U.35 U5 or more 28.00 6.20 U.70 3.15 3.70 19U7 $ 1 to $ 2 28.00% 7.10% 5.05% 3.55% U.00% 2 to 5 28.50 6.75 U.90 3.80 U.15 5 to 10 28.50 6.U0 5.00 3.75 U.io 10 to 20 30.70 6.60 5.U0 U.20 U.25 20 to 50 3 0 . eo 7.05 5.00 3.60 U.So 50 or more 30.10 6.50 5.15 3.30 3.80 19U8 $ 1 to $ 2 29.75% 7.70% 5.55% 3 .60% U.15% 2 to 5 29.65 7.15 5.05 U.05 U.30 5 to 10 30.20 6.90 5.70 U*5o U.25 10 to 20 32.00 6.95 5.70 U.5o U.55 20 to 50 31.60 6.90 5.75 3.60 U.50 50 or more 30.90 6.70 U.95 3.55 3.95 19U9 ♦ 1 to $ 2 31.50% 8.00% 6.05% 3.90% U.35% 2 to 5 31.50 7.60 5.55 U.05 U.6o 5 to 10 31.90 7.20 5.90 U.10 U.60 10 to 20 32.75 7.00 5.95 U.55 U.60 20 to 50 33.30 7.U0 6.10 3.es U.65 50 or more .... 6.85 i - j # 3.70 _ U-15

Sourcei Operating Results of Department and Specialty S tores, 19U6-19U Bureau of Business Research, Bulletin* No. 1267 ^158, 130, and TABLE 6

Total Expense and for Five Funo tlonal Classifications for krloua Sales Volu— Qroups, Unit ad States, 1946-1949 r ... . ■ Acfainls- Occupancy Publicity Buying and Selling and i tratlve Expense Expense Merchandising Delivery Expense Expense Expense L 1 1 6 *80$ 4.85$ 3.45$ 3.90$ 8.10$ ' 6.1*0 4.4o 3.05 3.80 8.35 6.20 4.95 3.55 4.10 8.70 6.20 4.95 4.00 4.30 9.35 , 6.55 4.70 3.30 4.35 9.90 6.20 4.70 3.15 3.70 10.25

7*10$ 5.05$ 3.55$ 4.00$ 8.30$ 6.75 4.90 3.80 4.15 8.90 6.1*0 5.00 3.75 4.10 9.25 6.60 5.40 4.20 4.25 10.25 7.05 5.00 3.60 4.5o 10.65 6.50 5.15 3.30 3.80 11.35

7.70$ 5.55$ 3 .60$ 4.15$ 8.70$ 7.15 5.05 4.05 4.30 9.10 6*90 5.70 4.50 4.25 9.70 6.95 5.70 4.50 4.55 10.30 6.90 5.75 3.60 4.50 10.85 6.70 4.95 3.55 3.95 11.75

6.00$ 6.05$ 3.90$ 4.35$ 9.20$ 7.60 5.55 4.05 4.60 9.70 7.20 5.90 4.10 4.60 10.10 7.00 5.95 4*55 4.60 10.65 7.1*0 6.10 3.85 4.65 11.30 6.85 5.40 bP ... . , m s ______12.20

± 9 of Depart— nt and Specialty S tores, 1946-191*9, Harvard University, pas Research, Bulletins No, i$67 128, 130, and 132* 53 of the higher buying expense in the larger store* vere the increased ratios of payroll costs for buyers, assistant buyers, clericals, and other buying personnel* With the data available, any conclusion as to the exact nature of the causes of this variation m u s t necessarily be conjectural.

The tendency for buyer's payroll expense ratios to be high­ er In the larger stores night reflect the assumption of more buying functions; but this might also be due, among other things, to the elty slse factor. Increased selling respon­ sibilities, or other forms of Increased managerial import­ ance of the buyer.

Selling and Delivery- The higher selling and deliv­ ery expense ratios in the larger stores vere due, primarily, to a substantially greater cost for "other" selling employees and delivery. High delivery costs have already been shown to be a function of city site. The higher payroll ratio was for stock and clerical workers, cashiers, wrappers, and other miscellaneous employees. The greater expense for wrappers resulted f r o m the higher per cent of send trans­ actions that are typically found in the larger stores,9

9------In 1949* for example, delivered transactions were 10 per cent of total transactions for stores with sales of $2 to $5 million. In the slse group with sales over $5° million the per cent of delivered transactions to total transactions was 21 per oent* For data concerning stores of other volumes see, F. L, Foster, Jr., op, olt•. p, 5 5 * 3U

1 consideration of the other payroll classifications offers little suggestion of higher expense ratios resulting from an increased assumption of marketing functions. One ex­ ception to this conclusion concerns the storage function*

Because of the lB4>ortance of hard goods lines in large de­ partment store sales, there is a need for a more extensive storage operation* This is a function of the merchandise carried rather than the size of store*

Conclusion- From the data available there Is little evidence to show that an Increased assumption of functions has been a major direct cause of higher expense ratios in larger stores* Only In the buying function does there appear to have been a difference that might be traced to a greater assumption of function. This is not to deny that larger stores are performing functions that smaller stores shift to others, but that, from the evidence available, this assumption has not resulted directly In a significantly greater expense ratio for larger stores*

One serious limitation to this conclusion results from the lack of functional expense data for stores with sales of less than $1 million annually* It Is more likely that a major lncreaae In the scope of functions performed by retail stores would appear among these stores* From the data In Table 2, It Is obvious that the greatest differentials

In expense ratios ocour between the sswllest size and the H ' ✓ medium slse stores. From the data available it is not pos­ sible to determine the extent to which this differential is a result of a greater assumption of functions In the progres­ sively larger stores. This factor, however, is probably of significance.

VARIATIONS IN SERVICE OFFERED

A third way that larger stores may perform more func­ tions is by offering more services to the customer. Common types of customer services offered by department stores and the payroll classifications affected by these services are: 10

PAYROLL EXPENSE SERVICE CLASSIFICATION AFFECTED

1. Credit Accounts Receivable 2, Delivery Delivery 5. Merchandise Information Other buying 4. Wrapping Other selling 5. Special schools Other selling 6 . Personal shopping Other superintendency and General Stor e 7* Information Same as 6 o. Phone 6c mall order sales Same as 6 9* Complaints 6c adjustments Same as 6 10. Returned goods Same as 6 11. Parking Same as 6 12. Other personal services Same as 6

Payroll dasslficatlons are selected since the main cost resulting from the offering of a service usually is that of payroll. A comparison of these expense ratios, by size of n r ------D. J. Dunoan and C. F. Phillips, Retailing. Principles and Methods. (Chicago, Richard D. Irwin Inc., I9 5 0 ;, PP. 4.7 2 -14.7 3 . The expense classifications are from Controllers' Congress, Standard Expense Accounting Manual for Department and Specialty Stores. (Mew York. National ftetall Dry Goods Association, pp. 3 I-I4.9 . 36

store, la found in Table 7* In all of the classifications

except accounts receivable there Is a tendency for the larger

stores to pay a greater share of the sales dollar for tctiv-

itles that reflect greater service. The differences between

adjacent volume groups are greatest for delivery payroll and

"other" selling payroll.

The variations In "other” selling payroll are accom­

panied by a generally Inverse relationship to salesclerk

payroll* While this suggests that a part of the greater

"other" selling Is In lieu of higher salesclerk payroll, the

increase in the former more than offsets any decrease in the

latter* Larger delivery payroll can be attributed to the

location of larger stores In larger cities, and to the fact

that larger stores usually deliver a greater proportion of

their total transactions* One of the best Indications of more customer service activity in the larger stores is the higher puperlntendency and general store payroll ratios found there*

RELATIVE EFFICIENCIES OF STORE SIZE

A third possible explanation of the Increased expense ratios of larger stores Is that the larger stores, by the

very nature of their slse, may be leas efficient than their

smaller competitors* Their important position in retail

trade is de facto evidence that they do perforin their TABLE 7

Expense Ratios and DLffarancas Between Expens • Ratios of AdJ for Storaa with Salas frow $1 mill on to Or or $50

(Mat Salaa equals 100 Par U ) (2) 13) (U)______isi Payroll Ex- $2-$5 $5-110 pa naa I taw M 2 Difference (or $2-|l*l Difference (or $l*-$lo) I Taar Millions (3)— (1) Millions (5M3) Millions

Accounts RaoalTabla 191*6 0.60 0.00 0.60 0.50 0.65 191*7 0.70 0.00 0.70 0.00 0.70 191*6 0.85 -0.10 0.75 -0.05 0.70 19k 9 0.95 -0.20 0.75 -0.05 0.70 Other Super In tendency and Oanaral Stora 191*6 0.35 0.00 0.35 0.15 o.5o 191*7 ** 0.30 0.10 0.1*0 191*6 ** 0.1*0 0.00 o.uo 191*9 * * 0.30 0.20 o.5o Other Buying 191*6 0.00 0.00 0.00 0.20 0.2u 191*7 * * 0.15 0.15 0.30 191*8 ** 0.15 0.10 0.25 191*9 0.15 0.05 0.20 0.15 o.35 Other Sailing 191*6 0.60 -0.10 0.50 0.70 l.2o 191*7 * * 0.75 0.U5 1.20 191*8 •# 0.75 0.60 1.35 191*9 0.55 0.3 0.85 0.50 1.35 Sales Clark 191*6 6.1*0 0.15 6.55 -0.55 6.iO 191*7 ** 6.55 -0.20 6.35 191*8 * « 6.65 -0.20 6.1*5 191*9 7.15 -0.30 6.85 -0.20 6.65 Delivery 191*6 0.35 0.25 0.60 0.10 0.7o 191*7 0.35 0.35 0.70 0.05 o.75 191*8 0.1*5 0.30 0.75 o.io 0.85 0.10 1.00 W 0-S5.... 0*8 0.90

* Not Arallabia

Sourca i Operating Raaulta of Department and Specialty Storaa» I* So lac tod Years fkiaineasResearoh, Bullatins No* 1^6, 128, 130~and 132. TABLE 7

Ratios of Adjacent Volume Groups, for Salsctad Expense Items, to Over $50 11111 ions, United States, 191*6 to 19l*9 uals 100 Per Cent) I5J______L6J______m ______i*2______i n ______tio) w $5-$10 $20-$50 $50 (or $1*5) or $1*—$10) Difference $10-$20 Difference (or $20-$l*5) Difference Millions Millions (7)-(5) Millions (9)-<7) Millions (ll)-(9) or More

0.65 0.00 0.65 -o.o5 0.60 -0.u5 0.65 0.70 0.00 0.70 -0.05 0.65 -0.05 0.60 0.70 0.00 0.70 -0.05 0.65 0.00 0.65 0.70 0.00 0.70 -0.05 0.65 0.00 0.65

0.50 0.20 0.70 .10 0.80 0.00 0.80 0.1*0 0.15 0.55 .15 0.70 -0.10 0.60 0.1*0 0.15 0.55 .05 o.6o 0.05 o.65 o.5o o.o5 o,55 .05 o.6o 0.10 0.7u

0.20 0.10 0.30 0.15 o.l*5 -0.05 0.1*0 0.30 0.00 0.30 0.15 0.1*5 0.05 u.5o 0.25 0.10 0.35 0.10 0,1*5 0.00 o.l*5 o.35 o.oo 0.35 0.15 o.5o -0.05 o.i*5

1.20 0.25 1.1*5 0.35 1.80 0.35 2.15 1.20 0.1*0 1.6o o.35 1.95 -0.35 2.30 1.35 0.25 1.6o 0.35 1.95 0.50 2.1*5 1.35 0.30 1.65 0.1*0 2.05 0.1*5 2.50

6.00 -0.05 5.95 0.05 6.00 —o.o5 5.55 6.35 —o.o5 6.3u -0.05 6.25 -0.25 6.00 6.1*5 —0.10 6.35 -0.05 6.30 —0.10 6.20 6.65 -0.15 6.50 0.00 6.50 -O.lu 6.1*0

0.7o o.35 1.05 —u.o5 1.00 0.1*5 1.1*5 o.75 0.50 1.25 -0.10 1.15 0.55 1.70 0.85 0.1*0 1.25 -0.10 1.15 0.65 1.80 1.00 0.1*0 1.1*0 -0.10 1.30 u.65 . 1-95

sleeted Years, Harvard University, Bureau of 36 marketing functions with economy and effectiveness.11 Sta­ tistics show that department stores hold an Important position in the distribution system and that their importance In the last twenty years has not decreased to any significant degree. They have continued to account for about 9 to 10 per cent of the total retail sales in this country. In 1 946 approximately 2560 department stores sold more than one third as much merchandise as did about 391*000 stores handling related kinds of merchandise.

Expense- The data presented in Table 3 show that, in a given city slse, the larger stores had lower total ex­ pense ratios in twenty six of forty one comparisons between stores of adjacent slse. A separate analysis of important natural expenses for these identical twenty six comparisons showed real estate and advertising costs to be consistently lower for larger stores. In only two cases were real n ------In a competitive economy the continued existence of an institutional type substantiates the need for the ser­ vices performed by that type. If no monopoly exists (and there la none in retailing) no institution can secure and hold an important share of total retail trade unless it performed its functions as efficiently or more efficiently than do competing types. 12 The stores handling related lines of merchandise are: general stores, dry goods and general merchandise stores, variety stores, apparel stores, furnlture-household- radlo stores, hardware stores, drug stores. Jewelry stores, and news dealers. Data from. Census of Business - 1946. Bulletin No. 1-R-0, United States sTuiimary, (U.S. Government Printing Offloe, 1951) Table 1C* 39 estate coata higher, and in only throe of the twenty six

compariaona were advertiaing ratios higher for the larger of adjacent volume groups. In almost one half of the com­ parisons the larger stores did have higher payroll expense ratios. Thus, the major factors in the lower expense ratios of the larger stores were real estate and advertising costs*

Net Gain- Another common measure by which store effi­ ciencies may be compared is by relative profitability. A comparison is made in Table 5 of "net gain before federal income tax" for stores of adjacent volume groups within the same city size groups. The larger stores achieved a greater net gain in thirty two of the forty one comparisons. This higher net gain might have been due either to larger gross margins, lower expenses, or a greater "net other income".

While no information Is available concerning the latter item, the higher net gain was accompanied by a lower expense ratio in twenty four of the thirty two comparisons.

Personnel Efficiency- Another aspect of relative effi­ ciencies of different size stores Is the productive utili­ zation of various factors for which expenses are Incurred.

Published material, presented in Table 8, is available only for personnel and space utilization, and only in terms of sales per unit. If it is assumed that a "sale" has comnon characteristics In stores of all sizes, this is an excellent measure. TABLE 8

Average Annual Salas par Qaployee, par Sales Clark, per Square Foot of Space, and par Square Foot of Selling Space, for Department Stores of Different Slse, United States, 191*0, 19l*3, 19l*6, and 19l*9

(Sales In Thousands) Sales Sales per Sales per Square Year per Sales­ Foot Store Slse Employee clerk 111 Space Selling space

191*0 $150 to $ 300 $ 6.3 $ 9.3 ** 300 to 500 6.0 8.1* $ 11*. 0 $ 20.0 500 to 750 5.9 9.2 11*.o 19.5 750 to 1,000 5.9 9.1* 12*. 5 20.0 1,000 to 2,000 5.8 10.8 15.2 23.0 2,000 to l*,ooo 6.3 12.2 18.0 28.5 1*,000 to 10,000 6.7 15.2 17.2* 32.0 10,000 to 20,000 6.9 17.5 19.2 1*1.5 20,000 or Moire 8.0 20.8 21.6 55.0 19i*3 $500 to $ 750 $ 9.0 $13.3 * • 750 to 1,000 9.2 11*.2 $ 25.0 $ 35.0 1,000 to 2,000 9.1 16.0 23.0 31*.0 2,000 to l*,ooo 8.8 16.0 26.5 39.0 1*,000 to 10,000 9.0 19.0 30.0 51.0 10,000 to 20,000 9.5 21.0 28. o 55.0 20,000 or More 9.1* 2l*.l* 26.li 71.0 191*6 $150 to $ 300 $13.0 $17.0 $ 22.0 $ 32.0 300 to 5oo 12.5 16.0 ** 5oo to 750 13.0 20.0 32.0 1*1*.0 750 to 1,000 12.5 18.5 31*. 0 l*5.o 1,000 to 2,000 11.8 20.5 36.0 51.0 2,000 to J*,000 11.3 20.6 33.0 5o.o i*,000 to 10,000 11.0 22.5 1*5.5 73.0 10,000 to 20,000 12.0 27.0 1*2.0 78.0 20,000 to 1*5,ooo 11.7 30.0 38.5 100.0 1*5,000 or More 13.5 36.0 1*2.0 115.0 191*9 $250 to $ 5oo $ll*. 5 $18.0 *« 5oo to 1,000 11.5 17.5 * a 1,000 to 2,000 11.0 21.0 $ 3i*.0 $ 50 2,000 to 5,000 12.0 22.5 37.0 60 5,000 to 10,000 12.0 26.0 1*6.0 72 10,000 to 20,000 12.0 28.0 36.0 72 20,000 to 50,000 12.5 32.5 39.0 91 50.000 or More ^*•5 . 38.0 1*1*.o ..... * Not Available

Sourcei Qperating Results of Paperteent and Specialty Stores, Harvard University, Bureau of Business Research, Bulle­ tins No. 113, p. 18j 119, p. 17; 126, p. 21*; and H2, p.58. U1

Sales per aaleaclerk were much greater In the larger stores than In the smaller. In 1 9 4 9# sales per salesclerk

In the largest stores were more than twice those In the smallest volume group. Since the larger stores hired a sub­ stantially greater share of part-time employees and usually required fewer hours of work per week per employee, the vol­ ume differences were actually understated.^ Among the more obvious reasons for this higher sales performance per salesclerk Is the greater traffic that is commonly found in the larger stores. These stores are In metropolitan centers and are commonly In 100 per cent locations.

Another lsportant cause of higher sales output per sales­ clerk Is that In the larger stores, with their emphasis on home furnishings and similar hard goods lines, sales-

In 1949 stores with sales of less than $250 thousand reported that 6 per cent of selling and no nonselling man-hours were part-time hours. This ratio increased to the volume group with sales of $20 to $50 million, where the ratio was 12 per cent of total selling and 7 par oent of total nonselling man-hours. For further information see, F. L. Foster, Jr., op. cit.. p. A special tabulation of store policies concerning the length of work weeks is presented in, M. P. McNair, Operating Results of Department and Specialty Stores In 1 9 4 7 ^ 1 Cambridge. Harvard University, Graduate School of Business, 194b), Bureau of Business Research Bulletin No. 12b, p. 15. In this analysis it was re­ ported that practically all of the responding stores where employees worked a five day week had sales of $2 million or more. The bulk of these stores had sales of $10 million or more. U2

clerks secured a higher total sales volume.1^- It Is likely

that the salesclerks in the larger stores were better

trained* In these stores, also, salesclerks are frequently

relieved of muoh nonselling detail, and sell In more minutely department!sad areas* As a result, they can become more expert In their particular line*

Failure of the larger stores to achieve a higher sales

per employee Is in distinct contrast to their showing with

sales per salesclerk* From the data available, there Is no

apparent reason why the stores with annual sales In the low millions should have the lowest sales per employee* In

the overall, the failure of larger stores to secure sig­ nificantly larger sales per employee can be traced to several factors* Larger stores offered more services, thus requiring additional nonselling employees to carry out these activities* Then too, the larger stores sold a greater pro­ portion of home furnishings which required them to employ

11* For example, in stores with 1 9 U 8 sales of more than $50 million, salesclerks In the furniture and bedding departments sold an annual average of $119 thousand per person* In women's and Blisses' dress departments, for the same store sixes, the average sales per sales­ clerk were less than $59 thousand* For further In­ formation see. Controllers' Congress, Departmental Merchandising and Operating Results of Department"" and Specialty a tores* lQlib? tHew YoriF7 National Retail Dry ooods Association, 1 9 4 9)* U3 is more delivery, warehouse and stock personnel. Additional coordinatlve personnel would ordinarily be required be­ cause of large else, the need for a professional protection force would be greater, and many of the bigger stores main­ tain their own power and workroom facilities. In 19i+9# department stores with sales of more than $50 million showed a ratio of nonselling to total employees of 65 per cent.

This compared to a ratio of 25 Per cent for stores with sales of less than $ 2 5 0 thousand, and I4.5 per cent for those with sales of $1 to $2 m i l l i o n . ^

Space Product1vlty- Information concerning the sales per space unit is given in Table 8, The main cause of the higher sales per square foot of selling space in the larger stores probably was the Increased shopping traffic commonly found in bigger cities. Greatest efficiency was secured in the two largest volume groups. These stores were typi­ cally located in cities of 500 thousand population or more.

Cities of this sise are ordinarily major trade centers that attract a large amount of rural and neighboring city traffic

1 3 ------The organisation chart of one large department store shows that the home furnishings and other hard goods divisions employ almost five times as many stock clerks as do the rest of the main store. While this proportion may or may not be typical of stores this sise, it is more common to find specialised stock and delivery per­ sonnel for hard goods lines than for merchandise lines that are more predominant in smaller stores. 16 P. L. Poster, Jr., o p . c l t .. p. 51* as wall *» local population. This high aalas per selling space unit la particularly significant, however, when It la realised that the larger stores did a relatively greater share of buaineas in lines with a low annual average sales per selling apace unit.

Failure of larger stores to achieve a similar showing with respect to sales per square foot of space can generally be attributed to the same factors that affected personnel efficiency per employee. A change in the emphasis of merchandise lines. Increased needs for services, a greater number of stockrooms and workrooms, and the greater import­ ance of wholesaling functions accounted for the bulk of this difference. The exact Importance of any of these factors can be only conjectural, since the published data leaves much to be desired in the way of specific information.

SUMMARY

In considering the static variations in department store expense It is observed that the larger stores have had higher expense ratios to sales than have the smaller stores.

In 191^9, this difference between the smallest and largest volume groups, reported In the Harvard studies, was \±.2. per cent of sales. Possible reasons for this difference are;

1. The larger stores are located in a different environment than the smaller stores. 2. The different else stores do not perform the seme functions because of merchandise differences, services offered, or functions that the smaller stores have either not assumed, or have shifted to other agencies.

3. The largeness of a store may foster higher expenses.

A substantial portion of the higher expense ratios for larger stores can be attributed to their location in larger cities. Payroll, real estate, advertising, and delivery costs all tended to be higher, for stores of the same site, in larger cities*

Larger stores made a greater share of their sales in furniture, bedding, and similar merchandise than did smaller stores. Sale of this merchandise usually required more selling expense, delivery, service, and space than did the

"soft goods" lines that predominate In smaller stores.

Larger stores also appear generally to have Incurred a high­ er payroll cost for customer service activities*

Although larger department stores are believed to per­ form more wholesaling functions than the smaller stores, the evidence is less clear as to the effect that the assumption of these functions has had on expense ratios. Except for the buying function, there is little evidence. In the data studied, to support the hypothesis that such an Increase In functions has been an obvious cause of expense ratio dif­ ference between medium else and large department stores*

It is felt, however, that this factor Is more Important bet**«n small and medium sise stores. From the limited

data available no concrete conclusion can be drawn at that

level* When the expense ratios of adjacent store volume

groups# within the same city sise group, are compared, the

larger stores have had the lower expenae ratio In a majority

of cases* In terms or net gain ratios, the larger stores

again showed a more favorable poaltlon. Information on per­

sonnel and space productivity shows that the larger stores achieved a substantially higher sales per salesclerk and

sales per square foot of selling space* To a substantial degree, this can be attributed to the large city location with Its attendant heavy shopping traffic* The failure of larger stores to achieve a greater sales per employee or sales per square foot of space oan be attributed to the

type of merchandise handled, offering of more services, and an Increased assumption of wholesaling functions In the bigger stores*

From the available Information there Is little evi­ dence that the larger department stores are less efficient marketing Institutions* While the value of the comparisons

Is somewhat obscured by variations In the lines of mer­ chandise handled, sise of city, and the nature of functions performed, there Is more to suggest that the large store

(l.e*, large with relation to Its environment) was able U7 to operate at a lower coat ratio and at a higher net gain ratio than were the amaller atorea in the aame environment CHAPTER III

DYNAMIC VARIATIONS IN DEPARTMENT STORE EXPENSE

The economy of this country varies in s number of ways* First* there is a seasonal variation caused by weather changes* certain holidays* harvest time* at cetera* These variations are usually predictable* There are oertaln cyclical changes that occur over a period of several years*

These are not as predictable as the seasonal changes* and are an Important source of unbalance in operating costs*

There Is also a secular movement which usually results from gradual changes in basic factors of a social or econom­ ic nature* Finally* there are fluctuations caused by episodic occurrences such as wars and revolutionary tech­ nological changes*

Because of these variations it is frequently found that a previously well-struck balance between expenditures and income disappears* The effect is generally that costs

(in absolute amounts) are less flexible than revenue with the result that* during a decline In business* expense ratios become abnormally high* The opposite coacnonly occurs when the business cycle is in the revival stage*

In either case* the task of evaluating the need for a given expenditure Is complicated by an Interaction of these and

j+e u<* other variables.

Publlehed Expense Data- Since 19^9 the data published by the Harvard Graduate School or Business have been given for a functional-natural expense croas-classlfication.

While this classiflcation provides the most detailed Informa­ tion data given in this form are shown only for groups of stores in specific sales volume classes. Use of statistics in this form poses several problems: First, the limits of the volume groups have been changed several times, particu­ larly since 1914-5* Second, the same stores and the same number of stores have not reported each year. Finally, because of cyclical and price changes, groups with the same dollar limits included different stores from one year to another. In spite of these problems there is little alter­ native but to use the data, with reservations, for the specific sales volume groups. To secure statistics which refleot conditions in similar stores, the median and inter­ quartile range of typical city else in a sales volume class was used to seleot the volume group for each year.

On this basis the groups for 19^9 and 193° have sales of

BK>re than $2 million; from 1951 to 191*1, sales of $1* to

$10 million; and f r o m 191*2 to 191*9 . sales of $10 to $20 million*1

1 In I929 and 1 9 5 0 functional expense statistics were given only for the group with sales "over $2 million." 30

SECULAR TRENDS IN EXPENSE

Th* unadjusted total expense ratios* given In column on* of Tabl* 9 ohow that tremendous cyclical and episodic chang** ob»our*d what **eular tr*nd th*r* may hav* b**n from

1929 to 19U 9 * In the analyal* of tlm* a*rl*a data by statistical mathoda It 1* a common praetle* to eomput* a

■•cular tr*nd first, remove It from th* data, and th*n study th* r*sldual eyelieal fluctuation*• A reversal of thla

•*qu*no* (l*e*t the removal of th* cyolleal influence* in order to study the residual secular movement) can be ftccom- pllshed by the ua* of a deflating Index* Such a deflator ha* been developed by Dr* Robert B* Miner, and 1* used h*re with correction* for revision* that have been made in some of the baslo data *2

Both the unadjusted and the adjusted expense ratios, together vlth the computed secular trend for th* latter, are shown In Figure 1* Th* least squares formula for th* adjusted data shows an upward trend In total expense ratio, for the store groups studied, of about ,5 ) per cent a year during the prewar period,^ This annual trend Increment £ Robert B* Miner, Trends and Variations In Marketing Costs, an unpublished dootoral dissertation, ¥he Ohio State University, 19M3* The trend was computed for the period 1929-19M-* This period was selected In order to minimise the bias that would be Introduced If the Inflated wartlsw and postwar periods were used* The least squares formula for the TABLE 9

Total Fvpenee Ratio*, Cyclical Adjustment and Adjusted Total Expense and Functional Expenses for Selected Volune Group* of Dapartasnt Staraa, Unitad Stataa, 1929 to 1949

(Mat aalaa in sach yaar equal* 100 par cant) Adjusted Total Cyclical idjuted Adjuatad Adjusted Adjusted Adjusted Selling and Tear Expaom Idjuitwnt Total itWnlatratlT. Occupancy Publicity Buying Delivery E i p a H Eipanaa frpense Expense Expenes Expense

1929 32.80* 100.00* 32.80* 7.30* 7.00* 4.5o* 4.35* 9.65* 1930 34.10 105.69 32.26 6.81 7.24 4.73 4.26 9.23 1931 36.00 lllt.66 31.40 6.63 7.68 4.49 4.01 8.59 1932 40.00 126.36 31.65 6.65 8.27 4.47 3.96 8.31 1933 38.40 125.23 30.66 6.15 7.67 4.63 3.75 8.46 W 3 t 37.10 ll6.0li 31.97 6.25 7.63 4.83 4.05 9.22 1935 36.80 107.26 34.31 6.95 7.88 5.22 4.29 9.98 193* 35.30 103.kS 34.12 7.22 7.49 5.07 4.45 9.96 1937 36.40 103.45 35.19 7.73 7.59 5.07 4.49 10.29 193* 37.60 107.19 35.11 7.74 7.65 4.99 4.43 10.26 1939 36.60 106.01 34.53 7.55 7.55 5.05 4*34 10.05 19Uo 35.50 101.93 34.83 7.75 7.46 4.91 4.42 10.30 191A 34.00 97.53 34.86 8.00 7.33 4.72 4.41 10.41 19li2 31.50 93. e9 33-55 7.88 7.14 4.15 4.26 10.12 19k3 28.60 92.71 31.06 7.23 6.15 3.72 4.48 9.49 1 9 U 27.90 94.03 29.67 7-13 5.64 3.46 4.4l 9.04 19k5 27.70 95.57 28.9e 6.49 5.34 3.61 4.39 9.16 19li6 28,80 95.54 30.15 6.49 5.18 4.19 4.50 9.79 19U7 30.70 96.23 31.95 6.66 5.61 4.36 4.42 10.65 1 9 M 32.00 93.60 34.20 7.43 6.09 4.ei 4.e6 11.00 19U9 ..J2-J2L. 96.e7 . J3-S1 . 7.23 6.14 4.70 4.75 10.99

Source: Operating Results of Department and Specialty Stores, 1929-19ii9, Harvard University, Bureau of Business Research; Table”VIII of Appendix A; and computations. FIGURE 1

Total Operating Expense Ratios, and Cyclically Adjusted Total Ex­ pense Ratios with Computed Secular Trend, far Selected Voluee Qroupe of Department Stores, United States, 1 9 2 9 - 1 9 U 9 Per Cent

Tr = 33.36 + .32671 Origin at 1 9 3 5 3 0 1 = 1 y e a r

Unadjusted

20

1929 1 9 3 9

Scmreei Table 9 and ca^xutatiana. 53 compares closely with that found In a raoant study employ-

lng aultipla correlation techniques .*+ In tha lattar study

tha annual increment vas computed to ba an Increase of

about .25 par oant a year, but this vas for storas of all

•Isas rathar than for a aalaotad volume group*

Trand* In Punotlonal Expansa- To traea tha saeular

movements In department stora expense further, data for tha

daflatad annual axpansa ratios for tha five functional

classifications ara presented, with tha eonputad saeular

trand for each, in Plgure 2* Whlla all functional expanse ratios exhibited a positive trend, only tha administrative

and general store, and sailing and delivery functions shov­

ed a substantial annual Increase. The least squares formulae for tha eonputad trends of tha five functions ara:

Administrative and General Storas y 0 - 7 .15X ♦ .1 0 9 8 x

Oo oupanoy t r - 7 .57 X ♦ .0022 x 0 Publicity! Y„ - Iu82* ♦ .0392 X Buying and Merchandisings y 8 - U.25X ♦ .0 3 1 7 X

3------trand of total axpanaa for tha aalaotad atoraa lot r c - 3 5 .3 6 ♦ .3 2 8 7 x origin at 1 9 3 5# X unit ■ 1 year ^ Robert H. Johnson, "Variations In Department Stora Sales - Expanse Ratios," Survey of Current Business. (Washington, Uo s. Department of 6osmeree ), fceptember, I9I4.6 , p. 18. FIGURE 2

Cyclically Adjusted Functional Expanse Ratios with Computed Per Cant Saeular Trends, for Salactad Volume Groups of Ratio Department Storas, Unitad States, 1929-19U9 cf Sales

Adn1 ni strati vs and General Store

Publicity

h —

Buying and Merchandising

12 Sailing and very 10

1929 1939

Sourest Table 9 and oamputations. Sailing and Dalivaryt Yc - 9-59* ♦ *1^29 X Origins at 1955# X u n i t “ 1 y a a r

Ad«lnl»tratlya and Qanaral Stora- From an analysis or tha natural and subfunotlonal axpansas undsr this functional classification, using tha sasa adjustment tachniquas pra- viously employed, tax oosta ara shown to ba tha suijor factor in tha poaitiva trand of administration costs. In fact, tha rsmoval of tha tax axpansa from tha total function ratio las vas this function with a slightly negative trand for tha years I9 2 9-I94I. This relationship Is axprassad by:

Y c » 7*08j< - .01+29 X; Origin-1955; X * 1 year

A detailed study of annual tax ratios shows that major in­ creases oame in tha years 1936 and 1937# The former yaar was tha first in which Soolal Seourlty payroll taxes ware levied* Tha first really substantial oolleotlon was for tha second half of 1936. This tax, together with levying of unemployment taxes, appear to have bean tha causa for tha higher tax axpansa ratios.

Sailing and Pallvary- Tha other function with a sub­ stantial positive trand in axpansa ratio during this period was that of selling and delivery. In tha investigation of tha subfunotlonal and natural axpansa items, four specific areas ara found with a positive secular movement. Tha most Important of these areas, accounting for more than one half of tha function's trand lnoreawnt, is sales da r k 56 p a y r o l l ♦ Tha data, presented In Figure 5 , a how that a significant alaaiant In thla trand was tha vary low payroll ratio aohlavad during tha dapth of tha depression* Tha sources of this substantial raduotlon ara lllustratad in

Tabla 1 0 * To tha extent that tha rasulta In thasa twalva storas ara typioal of all department storas, tha low sales­ clerk payroll ratios in tha period from 1931 to 1 9 3 4 vara due to a combination of smaller sailing forees, lower aver­ age salesolerk compensation levels, and a higher trans­ action output par salesolerk*

beginning with 1 9 3^4-# however, there was a substantial increase in tha salesolerk payroll ratio to sales* Import­ ant faotors In this rapid growth for several years probably vara tha Increasing pressure from unionisation, NRA oodas, and other "New Deal" policies and regulations that fostered higher wage rates and shorter work weeks • The data in

Table 10 show clearly that, after 1933* the number of sell­ ing eaqployees and their average annual compensation per person both lnoreased, while the number of transactions per olerk decreased substantially from 1 9 5 1 -1 9 3 2 levels*

Increases In the number of salesolerks and decreases In transactions per salesolerk from 1 9 3 2 to 1933 point up the probable effect of the MRA and the trend toward a reduction of hours worked per week* While department store sales were generally lower in 1 9 3 3 than In 1 9 3 2, the number of F I G U R E 3

Cyclically Adjusted Expense Ratios with Cowputed Secular Trends, Tor Selected Volume Croups of Department S t o r e e , 1929-191*9

Par C e n t of Sales

Salesclerk payroll

»r>t->v»T»« sellln,

Sales Supplies

1939

Source* See Table X of Appendix A. TABLE 10

Compensation of Personnel, and the Use and Kiiiciency of Utilisation of PerA Spaoe in Selected Qroups of Department Stores, United States, 1929-1"

Transactions per Transact i<*** P«r Annual Bsployee Sale sc lerk Tranj No. of Compensation Twelve Harvard Twelve Harvard per Sellinc per Identical Volume Identical Volnste Tear Employees Salesclerk Stores Class Stores Class F3 — . i is cunt equal to 100 per o en t * •1,050 3,190 3,1*50 8,500 7,500 1929 975 1112 1 875 855 1 1930 92 HI 99 96 1931 89 106 6 115 108 t 1932 80 92 119 110 * 1933 85 81* 101 91* 1931* 91 91 100 1 1055 97 3 1935 92 93 100 102 98 965 1936 98 5 95 101 100 100 102 0 1937 100 100 100 100 100 100 1938 107 109 1939 109 105 191*0 115 115 1 9 iil 113 loi 191*2 97 101 19li3 109 105 19W* 121 133 191*5 101 105 191*6 112 n o 191*7 97 loo 191*8 96 1 0 0 && 102 106

• Data not available

Source x Data for years 193U-19U9 from* Operating Results of Depar teent and Speoft 1931* to 191*9, (Harvard University, Bureau ot business Rose various for twelve store study frost Carl W. Sclmalts, Ibid.. 193 B»U»tin No" TABLE 10

and tbs D m and Kfficisnoy or Utilisation of Psraonnsi aiKl oups of Dapartawnt Storas, Uni tad Stats a, 1929-191*9

(1937 - 100 par cant)

Tranaaotions par Transaot Ions par teplojue Salaao lsrk Transactions Transactions ion Twelve Harvard W v e Harvard par Squars par Squars Identical Vnlnna Idantioal Volinas Foot of Foot of rk Storas Class Storas Class Spaca Sailing Spaca

3,190 3,15o 8,500 7,500 9 17

87* 85* 9 9 96 115 108 119 110 lOl 91 100 105* 97 100 102 96 96* 101 100 100 102 100 100 100 100 ICO* LOO 107 109 loo 106 109 105 100 100 115 115 111 106 113 101 111 106 97 101 122 130 109 105 133 138 121 133 11)1, I h h lOl 105 133 l h l 112 HO mi* 138 97 100 133 128 96 loo 122 122 102 106 122 128

' fro** Qparatlns Hasuits of Dspar tnsnt and Specialty Storas, IniTaraity, Bureau o t Business feasa iron) Taricue bulla tins. Data rroat Carl H. Sobaalts, Ibid.. 193 ^ Hat in Ho. 106, p. 12. aalesclerks employed In tha twelve store sample was 7,1 per eent higher and the transactions per employee were 15 per cent lower, A second expense with a positive secular trend was

"other" selling payroll. The average annual Increment for this expense was a ♦ , 0

"Increased services have been demanded, or at least have been offered by stores and accepted with alaorlty by consumers; credit, delivery, teaohers, demonstrators, not to mention such conveniences as rest roosu, wr V, •» fc/VU'WlAV, »I1U ,W VU . • « •

The average trend Increment of ,021^ per cent per year rep resented 2,2 per cent of the outlay for "other" selling payroll In 1 9^9 * The salesolerk trend Increment was only 1,1 per cent of the 19^9 outlay, M. P, MeMalr, Operating Results of Department and Special ty In 1 9 3 8 . (Cambrldge7 Harvard Univarsity. Bureau of Business Research, 1939)} Bulletin Ho, 1 0 9, p, Sailing supplies, the third expense with a positive trend from 1 9 2 9 to 1 9 4 1 - consisted of wrapping and packing materials, salesclerk supplies, and miscellaneous selling costs for menus, flowers, uniforms, laundry services, et cetera. While no verifiable explanation for this trend can be given, a large share of It was probably due to an in­ crease in wrapping and packing services.

The remaining expense with a positive trend from 19^9 to 19itl was delivery. The annual rate of Increase in this case was + ,038 per cent of sales. For the most part this growth can be traced to greater outlays for service p u r ­ chased from outside delivery agencies. Delivery payroll, in contrast to almost all other payroll classifications, decreased from 19^9 to 1941* This also points to a wider use of outside delivery agencies. One possible cause of this expense growth may have been the delivery of an in­ creasing per cent of total transactions during these years.

Data concerning the proportion of transactions delivered to total transactions are not complete enough either to substantiate or to refute this hypothesis. Information concerning the per cent of transactions delivered Is avail­ able only for 1957* 1959 to 1941* During these years there was no apparent Increase in the per cent of trans­ actions delivered. Higher delivery expense ratios may also have resulted from outside agencies being more costly on * P*r unit basis. It has con only been claimed that one of the major reasons for the change, by stores, to the use of outside delivery services was not economy, but to ellBiln-

«te the problems of industrial relations with truckers' unionsThe only data available from published sources concerning the relative costs per transaction between the two methods of delivery show that. In 1 9 4 7 # the cost per unit delivered was substantially higher for stores using g outside delivery agencies* In the light of this limited information there Is a strong possibility that higher per unit costs for outside delivery service and the greater use of these service agencies were the causes of the growth In the delivery expense ratio to net sales*

Trends in Other Expenses- A thorough scrutiny of the expense items within the remaining functional classifica­ tions failed to show, with the exception of display costs, any marked positive trend from 19^9 to 1941* The display trend was positive for both supplies and payroll* The com­ bined annual Increment for this twelve year period was .0 1 4

7 D. J, Duncan and C. P. Phillips, Retailing Principles and Methods. (Chicago, Richard Irwin, Inc., 1?5^) Revised edition, p. 4&9* Q In 1 9 4 7 stores with annual sales of $10 to $20 millions reported to the Harvard Graduate School of Business that the average cost per transaction delivered was $#2b for those with owned facilities, as compared to $*25 for those using outside services* It might be pointed out, however, that it is not possible to determine the effect of city sise on these comparative figures* b2 per cent or sales per year. Since both or these showed a similar increase It is likely that display errort grad­ ually received more attention and runds during this period* Several other expense class in cat ions did show a nega­ tive trend during this period. Floor supervisors1 payroll declined at the annual rate o r *011 per cent o r sales.

This negative tendency can be attributed to the probable

•hirt in runctlons from this executive to the department

■snager*^ As was previously mentioned, the greater use of outside delivery agencies resulted in a negative trend in delivery payroll expense ratios*

Trends in Personnel Productlvlty- The accent on the study of personnel productivity Is so new In department stores that little published information Is obtainable.10

9 "Fixing responsibility on the buyer for...supervision of the sales force In his department [is] typical of his [the buyer] widening activities*" See Duncan and Phillips, op, clt*. p* 1 8 8 ,

10 Most published materlal on personnel productivity Is found In the various Proceedings and papers that have been published by divisions of the National Retail Dry Gtoods Association* The Research Cosmlttee of the Controllers* Congress has issued two publications in which were compiled production results In the accounts receivable and accounts payable activities of the co­ operating stores. These are: Research Committee, Controllers* Congress, Accounts Payable Productlvity Survey. (New York, National detail Dry Goods Associa­ tion, 1950), also Ibid.. Accounts Receivable Product!v- 1ty Survey. 1931, 63

Inform*tion for th* years b*for* 193U la available only for

email samples of stores; sine* that time more complete data

ean b* had for th* groups of stores which report to the

Harvard Graduate School of Business. Data concerning pro­ ductivity ar* pr*s*nt*d in Tabl* 10. Much of the difference in the transactions per employee between the two samples for any given year was probably due to the typically larger

•tores in the small sample.

Consideration of the trend possibilities in both cases shows that there has been no secular Increase In productiv­ ity. either per employee or per salesclerk, from 1929 to

191+1. The most significant variation has been the substan­ tial cyollcal changes during this period. Output, as measured by annual transactions per person, was much higher during the several recession years than at any other time.

In defense of the relatively poor showing in personnel productivity, as demonstrated by these data, it must be admitted that certain outside Influences have depressed the number of transactions per person. It has been pointed out that the NRA codes and the Increased pressure for short­ er work weeks resulted in each employee working less time per week. The effect of this shorter work week has been for most stores to employ more people rather than to reduce the number of hours that the store is open. This action would obviously reduce the number of transactions per 6k person* More vacation, aide leave, and aiaillar benefits have bad tha same depressive arract on the index of trans­ act Iona par parson* Tranda In Spaca Productlvlty- Published information on the relation of transactions to space has been available only since 1957* Table 10 are shovn indexes of trans­ actions par square foot of sailing apace and par square foot of total apace* Tha vary slight upvard trend from 1957 to

19i|l can be explained by tha larger sales volumes of the later years of this period* Since stores must ordinarily have some excess space for use at high volume peaks, the cyclical lnorease in sales in 191+0 and 191+1 enabled manage­ ment to make a sK>re complete use of available space*

Prewar Trends In the Postwar Period- The projection of the prewar trend into the postwar period is also shown in Figures 1. 2. and 5* By such an extrapolation it is possible to show to what extent the postwar expense patterns have reached the levels which they might have been expected to reach if the prewar conditions had continued*

The deflation of the functional expense ratios, so as to reduce the Ippaot of oyellcal changes, was carried out for the seleoted volume groups for the period 191+2 to

19l+9* Total expense ratios had not returned, by 191+9* to even the 191+1 level* Since 191+5# however, there has been

» marked move back toward the level of the extrapolated trend. Only In the buying and merchandising function haa tha expense remained at tha ganeral level that would have been expected from prewar experience. The failure of buy­ ing coats to decline during the war period can be attributed to the specific problems concerned with the procurement of merchandise under short supply conditions. The postwar high level of this functional expense was due. In part • to

Increases In receiving and marking, and "other" buying activities •

Postwar expense ratios for the administrative and gen­ eral store, and the occupancy functions have been farthest from the projection of prewar trend. For occupancy costs this is understandable In the light of the fixed nature of this expense. It has already been shown that the high secular trend in the administrative function was due to a substantial rise In tax costs during the latter part of the 1 9 2 9-1914!. period. Another important reason for the relatively low administrative cost has been the postwar revision of the Imputed Interest rate charges.11 With the exception of executive payroll, all other payroll costs under the adialnlstratlve and general store function had surpassed the 1 9 4^ levels by 1 9 4 9»

11 Since 1 9 4 & the interest charges Imputed to the invest­ ment In accounts receivable and merchandise have been set at 4 per oent in the Harvard studies. Prior to 194-5 * straight 6 per cent was charged. In 1945 * slid­ ing scale of oharges was used* The extrapolated trend for the selling and delivery, and the publicity functions has been closely approached by the actual expense ratios in the postwar years. The main reasons for the substantial increase in selling expenses has been the rapid rise of payroll costs, particularly for salesclerks and "other" selling employees, No specific ex- pens© can be singled out from those under the publicity function unless it is the unclassified group. This classi­ fication is made up of such a miscellany of expenses that

It Is Impossible to determine what might have been the cause for the higher ratio in 19U9 *

For the postwar period there has been little that is encouraging from the productivity data as typified by transactions per employee and transactions per salesclerk.

In both cases the gains made during the war were quickly lost after the oessation of hostilities. Productivity of space, on the other hand, has been much higher in the post­ war period than in any previous period for which data are available. To a large extent this is due to the more complete utilization of existing facilities. Since stores, like utilities, must have excess capacity for peak loads, the higher output per square foot represents a more thorough utilisation of space than during previous years. o7

NONSECULAR VARIATIONS IN EXPENSE

Prom 19^9 to 19I4.9 triere nave oeen three rn&jcr p e r ­

iods of business activity, each with somewhat distinctive

characteristics. Up to 191A there was a complete business

cycle of unprecedented proportions. Prom 1 9 ^ to 19U6

there was a tremendous activity Increase as a result of

probably the greatest episodic event in history. In the

years from 1 9 to 1 9 5® business has been at a very high

peacetime level. This latter period might well be called

the beginning and peak of a new business cycle at a level

much higher than any seen before. In terms of past exper­

ience it is surely a peak, although in terms of an unknown

future it may well be a low or at least only a moderately

high level.

Because of the tremendous variety of disruptive

elements that have come into play, a detailed analysis of

nonaecular variations of specific expense during this

twenty one year period does not seem warranted. If the analysis is restricted to the major natural expenses it is found that three of them, payroll, real estate, and adver­

tising, accounted for from 7° to 75 P®** cent of the total expense each year. The general pattern of these expenses, together with a few major subclassifications, is presented in Figure it. In this illustration the expense figures are indexes of dollar outlay for the various items with n o u n 1$

Index of Dalle penee Outlay

*-- 1--1-- 1-- *—H --♦ » » <--1-- 1--1--1-- 1-- 1-- 1— t > «-- h 1929 1932 1937 19ia 191* 191*6 191 *9

Sawroet Appendix A, Table IX 69 net sales in 1929 equaling 100 per cent* With these in­ dex**, * comparison can be made between the actual dollar outlays for expenses In the various years. By this method, only differences In dollar outlay for expense are compared*

In an expense ratio to sales comparison, variations are the result of both expense outlay and sales volume changes from year to year*

Payroll Expense- During the decline of business activ­ ity to the low levels of 1 9 3 2-1 9 3 3 * payroll proved to be the most manageable of the major natural expenses. This pattern of flexibility is apparent throughout the entire 1 9 2 9-1 9U 9 period* The expense varied from as little as l|.£>*7 P®r cent of total expense, in 1 9 3 2 , to as much as 55*^ per cent in

19M>, primarily as a result of relatively high flexibility in payroll outlays for the selling function and the rela­ tive rigidity in nonpayroll costs* Publicity and occupancy payrolls have evidenced a marked rigidity together with a tendency to absorb a greater share of total payroll since

I9I4JU Buying and administrative personnel costs followed the total payroll pattern*

Real Estate and Advertising Costs- The marked rigid­ ity of real estate costs is apparent from the data In

Figure 4* A lag In the adjustment of these costs, as shown by a lower outlay In 1 9 3 7 * another characteristic of relatively fixed costs* Government control and the ?o

fixed nature of depreciation charges are reflected In the

slight increase in real estate costs during the war and

postwar years as compared to prewar years*

Advertising costs have moved In much the same pattern

ts those for real estate. While advertising outlays are

relatively fixed over a short period, since plans and com­ mitments for space must be made in advance, there is

usually no fixed or contractural cost over a period of a year or more* This rigidity, therefore, must stem from

sources other than those that have made real estate costs stable. While expenditures for advertising can theoretically be completely flexible over a year's time, it is obvious that store managements have not secured such flexibility.

Per cent to sales, except in a restrained manner, has not been closely followed as the cost crlterlan. A possible cause for this rigidity is that sufficient advertising effort is usually a prerequisite for the attainment of a goal sales volume* Even when sales are cyclically low.

It is necessary to advertise vigorously to secure and hold a share of the reduced market* The failure of adver­ tising costs to rise as rapidly as other costs in the war and postwar periods can be traced to newsprint shortages, greater customer demand, and short supplies in many lines*

All of these made heavy advertising less mandatory*

Other Expenses- Approximately one half of this group of natural expenses generally oonslsts of costs for supplies. ?l Interest on the Investment in merchandise and accounts re­

ceivable, taxes (other than federal income and property), and services purchased. Throughout the entire twenty one year period the first two of these, supplies and Interest, have varied closely with sales volume. During the war period, conservation practices and government restrictions reduced the supplies cost to an abnormally low level in proportion to the high sales activity. By 1914-9. services purchased were more than four times as high as in 19^9 . and taxes (other than federal income and property) were seven times as large as in 1 9 2 9* As has been pointed out earlier in this chapter, these variations have been primar­ ily secular in nature*

General Expense Patterns- Throughout the twenty one years studied, the overall expense outlay to sales relation­ ship has been fairly predictable. During years of peace, when no major shortages or general governmental controls existed, the year to year change in expense outlay has been from 50 to 80 per cent of the sales volume change*

The way in which a given expense varied with a sales change appears to be determined by the sinner in which the cost

Is contracted and the peculiar circumstances that exist at the time the cost is incurred* Further consideration of the nsnner in which costs are contracted will be given in the following section* 72

NATURE OF DYNAMIC EXPENSE INCURRENCE

In e d attempt to understand the problems of dynamic azpanae -variation more thoroughly, and to bring out more clsarly the nature of these problems, it is desirable to classify what appear to be the dominant causes of such var­ iations* Such a classification will not always be of mutually exclusive groups since there are many cases where mors than one factor plays an Important role*

Fixed or Contractural Expenses- There are some ex­ penses that are set by either a contractural arrangement or by making a fixed charge* Rentals, depreciation, and

Interest charges are the most Important costs of this type*

In times of high sales volume these expenses appear to be abnormally low, while in times of low volume they are ab­ normally high* In general, little short run control can be exerted over these costs unless the original manner of determination is revised* Such a change has been found in instances where stores have made rental contracts on a per­ centage lease basis* For the most part, however, it is likely that these costs will oontlnue to have a high degree of rigidity*

Expenses Set by Outside Agencies - Expenses found in this group commonly vary in either an episodic or secular aanner* Taxes, utilities, outside services costs, and costs resulting from government legislation or regulations 73 trt of till* typo* In the** ctses the are* of free action open to management Is severely restricted* The lower de­ livery costs during World War II and the tremendous growth

In certain taxes during the period 1936-1939 ***# examples of this type of variation. While in some cases the form of service used or the amount of property to hold can be chsnged so as to reduce costs, this action is usually limited in scope* This group offers relatively few short run opportunities for improvement except by major changes in policy concerning operational or organisational patterns*

Competltlvely Incurred Expenses- Expenses in this clisslflcatlon range from moderately rigid to highly var­ iable. Managerial decision, theoretically, has a free rein in this area, but the practical competitive factor severely restricts this freedom of action* For example, sales pro-

*101ion efforts are often detersd.ned more by the vigor of promotion from other stores than by other factors* That this will foster a moderate rigidity Is shown by the adver­ tising expense in Figure ij.* The degree of service offered and the general nature of services are also often dictated by competitive conditions*

Expenses Determined by Policy- There is also a group of expenses, highly variable to episodic in nature, where managements can and do exert a wide freedom of action in outlay determination* Costs for executive payrolls, repairs, certain employee benefits, et cetera, are in this group* 7k

These outlay* may be deferred, undertaken at a highly accel­ erated rate, greatly reduced, or almost eliminated If manage­ ment chooses* While these actions may often be restrained by various circumstances, a variation in the cost will usually have little impact on sales volume*

Expenses Resulting from Specific Causation- Much of tha dynamic variability In expense can be traced to the fact that sales volume la often not the major determinant of a cost* The costs of buying* while surely reflecting sales volume variations to a substantial degree, probably are de­ termined to a greater extent by market conditions and the need for expert buymanshlp* The delivery expense, while greatly affected by the voluaw of transactions sold* Is also In­ fluenced by variations In the type of merchandise sold* the per cent of transactions delivered, and probably even by the weather* Many costs resulting from competitive condi­ tions are not directly reflected in an Increased sales volume* It is obvious that this classification cuts across the lines of many of the others listed here* It is also apparent that recognition of the fact that sales volume is often not the determinant of an expense level vitiates much of the usefulness of the per oent to sales expense ratio as a budgeting and oontrol tool. It Is probable that the lack of adequate Information concerning the nature and isqportance of specific independent variables and their effect on store lb expen** has b«en a major barriar in the development of sound expens* management In department stores. A greater under­ standing of the causal factors and their influence would surely foster a more effloient use of the expense dollar•

Rrpenses of Inefficiency- The expenses of inefficiency are of tw> general, overlapping types* In the first of tnese are the inefficiencies of unused capacity* For example, costs of space and the amount of space to maintain must be determined in terms of maximum needs as well as minimum re­ quirements* During certain parts of the year, and of the business cycle, the productivity of space is much lower than would be maintained over a long period* because of this, the costs of the period of reduced space needs will appear abnormally high* It is also believed that there la large amounts of unused capaolty in salesforce and other working forces* In one of the few studies made of sales­ clerk time it was learned that less than I4.0 per cent of 12 the clerk's time was spent in actual selling* The relatively high production per salesclerk during the early

1930's also attests to existence of unused salesforce capacity* The discharge of many activities requires the employment of personnel, space, and equipment in relatively large units* For example, a delivery truck may be needed IS ------Gustave £* Bittner, Analysis of Retail Selling Time* United States Bureau of Foreign and Domestic* Connerce, {Washington, D«C*, U .3.Government Printing Office,192b)* 76 even though it 1b used to only one half of its capacity.

Cne half of the Investment in ouch a piece of equipment

represents an investment vaate. More delivery activity up

to the limit of the capacity of this truck would not Increase

the delivery costs to a proportionate degree•

Although it is not possible to measure the importance

of the problem of unused capacity, it is believed to oe of

aajor consequence. The general nature of retail operations,

in vhlch store facilities are freely available to a consum­

ing public, fosters a rather wide range of operational tempo.

As long as retailing is carried on in this manner there is

likely to be large units of unused capacity. There does

appear, however, to be many possibilities by which manage­

ments Blight ease the impact of unused capacity costs through

the shifting of functions to other agencies, the promotion

◦f different shopping patterns, and the revision of organi­

sation and operations.

A second class of inefficiencies resulting In higher

expenses are those of management, organizational arrange­

ments, environmental conditions, operational methods, and

personnel inadequacies. While published expense data do

not show the specific nature of these, the comparison of

"common" results with "goal" results In the Harvard studies

throws this problem into bold relief. Here appears to oe a fertile field for the application of scientific manage-

*ant principles and research techniques. Further consider- 77 atlon of the specific problems to be found in this ares of expense study is given in many of the remaining chapters of this dissertation.

SUMMARY AND CONCLUSIONS

Total expense Increased during the prewar period, for th« stores studied, by an average of .55 per cent per year.

Slightly over 75 per cent of this secular increment resulted from increased costs for taxes, sales supplies, delivery service purchased, and higher payroll costs for salesclerks,

"other" selling employees, and display workers. oecause of the unique conditions resulting from a wartime economy, most of these expenses did not maintain this secular increment during the period from 1 9ip^ to 1 9U^* In the postwar period many of them have approached extrapolated trend levels, vhlle the salesclerk and "other" selling payrolls had, by

1914.8, surpassed the projected trend. Among the functional expenses only those for selling and delivery, and publicity have, by 1 9 4 9* approached the extrapolated trend levels.

While there was an increase in the productivity of personnel during the decline of the early 1950'• end the war period, there has been no evidence that any positive secular trend exists or that these improvements have had any perma­ nence. Space productivity has climbed since the prewar period, prlsmirily because of higher prices and the episo d i c a l ­ ly and cyclically high level of business since 19U2 * 7 s

The cyclical variations In expense ratios show that

most expenses are partially fixed and partially variable.

rn « few cases, e.g., real estate costs, depreciation, et

cetera, there has been a high degree of fixity. Of the

major natural expenses, selling payroll appears to have been

the most flexible, while advertising costs have been only

moderately variable. Careful consideration of the dynamic expense ratio

variations and the causes of these variations suggests that

aany have resulted from a combination of specific conditions

•xtant at the time with other more general causal factors.

Tha manner in which the cost is incurred is greatly affected

by contractural arrangements, policy decisions, the need for maintaining competitive position, and specific causal factors which are often not sales volume.

Conclusions- In general there has been a strong tend­ ency for department store expenses to increase since 1929*

Data available as far back as 19<^0 show that this general trend was also in evidence during the period I9 2O-I9 2 9* While conditions encountered from 1914.2 to 1914.6 temporarily reversed this trend, experience since that time suggests that the same or similar factors have again been operating.

This problem of increasing department store costa, at a time when the "high costs of distribution11 have been criti­ cised by many, makes a study of expense and its management

* project that offers a substantial opportunity for a real contribution to marketing. CHAPTER IV

EXPENSE MANAGEMENT PRACTICES IN DEPARTMENT STORES

In February, 1951* questionnaires vere sent to 155 leading U.S. department stores vlth estimated annual sales of $10 million or more.^ Fifty three usable questionnaires,

59*5 par cent of the 155 sant out, were returned. Response by geographic area varied from about Id per cent return from the New England states to bij. per cent from the Pacific states. Forty nine per cent of the stores In ownership groups replied as compared to 55 Per cent from independents.

Twenty two stores had 195° sales of less than $20 million, while thirty one had sales of more than that amount.

The general aim of this survey was to secure a clear picture of the manner in which expense management was

carried out in the various stores. Toward this end the questionnaire was designed to obtain information concern­ ing:2

The lower limit of $10 million in a n n u a l sales was arbi­ trarily selected as the approximate lower limit of store sise to be studied. By the size limitation it was felt that the study was restricted to a somewhat homogeneous group typified by the downtown department store of a trade center. For the most part the volume estimates came from a personal comparison of some stores with stores of known sales volume, estimates by others who were familiar with the stores in question, and by the selection of leading stores in cities which were clearly large enough to support a store of such volume, 2 A copy of the questionnaire is included as Appendix B,

79 co

1 . The nature of the expense budgeting process, 2 . The nature of the expense control process, 3 . The nature and extent of the efforts to reduce expense during the postwar period,

I*. The extent to which "productivity" concepts have been employed and managerial opinion as to their value.

These will be taken up in turn, followed by an Interpreta­

tion, in the latter part of the chapter, of the conceptual aspects of expense management as evidenced from the replies received.

The importance given to expense problems by store man­ agements can be roughly measured by the executive positions of the respondents. In most cases the original Inquiry was addressed to the president of the firm. One half of the replies came from a corporate executive at the level of

Treasurer or higher. Most of the remaining respondents were either the controllers or special budget or research staff members,

EXPENSE BUDGETING

Almost 10 per cent of the executives reported that ex­ pense is not budgeted In their stores. This Is, of course, not to say that expense problems have been Ignored, but rather that some managements have chosen to solve such prob­ lems by naans other than a formalised budget. Careful comparisons to last year's results or to the lowest cost 61

achieved In the past are employed as sucstitutes Tor a for-

nml budget. Prom further consideration of these practices

It Is apparent that the use of last year's actual results

amounts to about the same thing as using a budget. The

difference is more a matter of label than practice. While

some question may be raised as to the desirability of

complete dependence on past results, the stores following

this pattern are among the leading and most successful

stores in their respective trading areas.

Period and Purpose of the Budget- While almost all of

the stores have an expense budget, there are marked differ­ ences In the time period for which the budget is made, and

in the purpose of the budget* In more than I4.O per cent of

the stores an expense budget is made for no period shorter

than six months. In most of the remaining cases the normal budget period is one month. Multiple budget periods are used in one third of the stores, with the usual combination being that of six months and one month.

An attempt was made, by a free response question, to secure executive opinion as to the primary reason for ex­ pense budgeting. Most of the statements concerning the budget's function m a y be classified by the following: tip

STATEMENT PER CENT OF BUDGETING STORES

1* It gives a projected profit end loss estimate* 51

d. It facilitates the control of expense* I4J.

3# It provides a basis for manage­ ment plans and decisions. 12

I*. It makes spending more intelligent* 10

5. It makes executives conscious of expense* 10

In nost stores the budget is used to forecast operations or to control expense. While the difference in these

Answers may be a subtle one. It is an important distinction*

Those who give emphasis to the control aspect tend also to be those who budget for a short period or for more than one period. Inherent in these five statements of budget purpose appears to be at least one more basic concept of an expense budget's function* While this concept is best typified by the statement, “makes spending more intelligent", it would

Also seem to include the use of the budget for sianagerlal guidance. In either case, the meaning is broader than sImply to control, or to formalize operations in advance*

It states in the one case, and implies in the second, that the budget is a working tool and guide which enables man­ agement to use each expense dollar most wisely. While this sight, in the literal sense of the word, mean “control", b?

such la not the general meaning of the term In retailing.^

Budget Development- A free response question was

aaked concerning the steps through which the expense budget­

ing process goes before completion. While the specific

answers vary widely, they do fall into a general pattern

that la easily distinguishable. In the majority of cases

sons executive, whose concern is with either financial or

budgetary matters. Initiates the process. In about one half

of the stores this executive or someone In his office sends

the necessary historical Information, upon which to ba8e

the budget, to the line executive concerned. This line

executive, sometimes In conjunction with a central budget

office or other line executives, makes out the budget. It

then goes to the budget office for review, consolidation,

or both, and is finally approved by a corporate executive

of the firm. While this final approving authority Is

usually a single executive. It Is not uncommon for a com­

mittee to be the final approving authority. In most of the

remaining replies the answer was not sufficiently clear to

determine whether or not this procedure is followed.

An analysis was also made to determine the lowest executive level to which the budgeting process is carried.

3 The usual concept is typified by* "The store manager comes into Intimate contact with the expense budget [in] • •• keeping the costs within liati.ts set." See O.F. Robinson and W.B. Brisco, Store Organisation and Operation. (New York, Prentice-Hall, Inc., 19d9. p. i&5. In more than one hair of the stores vhere expense budgets

are used, the department manager takes an active part in

the budgeting process. In most of the remaining stores

ths lowest line executive to participate actively in budget

preparation is at the division manager level or above.

Payroll Budget Determination- In Table 11 is present­

ed information concerning the factors that are considered in

the budgeting of payroll and selected nonpayroll expenses.

The budgeted amount for executive payroll is determined, in

a najorlty of stores, either by past payroll levels, fixed

policy, or smnagement review. Such a budgeting pattern makes

executive payroll rather stable In the short run, although

It night easily become quite erratic at times. Data present­

ed In Chapter III show that executive payroll did fluctuate

widely during the depression period of the 1950's, The

■ties plan is also an Important factor in executive pay­

roll b u d g e t i n g i n a b o u t 2 0 per cent of the stores*

There are several significant differences in the

factors that determine employee as compared to executive pay­

roll. For employee payroll these differences are reflected

primarily in an increased Importance given to the sales plan, a decreased dependence on "past experience*1, and an Increased use of work load measurement. Except In several stores where engineering techniques are used to determine work

load, past experience, in the form of historical production records, is still the smjor factor in budgeting, A specific table n Factors and Considerations in Determining tha Amount to be Budgeted for Selected Payroll and Nonpay­ roll Expanses, 5C U. S. Department Stores with Estimated Annual Sales of More than $1C Millions, 1951

PAIROLL EXPENSES NONPAIROLL EXPENSES trtcuTrre EkPLOIEE Travel and Non- Non- Adver­ Service Communica­ Function Selling Selling Selling Selling tising Supplies Purchased tions

Planned Sales 9 9 16 31* 3ii 17 9 11 Past Experience 23 23 u* 12 13 22 23 20 Fixed Policy or Management Review 13 11 0 0 3 0 3 7 Store Comparison 6 9 5 5 6 7 7 7 Workload or Trans­ actions 26 lit 0 3 6 Tread (Costs or Business Conditions) h 5 k 7 10 10 5 3 Actual Sales 0 0 0 3 0 0 0 0 Purchase or Promotion Flan 0 0 0 0 9 0 0 5 Market Conditions 0 0 0 0 0 0 0 9 Coverage, Needs 0 0 0 6 0 0 0 0 Special Items or Estimated Needs 0 0 0 0 2 13 22 16 Departaent Site and Personnel 5 k 8 6 0 0 0 0 Not Budgeted 0 0 0 0 h 1 1 1 Other 0 0 0 0 3 2 0 0 No Answer 6 6 h li 5 7 k 5

Source: Mailed survey by C. W* Emory, February, 1951. 66

rsply of "P*®t experience", however, suggests a more direct

dependence on laet year's resulta than does its inclusion

as s base of historical reference In relating estimates of

payroll coats to sales plan and work load.

In planning sales payrolls the major emphasis is

given to the sales budget, while In nonselling It Is more

eomson to use specific work loads* Slightly over one half

of the stores use more appropriate bases than planned sales

for budgeting nonselling payroll costs* Another one third

of the stores still use the sales plan for budgeting non*

soiling personnel expense,

Honpayroll Expense Budget Determination- Information vat also sought on the budgeting of four major nonpayroll

•xpense Items which are usually susceptible to some sort of

effective control. The greatest single factor determining

the amount to be budgeted for advertising and promotion is

the sales plan. More than two thirds of the stores report this as the most Important factor, with It often being the sola determinant.

In the budgeting of the other three nonpayroll expenses there exists a relatively stable pattern. Generally speak­ ing* past experlenoe is the main determinant, either direct­ ly or indirectly* In a number of oases this past experience la correlated with sales, while in other Instances it appears that only the past consuaqptlon rate Is considered.

Little attention Is given to the actual sales level as long ti?

it does not w r y by unusually great amounts. There appears, also, to be some reliance on comparison with standard ratios or with other stores*

Budget Flexibility* In an attempt to determine more clearly the manner in which the expense budget Is used as a control devloe* It was asked whether the payroll budget it revised when the actual work load differs from that ex* pected. In about one fourth of the stores, where expense la budgeted, the payroll budget is not revised to conform to actual need conditions* Perusal of the returned ques­ tionnaires from these stores shows that, in one half of them, expense Is budgeted for a period as short as one month. This, to a degree, serves the same purpose as a budget revision In that work load will not vary for a pro­ longed period before a new budget is made* In the stores where the budget Is neither revised nor made for periods aa ahort as one month, the following thoughts were express­ ed by the responding executives:

1* Extra expense is compared to extra work load to determine If justified*

2. The per cent to sales of actual vs* budget is considered*

Results are shown as "plus or minus" and e x p l a i n e d *

it* Ho ohange Is made except for new duties*

Several comments made by those whose stores do revise the budget are of Interest here* One store reported that no 88 change i* made in the budget until a variation of 10 per

cent or more exists between actual work load and the budget­

ed load* Three stores reported the use of a variable |l budget*^

CONTROL OP EXPENSE

A second aim of the survey was to determine the nature

of expense control practices and the manner In which they

are carried out. The same expense classifications that were

used for the questions concerning the budgeting process were

•nployed in this analysis*

Control Responsibility- The most coanion position of

responsibility for the control of expense is that of control­

ler* In about one half of the stores he Is either the high­

est level executive (hence the ultimate responsible

executive) with oontrol responsibility* or he shares this

position with the operations smLnager* The latter holds or

shares responsibility for expense control in about one

fourth of the stores* A study of the individual returns

snows that reported responsibility emanates from the top

echelon and spreads to lower levels in the following aanner x j------"A flexible (or variable) budget is one which provides separate expense allowances at varying levels of pro­ ductive capscity** See L*P* Alford and J*R* Bangs* Editors* Production Handbook* (New York* The Ronald Press Company* 1^1*4)* P • l$3l• b9

PER CENT OF TOTAL STORES

1. To the departmental laval ...... 19 2. To the apacial staff executive leval 8 5. To tha division or major lina axacutlva laval ...... 19 4. To tha controller-operations manager laval ...... lj.6 % To tha corporata axacutlva laval.. . b b. Uncar tain as to tha laval ...... 2

From thasa data It la obvious that respcnsibillty for ex­

pense control, in tha stores surveyed, remains rather

centralised* While tha department manager participates In

the budgeting process in more than one half of tha stores*

he has an Important role In tha oontrol of expanse in only

about 20 par cant of tha cases* The two questions, as

phrased, are not sufficiently similar to warrant tha conclu­

sion that Insufficient control responsibility is given to

the department manager in light of his participation In tha

budgeting process* Tha substantial difference in tha pro­

portion sharing tha budgeting End tha proportion sharing

control, however* does tend to substantiate this view*

Control of Payroll Expanse- Executive payroll, for the most part, la controlled by policy and a*nageawnt decision, or by a relating of actual cost to tha expense budget* While the returns do not show it to be the case.

It la likely that much of the oontrol by "management decision" is through a comparison of actual expense with expense budgeted* The lsy>ortance of these and other factors

Is shown In Table 12* TABLE 12

Method by which Selected Payroll and Nonpayroll Expenses are Controlled in 53 U. S. Department Store* with Estimated Animal Sales of More than $10 Million, 1951

P A I R 0 L L EXPENSES NONPATROLL EXP E N S E S firicufrvE E#Lcta Travel and Nod— Non- Adver­ Service Comeuni ca­ Method Selling Selling Selling Selling tising Supplies Purchased tions

Budget Comparison 19 18 26 27 30 22 21 25 Policy or Manage­ ment Decision 26 27 21 18 21 28 23 27 Actual Sales or Business Conditions 7 8 7 15 8 3 8 5 Past Experience or Contract k 3 2 3 2 3 5 5 Hours or Personnel Count h 5 11 8 0 Needs or Workload 0 0 6 0 0 5 3 3 Authorisation or Requisition 0 0 0 0 0 1» 0 7 Controller Rev 0 0 5 7 0 0 Lowest Cost or Conservation 0 0 0 0 0 h h 3 Promotion PIal 0 0 0 0 2 0 0 0 Other 2 2 2 2 2 3 3 3 No Control 0 0 0 0 0 0 2 3 No Answer h 5 3 3 It 5 6 a

Source: Mailed survey by C. W. Qsary, February, 1951. Q1

Reference to the sales budgst assumes a mors Important rols In the oontrol or employee payroll costs than with ex­ ecutive costs. Again, the Importance of management decision shows a close correlation with the comparison to the expense budget, and tends to reflect a different statement of the sane general control technique. In controlling employee payroll, actual sales volume and business conditions play an Important part. This is explained by the great effect that a change In business volume has on employment needs at tha operative level. Weekly, and less frequently dally or monthly, counts of personnel or hours are used In control­ ling both selling and nonselling payroll coats. Several stores also report that no personnel say be employed with­ out an approval from one of the firm's top executives.

Control of Konpayroll Expense- In the control of nonpayroll expenses the same control patterns, (1) compari­ son to the budget, and (£) management review, are found.

Of the four nonpayroll expense classifications, all but supplies are controlled largely in the light of actual sales or business conditions. Need for the expenditure or usage rsqulrements are both important considerations In the con­ trol of supplies and travel and communlcations expenses.

This control Is frequently maintained through specific authorisation or requisition approvals. When these ex­ penses are controlled with reference to the expense budget, the month was cited as the usual comparison tin* period. 92 Responses to the questionnaires show that the control

Is primarily guided by the budgeted figure. In other words, ths budget is actually used as a control tool. There is, on the other hand, a great dependence on managerial review and decision* Prom a study of the Individual returns it la apparent that this review and decision is usually at a high executive level, and is baaed on many of the same factors that originally determined the expense budget*

EXPENSE REDUCTION

The rapid increase in, and growing rigidity of, depart­ ment store operating expenses In the postwar period have stimulated Intensive expense reduction efforts in most de­ partment stores* While the areas of effort, the manner of attack, and the techniques employed vary widely, they have all been directed at a single goal of lower costs*

Areas of Reduction Effort- The major expense reduction efforts have been In nonselling activities, with particular emphasis on those under the cognisance of the operations manager* A breakdown of the areas of reduction effort is at followsi 93

AREA. TIKES MENTIONED 1. Storewlde ...... 15 Nonselling Areas 52 General nonselling k P a y r o l l ...... Superlntendency .. 29 Control A Office . 10 Seles Promotion 3 . Selling Areas .. 9 1|. Management ..... 1 5 . Personnel ...... 1 0« General payroll 7# Other •••••«•••• I d. No Answer . TOTAL

It is Interesting to note that, although the selling areas srs probably the largest single source of expense, in only nine stores was it speolfleally mentioned that expense re­ duction efforts ha we been siade there* While the heavy re­ porting of reduction efforts In the area commonly under the operations superintendent would suggest an area of concentra­

tion, an analysis of the replies shows that fifteen different types of specific activities are Included In the enumera­ tion. In no case were reduction efforts mentioned in more

than four different stores for the same department in the general group of activities that fall under "superintend- ency." It is likely that the wide variation In the points of attack is the result of cost problems and personalities

that have been peculiar to individual stores*

Types of Reduction Effort- Answers to a free re­

sponse question concerning the general types of reduction efforts employed may be classified Into the following groupss t y p e o p e f f o r t TIMES MENTIONED

Detailed challenge or scrutiny of tha coat 15 System or work aImpliflcation ...... 11 Mora or battar equipment ...... 9 Inatallatlon or greater uaa of standarda.. 7 Personnel raduetiona ...... 6 Increased oontrol or auparvision ...... 9 Inoreased training ...... Physical improvements ...... 3 Outside consultants ...... 3 Increased equipment utilization ...... 3 Layout ehangaa ...... 2 O t h e r ...... TOTAL &

A study of returns from atorea reporting tha use or detailed challenge and scrutiny or costa shows that they are usually the same stores where reduction attempts have bean carried out In a storewlde nftnner. It appears that in many or tnese cases a more or less "shotgun" approach has been made to the problems or expense reduction.

A consideration or the nature or these reduction ef- forts brings o u t a cross c l a s s i r i c a t l o n or s o m e s l g n l f l - cance. Of the speciric techniques or approaches used, twenty sight concerned nonpersonnel raetors or equipment and en­ vironment. This group Includes slmplirication or work.

Increased mechanisation, greater utilisation or equipment, and certain physical lmprovesients and layout changes.

Another group or fourteen responses concerned strictly per­ sonnel matters such as training. Increased supervision, and the reduction of personnel. One fact that might warrant

■ore than passing comment ooncerns the apparent lack of 95 consideration for training as a coat reduction device* It

la possible that many respondents look upon this as a con­

stant reduction technique rather than a "special effort".

In the previous section it vas pointed out that re­

duction efforts in selling areas had been reported in only nine stores. Further consideration of the returns from these

stores shows that the major attempts to reduce costa were

to maintain closer control in terms of personnel, and

constantly to scrutinise the costs of selling. In the

office and other activities under the controller, emphasis has been on improved mechanisation, work simplification,

cute in the work force (frequently due to increased

Mechanisation), and constant scrutiny of costs.

Speclflc Investigative Techniques- To learn more concerning the use of what are oosmonly called "industrial engineering" techniques, the question was asked. "Have any of the following been used to reduce expense or improve produe ti vi ty?" 5

5------Work Simplification, as used in retailing, has come to wean a program of training and assisting line executives and operative employees In the techniques of analysis and Improvement in their own particular work environment.

Workplace Layout study Involves the analysis of physical environment as it affects the efficiency of operations and of employees.

Equipment utilisation study is concerned with the manner in which machine oapaolty is utilised In both a quantita­ tive and qualitative manner. Thus, is a machine fully utilised both as to time and the machine's capabilities? (Continued on next page) 96

1. Work Simplification 2* W o r k p l a c e l a y o u t s t u d y Equipment utilisation study 4, Methods (procedures) studies

A tabulation of the answers to this question are shown in

Table 15* The large number of affirmative replies suggests that the terms stay not have been understood as meant in the question* Analysis of other questions on the returns sub­ stantiates this belief* For example, work simplification does not describe all aotiTitles which eiight have as their ala the simplification of work* In interviews at some of the largest and most efficiently operated stores in this oountry it was learned that this technique has only recently been inaugurated in these stores* It is unlikely that more than 80 per cent of the stores are using such a program*

In each of the other three techniques there are specific characteristics that are typical of each method, from an engineering viewpoint, and which have probably not been employed to the extent that answers In the returns would auggest* The weakness of the question lies In the failure

(Continued from preceding page) Methods or Procedures study la a generalised term used here to cover the probleau of process analysis and motion study* It is synonymous with Operations Analysis* It Includes an analysis of each activity as well as the sequence of activities*

It can be seen that Work Simplification embraces as­ pects of the other three techniques mentioned* The distinction comes from the fact that Work Simplifica­ tion is a speelflo program designed to enlist the •ervlees of line supervisors and operative employees* TABLE L3

York Areas Where Four Selected Efficiency Iwprorwent Technique* have been Uwd In 53 U. 3. Department Stores with Estimated Annual Salas of Mora than $10 Millions, 1951

No. o? Stores Using fee Work Workplace Equipment Methods Area or More Simplification layout Utilisation Study

Total Stores Using any Technique U7 10 31 36 1*0

Qffioaa 21 17 3 10 10 ReoeiTing and Marking 16 10 6 5 7 larahouae 15 7 6 13 1 Workrooms 13 li 12 7 a Wrapping and Packing 10 10 10 0 Salas Audit 7 2 1 3 6 Accounts Receivable 6 1 1 6 3 Aooounta Payable 2 0 1 a Selling Departments 2 3 it 0 Delivery 3 1 0 3 0 Housekeeping and Maintenanoe 3 0 0 3 0 Payroll Qffioe 3 0 0 2 2 Cashiering 3 0 0 3 1 Credit Qffioe 3 3 1 0 2 Other 2i* 0 0 0 0 All AotiTitles 15 13 a a 15 Mo Answer 12 0 0 0 0

Sourcei Mailed Survty by C, W. Baory, February, 1951. to anticipate the wide variety of Interpretations*

One or the first things that is apparent from a study

of the information presented in Table 1$ Is that there has

been a wide application of one or more of these general

lines of investigation to many distinct types of work. Zn

no ease, however, did more than sixteen stores report using

any one of these techniques in a single clearly defined

vork center or department*

The activities with the most widespread use of scien­

tific techniques have been those concerned with the handling,

■oving, storage, and checking of merchandise. In these,

vork simplification has been the most Important method

used, although all three of the others have been employed

to a degree. Study of the utilisation of equipment has

been of paramount importance in the more routine office

activities* Investigative techniques have received very

little application in selling activities, although there

would appear to be many situations where such methods could

be applied profitably*

USB OF PRODUCTION STANDARDS

On the questionnaires a list of seventeen store activ­ ities was given from which executives oould select those where standards are used* While almost 9° Par cent of the respondents reported the use of standards to some extent, it is found, on closer study, that the term "standard" meant 99

different tilings to different respondents. For example, an

expense ratio to salos la oonsidsrsd by sons to ba a pro­

duction standard* although in tha terminology of soiantlfle

■snsgsaant It would not be.

In attempting to pirasant tha basic similarities and

differences more clearly* tha specific activities in which

production standards might ba used are grouped into rather

hoaogsnaous classes. On this basis* all activities are:

I* Those that represent rather standardised and predictable vork involving the physical handling of merchandise and materials,

II, Those of a rather standardised and predictable nature involving the handling of papers and office routine,

III, Those that involve meeting the publlo and serv­ ing it. These activities are less routine and less predictable. To a large degree* traffic flov determines the rate of work,

IV, Those that involve certain creative types of vork,

Kseh of these elaases will be dlsoussed separately,

group £- There is a widespread use of production standards in all Oroup I activities with the exception of

•toekwork, The distribution of usage is as follows t PER CENT OF STORES ACTIVITY USING STANDARDS Receiving and narking ...... 77 Wrapping and packing ...... ,...... 79 Housekeeping and maintenance .... $0 Warehousing ...... Wor krooms ...... 60 D e l i v e r y ...... 66 Stookwork ...... 17 STORES USING STANDARDS - 1*7 100

Production standards ara used in four of these activities bp at least 60 per cent of the stores. An average (arith­ metic mean) of I4.• X activities with production standards is found in the typical store, while about 80 per cent of the stores use production standards in at least one of the group 1 activities •

Qroup XI- In Group II about three fourths of the total stores in the sample report production standards in one or more activities. In this group It is moat common to find them used in accounts receivable, sales auditing, and accounts payable departments. The complete tabulation of the prevalence of production standards in Group II activ­ ities is: PER CENT OF STORES ACTIVITY USING STANDARDS

Cashiering ...... 5 Accounts Payable •• 6 Credit ...... 58 Sales audit ...... A 0counts receivable Accounting ...... *8 STORES USING STANDARDS - U7

In analysing the individual returns it was found that thirty four stores use standards for both wrapping and pack­ ing and aeoounts receivable work, A separate tabulation of these stores was made to determine the manner in which the standards have been developed, by whom, and in what terms they are stated. 101

PER CENT OF HOW STANDARD WAS DETERMINED? STORES

Past output ...... 71+ Tisw s t u d y ...... 2 4 Comparison with other stores ...... 30 Exscut Ire opinion • •••...... 15 TOTAL STORES - 34

While more than one base is used in many stores the most

important single determinant of a production standard la

past output* In the eight stores where time studies are reported, three respondents reported that the use was

"occasionally**

Further insight into the nature of production standards

li gained in considering by whom the standards were set*

PER CENT OF WHO SET THE STANDARD? STORES

Supervisor ...... 24 NRDOA ...... 3 Specialists ...... 27 Central group ...... 9 Management ...... 6 Operating manager ...... 3 No answer ...... 45 TOTAL STORES - 34

In most cases where the information was given, the stand­ ard was reported as consisting of a number of work units related to some time base* In many cases this work unit

Is s transaction, while In other stores It is a specific unit designed to describe the output of a given work center or employee*

An evaluation of these factors leads to the conclu­ sion that not all stores using standards In wrapping and 102

accounts receivable vork employ true production standards.

A true production standard is expressed in units of vork b per glean time period. This Is not to say that other

measurements used in stores may not be called standards,

but that they are not "production standards" in the precise

sense of the term. With respect to the analysis of Individ­

ual stores, the folloving classifications of standards can

be made: PER CENT OP TYPE OP STANDARD STORES Operating ratio standard .... 6 Cost-physical volume standard• 6 Work unit-time standard ...... $6 Engineered (time study) standard•• 9 Cost-vork unit standard ...... 5 Indefinite ...... 21 TOTAL STORES -

Group III- Cashiering is Included in both Oroup II

and Oroup III. While much of the vork is similar to that

of Oroup II activities, and in fact organizationally it is

common to place the cashier force under the same executive aa the other Oroup II activities, many of the characteristics of vork flov are similar to those in Oroup III. In this latter group are the folloving:

6 Research Committee, Controllers' Congress, Accounts Receivable Froduotlvlty Study. (Nev York, Nafclorml Retail Dry ooode Association, l9JI^. This concept has been recognized by the Hatlonal Retail Dry Ooods Association In Its studies on productivity. 10?

PER CENT OP STORES ACTIVITY USINO STANDARDS

Selling .. 85 Adjustment 51 Cashiering 55 STORES USING STANDARDS - itf

An analysis of tha individual questionnaire# was again aada to determine, for this group of activities, who

sat tha sailing standard, in what terms It was aet, and on what basis it was sat. It was determined, from this analysis, that In more than one half of tha cases the

standards are not true production standards. When classi­

fied as to tha standard type the following distribution Is obtained:

PER CENT OP STORES TYPE OF STANDARD USING STANDARDS

Operating ratio 53* Cost-transaet1on 6* Transaction-time 21 Indefinite ..... 19 STORES USING STANDARDS - 1+7 « Two stores use both types

This information substantiates the earlier claim that many respondents do not understand the real nature of a produc­ tion standard.

Group IV- In about one fifth of the stores (nine out of forty seven), production standards are used In the adver­ tising sections. Analysis of the Individual questionnaires disclosed that two of these standards are actually operat­ ing ratios, while four of them are of a work unit-time ioU nature* Six atorea raportad ualng production atandarda in display work.

In tha overall, there appeara to ba a number of atorea vhara production atandarda are uaed in the oontrol of pay­ roll axpenaea. The quality of the atandard, the terma In vhleh it la stated, and the originator, all vary substan­ tially. True p r o d u c t i o n a tandard a are m os t p r e v a l e n t in the nonselling areas where the activity la Important and routlnised.

EXECUTIVE OPINIOM

In one of the moat Interesting questions In the survey the respondents were asked for their opinion as to how the problem of expense reduction and productivity Improvement can beat be attacked. Slnoe this was another free response question and since the exact statements may be of Interest to the reader, a copy of the answers la Included as Appen­ dix C. Two possibilities were offered in this question:

(1) expenae reduction, and (2) productivity improvement.

These two are not always the same in a direct senae, nor do they always require the same approach or solution. If the anawers secured are classified on the basis of whether the reply appears to lead to greater productivity directly, or to expense reduction, or to neither or both, the group­ ings under “A*, *B", and "C* are obtained. I'M

APPROACH TIMES MENTIONED

- Productivity approach

Engineering or improved method* .... 16 Constant or detailed atudy (emphaala on production)...... 11+ Education and training ...... 7 Use of research specialists ...... 4 Mechanization ...... 3 Use of incentives ...... y More data (emphasis on production)... Z Analysis of past performance (emphasis on production) ...... Z Other ...... 3 Group Total ^4*

- Cost approach

Constant or detailed scrutiny and challenge ...... 11 Increased expense consciousness .... 3 More management review ...... 4 More or closer control ...... 3 More responsibility to line executives 7 Sell personnel on expense reduction cooperation ...... 4 More or better data (emphasis on costs) 1 Analysis of past performance (emphasis on costs) ...... 1 Other ...... d Group Total £1+

"C* No Answer ...... 7 Other (not elsewhere classified) Z Group Total ^

Of the 107 suggestions mentioned. per cent lead to reduced expense through an increase In productivity of personnel or operations. Forty one per cent of the answers were suggestions of a direct approach to problems of ex­ pense reduction per ae rather than with an attempt to Im­ prove cost conditions through Increased productivity. 10b

Neither group “A" nor group "B” alone hold* the sole

answer to the needs in department stores* While an attack

on expense per se appears to he striking at effects rather

than causes, there are surely many clrexamstanoes where this

Is the best approach* A comparison of the type of answer

given by executives to this question and answers to other

questions shows that many managers do realise the need for

productivity Improvement even If their store is not pr a c ­

ticing what is suggested*

APPROACHES TO EXPENSE MANAGEMENT

Returns from the fifty three stores show a wide range of opinion concerning the treatment of expense* In some caies the Indication of a certain attitude toward expense management Is expressed In one answer and contradicted In a later statement* Often this appears to result from a lack of a well considered philosophy of expense management*

In answers to most of the questions asked, two or more different viewpoints emerge* Not only may the application of these different approaches be seen side by side In a single store, but also the degree to which each type of approach Is employed varies from store to store* It is fait, however, that these different viewpoints concerning apaciflc expense management questions can be synthesised into definable patterns* 107

On* Important aspect of expense management approach it concerned with managerial attitude toward the expense budget* From one point of view it is an Instrument for the guidance of management in making more intelligent decisions concerning the patterns of expenditure that should be made.

On the other hand, many executives look upon the expense budget primarily as a device for the control (with strong implications of curtailment playing a major role) of expense or for the formalisation of operations so as to predict the profit for a future period. In essence, the first type of management has a more positive attitude toward the Incurring of expense. In these stores the desirability of the expend­ iture is more directly measured by the expected return from such an outlay. In the second case the concept is more negative in that costs are not looked upon as Investments in efficiently returned services as much as obstacles to profitable operation.

A seoond aspect of expense management concerns the problem of whether or not to decentralise the expense budget­ ing process to the department manager level. One school of thought holds that, although it is necessary to have a re­ view by management at a high echelon, an important part of the initial determination of the budget should be carried out at the department level. Accompanying this point of view Is frequently a similar one concerning the decentrall- 108

utlon of responsibility for the control of costa. It Is

typical In many other stores to find a concept of expense

administration which holds that both budgeting and control

ar« the primary concern of the controller, operations

manager, or some other major executive*

There are also two different approaches as to the type

of units used to express the expense budget. On the one

hand, specific work units have been designed to reflect,

with maximum accuracy, the work load of a given activity.

Staples of such units are: "packages wrapped", "invoices

paid", and "transactions completed** • While these have been

used principally in nonselling areas, they are found In a number of selling activities. On the other hand, many

stores budget and control expense In terais of an expense

per cent to sales. As was pointed out In Chapter III. this

unit is often not the best expression of expense need or requirements .

In the attempts that have been amide to reduce expense

since World War II. It has been coaunon In many stores to attack these problems In terae of specific work centers or operations. By so doing, aminagements have recognised that

the problem of expense reduction, while It has very import­ ant stcre-wlde aspects, lies at the department level where aoet of the eontrollable oosts originate. To follow this approach means to select specific activities and to subject them to a thorough analysis for Improvement possibilities. 1 09

Many other managements, however, attack the problems or

expanse reduction from the top. In a store-wide manner.

Thslr method may be described as that or allover watchful­

ness end scrutiny. While such vigilance la surely needed.

It Is not felt that maximum expense reductions are realized

by sole dependence on this approach.

In carrying out the postwar reduction efforts, which

most of the executives stated they had inaugurated, one

method has been to attack from the point of view of improve*

ment In efficiency or productivity. In this approach, ex­

pense reduction is made by Increased mechanization, methods

studies, work simplification, and other techniques. In

this manner, managements have given their attention to the

causes of expense and, through the study of the causes, to

reduce the effects, i.e., the high expense. Those holding

the other point of view were more prone to attack the effect

(high expense) without giving adequate consideration to the

causes.

In stores where specific work units have been develop*

ed, s substantial use is made of production standards for

ths management of payroll costs. While these are more com­

monly found in the operating and controller's areas, they

*rs also used In a number of selling and advertising

•ctlTitles. In stores where reliance is primarily placed on the per cent to sales unit, production standards are 110 lesa In evidence. A final specific consideration in analysing philo­

sophical aspects of department store expense management is

tha analysis of executive opinion concerning the avenues by

which expense reduction and increased productivity can be

best achieved. Many executives recommended increased

application of engineering approaches and greater study of

methods and procedures. On the other hand, there were a

number of other executives who recommended approaches that

are more concerned with the cost aspect alone. Many of

these latter executives gave little consideration to the

fact that one of the major causes of high costs is the

existence of waste and inefficiencies.

In the consideration of the preceding eight specific

points of difference between attitudes, methods, and

opinions of the respondents and their stores, it is believed

that two general schools of thought have emerged. It is

further believed that these two different schools of

thought represent two distinct concepts of expense manage - aant. For lack of better terms these two approaches may be

celled “traditional" and "progressive". In the study of the

individual returns from the various stores it is apparent

that few stores possess all of the aspects of one of these points of view, and none of the other. In other words, no

•tore was found that was completely “progress!ve", and few Ill stores were found that appear to ba completely " traditional",

In order to apply a yardstick to the expense manage­ ment concepts of the various store managements, a tabulation

VAf B*de for all stores In the sample as to the degree to which the "progressive11 characteristics are present In each.

Every store vas evaluated on the folloving eight questions:

1 . Is the main purpose of the expense budget to act as a guide to more intelligent spending? 2. Is expense budgeting decentralised? 5. Are specific work units used In the expense budgeting process? It. Is the responsibility for control of expense deoentrali sed? 5 . Vas a decentralised approach made to the postwar expense reduction problems? b. Are progressive research techniques used In the attempt to reduce expense? 7* Are productlon-tlme standards used In the oontrol of payroll costs? b. Are the industrial engineering and methods Improvement approaches recommended for attacking the problems of high cost and low productivity?

When all stores are s«aiured# the presence of these elements varies from as many as seven of the eight In four stores, to six stores with none of these characteristics. Stores whlch

*rs known throughout retailing for their progressive and successful attacks upon operating problems are conspicuous

tha large number of these factors Included In their returns. There are sixteen stores that possess five or mors of these oharacterlstlos. Of these stores, four possess six oharacterlstlos, and four possess seven of than. 112

From tills analysis It Is not possible to state exactly

•i0w aany managements ahov a "progressive" attitude toward expense administration. There are too many gradations of viewpoint for such a classification to be defensible. If the presence of four or more of these traits is considered to characterise “progressiveness", then about 1*2 per cent of the stores are included. If, on the other hand, the requirement Is five of the eight characteristics, then only

50 per cent of the stores are Included. It would seem that probably stores with five or six of these traits would generally be considered "progressl ve", while those with, s»y two or less, would be definitely In the "traditional" philosophy. The remaining stores are borderline cases that may or may not belong in one group or the other. In asny of these cases further Information bearing on these points would clarify their status. It must also be re - ssmbered that, even In the stores that have most of the

"progressive” characteristics, there Is probably a wide variation as to the number of activities that are treated in this manner.

A comparison of the presence of these eight “progres­ sive" characteristics in the sixteen stores (with five or more of these traits) with those In all of the remaining stores Is shown In Table 11*. In most cases the prevalence of these characteristics is at least twice as common In TifiLE Hi

Existence of Specific "Progressive" Expenae Manege— nt Characteristics In Two Soloctod Qroups of Depertaent Stores with Estimated fcnrcaal Salas over $10 Million, 1951

Sixteen Stores i n Other Stores

Mo* Having Per Cent M a h e r No. Having Per Cent of Choreetori«tlc Characteristic of Oroup Answering Characteristic Those Answering

Budget for Intelligent Spending 6 38 33 5 15 Decentralized Budgeting 15 91* 26 12 1*6 Budget In Work Unite 16 100 3h 10 29 Decentralised Control 8 50 37 6 16 Decentralised Expense Reduction 10 62 3ii 13 38 "Progressive* Reduction Techniques Used lit 88 27 8 30 Production-Time Standards Used lb 88 35 7 20 "Progressive* Opinion as to Attack on Problems 12 29 16

Source: Mailed survey by C. Qaory, February, 1951. 114 tne sixteen stores as In the other stores. The major ex­ ception to this general pattern la the question concerning executive opinion as to how the most logical attack could be made on high expense problems• While it is true that

In only one of these traits do all of the sixteen stores concur, this does not vitiate the logic or value in these characteristics. It is merely evidence that few if any stores have developed their expense stanagement concepts as far as is possible. A further consideration of approaches and practices in expense management for most of these six­ teen stores will be given in Chapter V. CHAPTER V

POSTWAR INNOVATIONS IN EXPENSE MANAGEMENT

A careful analysis of returns from the survey discussed

In Chapter IV showed that a wide range of expense management practice exists in department stores today. There are many different shades of approach ranging from that which is negative, static, and unimaginative to that which is highly

Innovative and flexible. It is with the latter type of managerial thinking that this chapter is concerned.

In those stores where a “progressive* approach to ex- pens* management prevails, research techniques are employed

In the analysis of expense problems. Physical production standards, decentralised budgeting, decentralised control, and an Industrial engineering approach are cosunonly used in solving the problem of operational efficiency. The attitude of management in many of these stores is that an expense budget is not so much a financial accounting tool for the prediction of a profit and loss position as it is a device by which spending may be carried out more intelligently.

The importance of these Innovations to the develop- aent of sound expense aianagement can not be overemphasized.

To investigate more thoroughly these Innovations, when they were adopted, in what areas they have been employed, in what terms they have been stated, and to discover the limits

115 lib

to *hlch certain research techniques and concepts of ex­ pense sianagement have been carried Is the aim of this

chapter. The material presented here has come, for the most part, from three sources. During the summer of 1950* depth interviews were made with major executives In nine of the leading department stores In this country. A portion of the Information concerning the development of these innova­ tions and concepts has also come from the published research projects of the Controllers1 Congress and the proceedings of various meetings of the groups of the National Retail

Dry Goods Association. The third source is a second mall questionnaire, which was sent in May, 1951» to sixteen stores that were mentioned In Chapter IV as being the most progressive in attack on expense management problems.

Awareness of Expense Management Problems- In most of the large department stores In this country increasing attention has been given to problems of expense management since l % - 5 • As an example of this interest, the theme of the 37th Annual Controllers1 Congress Convention, held In

June, 191+7. **■ HImprovements in Methods to Effect Lower

Distribution Cost". Executives Interviewed In June and

July, I99O, were unanimous In their statements that expense control and reduction were occupying more of their time and

Attention. The executive of one store reported that ex- penie control la "one of the chief topics from the president 117 on down". This store had no formal expense control before

19U<>. This Increased awareness of expense management needs has been expressed in several forms. In many of these stores it has meant the expansion of the areas of expense control. While this has ordinarily meant the placing of additional nonpayroll expenses under control, several stores have also established controls, for the first time, over cartain payroll classifications. Widespread changes in ths expense control procedures In stores also reflect this growing awareness of expense sianagement problems. Budget committees are being used frequently to review budgets each week and to work for expense reduction. The establishment of a regular expense control office and a reduction In the budget time period are additional ways that Increased aware - neae of expense management needs are evidenced.

Actual expense Is compared to the budget more frequent­ ly than before, and a speedup In the reporting of cost

Information has taken place. It Is now common to find employee payroll costs being reviewed weekly and sometimes even dally. Executive payroll and the controllable nonpay­ roll costs are usually reviewed monthly. This tempo gsner- ally represents a more frequent review than formerly. In

*11 cases where this shorter review period is used the man­ agements have reported favorable results in the form of lower coats or lsy>roved performance. Just how far this 118 reduction of control time period can be carried la problem­ atical* While weekly control of employee payroll, for

•xaaple, does enable managements to plan for many of the variable employment needs, the diurnal variations and the at; to day fluctuations can not be treated In a proper man­ ner. Pally, and perhaps even hourly control Is necessary

If a tight rein is to be held on payroll costs. On the other hand several respondents to the May survey report that a number of nonpayroll costs are controlled on a daily schedule* In many cases this would hardly appear to be necessary since the day to day costs are not sufficiently controllable* It must be remembered that, while all costs are controllable over a long term period, as the time period grows shorter the amount of controllability decreases to tne point where a particular cost is virtually fixed*

For coats such as supplies, communications, e_t cetera, this point is probably reached before the control period la reduced to the dally level*

INNOVATIONS IN EXPENSE BUDGETING

It is apparent from the general discussion of expense budgeting in Chapter IV that a wide range of budgeting practice exists in department stores* When viewed in retrospect, these practices appear to follow a definite evolutionary pattern* Evolution of Expenie Budgeting- The firat attempts to budget expense probably were made in conjunction with stl9g foreoasts* These budgets were often for a six months p eriod and were made primarily for the prediction of profits*

Th« very short run control of expense to this budget was not contemplated* so the budget served its purpose admirably*

In almost all stores today such a budget is made for fore­ cast purposes* It soon became apparent to some managements that s budget* to be used as an effective control device* oust be more flexible than the six months forecast* Since

World War II this need has resulted in two general types of innovations* First* many stores are now making a one month budget* This shorter period enables management to uaa the budget as a much more accurate control device than was formerly possible. Another approach* with the same goal* has been to leave the six months budget as deter­ mined originally* but to make short run comparisons between actual and budgeted costs* Although it is expeoted that there will be differences between actual and budgeted expenses* these differences must be explained if the actual is the higher* While these two approaches are

Improvements over the six months forecast* they represent an attempt to secure control by using a tool that is not vail designed for control work. The fixed budget Is a forscasting device and does not give a maximum effectlve- naa* when used for oontrol purposes* IPO

In most of the stores classified as "progressive" the short period fixed budget with frequent revisions or comparisons is still used. In a few of these stores, how­ ever, a further step has been taken toward more effective control. In four out of thirteen stores surveyed In May,

1951, some form of variable budget is in use,1 This tech­ nique is used primarily for the control of payroll costs

In nonselling departments, although In at least one store

It is also used In selling divisions and for nonpayroll expenses. The variable budget represents the most advanced step yet made In the effort to budget for maximum expense control. In none of the stores where it is used does it appear that its full potentialities have been realized.

INNOVATIONS IN THE CONTROL OF EXPENSE

Innovations in the control of department store expense nave taken several forms. Changes have been made In the organisational units by which control is exercised. The terms in which control is exercised have also been exten­ sively revised since the end of World War II. This revision process la still being carried out at an accelerated rate.

Changes in Control Units- Changes in control units

I------1 definition of a variable budget is given on page 8 7 * * more complete discussion of the variable budget, how it is developed and the manner in which it is used will be found in Chapter IX. 121

have taken three different forma. First thors has been a

revision or expense classifications. The adoption of the

work center as a control unit, and shifts in executive

expense responsibility also highlight the attempt to improve

expense control* In the more "progressive" stores, changes in expense

classifications have taken two forms. First, there has

teen a widespread tendency to separate existing expense

classifications Into finer units. As long as this is carried

out on a logical basis this tendency is to be commended.

There have been oases, however, where the development of

too fine a breakdown has actually hampered control. There

has also been a tendency for stores to revise their expense

classifications in order to standardise them with other

classifications *

While some executives report that the work center

concept has been used in their stores for as much as twenty

years, use of this idea has grown since 1 9J+5 * the

stores studied, the number of work centers varied from as

few as fifteen to as many as 1 2 0 . While this variation

la partially a function of store else, one of the largest

■ tores uses relatively few work centers. The average nuaber in large stores appears to be from fifty to sixty

five. The work center concept, of course, is primarily adapted to nonselling activities* 1P2

In ion* ftor«a an at tampt Is being made to break away from the use of functional expanse classifications in the control of costs. It Is balng realized that expense con­ trol is not achieved by a system or a classification, but by individuals. In line with this thinking, expenses are being assigned to specific executives rather than to an organizational or functional classification. The attempt is made to assign this expense responsibility to the person who la in the position to exercise maximum control. For example, a department manager's salary cost, while it is definitely a cost incurred in operating a given department, is best controlled by the immediate superior of the depart­ ment manager. In spite of these innovations there are still many stores where expenses are classified by function or some other base which offers little in the way of positive cost control*

Changes in Control Terms- Among the "progressive" stores there has been a marked change in the nature of ex­ pense oontrol terms since 1 9U 5 * In general this change bes been away from the per cent to sales concept toward some other term that is more precise and more directly correlated with the need to incur expense in a given situa­ tion. In the nonselling activities this trend has been toward a mu oh wider use of speoific work units. while in selling activities the shift has been to transactions. If proparly applied, both of these represent steps forward 123 in expsnse management* One or the greatest dangers In using work units la that the unit might not be an appropriate measure* In some of the stores studied It was found that soma work units are so inappropriate that it is doubted vnethsr any real advantage is secured over the use of the per cent to sales ra t i o •

The Use of Production Standards- Along with the devel­ opment of work units of measurement has come the employment of production standards* While In several stores these work units were expressed only in transactions, It is more common to find the unit specifically designed as a direct measure for a particular work center* In the survey of thirteen "progressive* stores it was found that the use of production standards varied among stores and among different activities* Of this sample, the number of stores using physical production standards in specific activities were:

1 —It stores 5-8 stores 9-12 stores

Housekeeping Warehousing Receiving 8c marking Stockkeeping Cashiering Wrapping & packing Accounting Aooounts Payable Delivery Display Credit Sales Audit Advertising Accounts receivable Sales AdJustment

^rom this breakdown it is obvious that many stores have not

Applied physical production standards to the limit possible*

Mot only is there a wide difference in the areas of us*get but also there is a substantial difference in the quality of the standards used* In only about one half of 12^ tfie stores surveyed was It round that the standards had been developed by a person with training In standards setting.

While training does not guarantee that proper standards are set up, the lack of trained personnel is likely to result

In standards that are of less than maximum value*

The manner of setting standards also varies widely from one store to suiother. These variations and quality differences are more apparent when the following descriptions of the setting procedure are read.

Case #1- In this atore the standard was set by the department manager and the budget office:

"In the case of Wrapping and Packing It waa deter­ mined that we should have aa a production unit a package per hour.•,eaoh wrapper was required to detach the stub from the aalescheck which was re­ tained, and turned Into her supervisor as evidence of the number of units wrapped during the day. These various counts were collected and thus we were able to obtain a production for these depart­ ments and for each Individual person In the department. For the measurement of productivity we compare the productivity of each person against what Is oalled the norm of the department which is an arithmetic m a n , ” Case #2- This store has been using the work center concept and production standards only since the end of World War II.

"These standards were used and arrived at by ______[buying group] and are contained in their Production Manuals." The actual determination of the standard units was arrived

*t by number agreement. The extent to which these have been set by time study is not known. 125

case #3- In tills esse the Installation and use or

physical production standards has been a development or the

last two years*

"Unit or measure agreed upon with department heads. Data eolleeted for 15 weeks and tabulated on unit per hour basis. Median rigure In upper quartile selected as a standard."

Case #14.- In this store several dirrerent approaches

have been used. In all cases, however, the standard is

reported to have been developed by a person trained In

standards setting:

"(A) Billers In accounts receivable, time studies were developed. (B) For marking, a management consultant set predetermined time standards. (C) For delivery, past production was used as the guide. (D) For alteration, experience was used to develop present standards."

Case # 5 - Production standards have been used In this

store In almost all nonaelllng work centers. The standards

setting technique described here Is the general approach

used:

"Detailed analysis of operation to Improve, standardise, and then time study operation by eleawnts. Leveling of readings, use of rest and fatigue allowances, and use of proper occurrences are a part of oomputlng the standard. Supervisors and employees are trained In the use and applica­ tion of the standards

From the description of these approaches It Is appar­ ent that no standardised technique has been developed which is used In moot stores. Not only does the manner of setting the standards vary, but also the quality is obviously differ­ ent In the Individual examples. For example, the packing 126

standard described In Case #1 la based on an average pro­

duction In the department. No distinction or allowance Is

sade for any of the highly variable characteristics that

*111 be found to exist In packages. The number of pieces

to be wrapped, the type of merchandise, the type of pack­

ing. and whether It Is a gift wrap or a regular wrap will

til affect the production speed to a significant degree.

The uee of the standard described in Case #1 for day to

day evaluation of packer's efficiency will In many cases

be Misleading.

One of the greatest dangers in the use of production

standards is that poor standards are sometimes developed

and used. When they are improperly applied or fall to

achieve hoped for results, the entire Idea of production

standards In department stores is condemned. In many of

these situations It Is more likely that the poor results

are due to Inappropriate applications of Improperly devel­

oped standards* Pine control can not be aohleved with

crude instruments. This sal a application is likely to occur

In department stores because of the tendency for manage- aents to copy systems used elsewhere without giving sufficient consideration to differences in conditions.

Prcdetermlned Costs- Another major Innovation in ex­ pense control In department stores has been the adoption of

predetermined costs. In manufacturing, where standard or predetermined costs have been widely used, they are employed 1 2 7

In co#t control. Inventory costing, budgetary planning, and 2 pricing* Predetermined costs are now being used i n three of the thirteen stores surveyed in May, 1 9 5 1 , although in one of these it was reported that they are not accurate and are not used much. The use of predetermined costs in department stores la based on the premise that, while costs are Incurred in nan; nonselling departments, the flow of work which deter* mines the nonselling department activity originates In the sailing departments. Under the usual costing systems In use today In department stores, the selling department manager has no responsibility for the amount of work origi­ nating in his department and Is given no direct incentive for controlling this flow of work. Under the system of predetermined costs a selling department la charged for the aetual amount of work that has originated in his de­ partment but has been processed in a nonselling department.

By this method, a selling department manager is stimulated to reduce the work flow from his unit In order that he may secure a smaller charge from the nonselling service depart­ ments and thus achieve a lower cost of operations. In former times most charges for nonselling service costs were prorated on a sales volume basis. Under such a system it r------A Reexamination of Standard Costs," N.A.C.A. Bulletin. Section Three, February 1, I 9U 8 , pp. 6 9 5 -7 ^8 . 128

B»d« no difference, from the viewpoint of selling department

costa* what volume of work originated there for nonselling

departments to do* In stores now using predetermined costs

the areas of common usage are: wrapping and packing, re­

ceiving and marking, newspaper advertising and preparation,

display, adjustments, space rental, stock repair and stock-

clerk salaries, shopping service, layaway and C*0*D.

expanse, housekeeping and repairs, divisional office expense, and Interest, Insurance, and taxes on merchandise Inventory*

RESEARCH ACTIVITY

Slnee World War II there has been a greater use made

of research personnel in department stores* Of the thir­

teen stores surveyed in May, 1931* eleven have a "research

or methods department or a research staff member•" In one half of these stores this staff has been added since 1 9 4 5 *

The number of researoh personnel per store varies from two

to seventeen, with five stores reporting four or less

people employed In a research position* In no store does the research personnel number more than *2 of 1 per cent of total store personnel, and In most stores the proportion

1> even smaller* While no recommended ratio of research to total personnel can be given, it Is believed that few

»tores have an adequate research force to carry out the

®°#t pressing of research needs* This is one area where 129 store wanagements have been guilty of false economy.

The research activity generally carried on in these stores has been concerned with problems of systems and pro­ cedures improvements. While this type of research Is definitely needed. It is felt that other types of research are also important. In only two of the stores studied has any real marketing research been undertaken. In essence.

It appears that most research needs, both of a marketing and an operational nature, have been neglected to some degree

In all stores and have been almost completely ignored In many stores.

Investigation Techniques - All of the thirteen “pro- grassi ve" stores reported that work simplification, work­ place layout, equipment utilisation, or methods studies nave been undertaken. From the data in Table 15 it la obvious that the three investigative techniques have had widespread application. Even more striking are the many areas In which no use is reported of any of these approaches.

In fact, no more than five of thirteen stores have used any one technique In a specific area. It must be remembered that these are typloal stores, but represent those that nave been judged to be most Innovative among a much larger

Areas Where Three Selected Research Techniques Have Been Used in 13 S. Department Stores with Estimated Annual Sales of More Than $10 Million, 1951

Workplace Equipment Layout Utilisation Methods Area Study study Study

Areas Under the Controller 0 1 1 Sales Audit 0 3 2 Credit 0 0 1 Mill Call 1 0 1 Of floes 3 3 3 Accounts Receivable □ 2 1 Accounts Payable o 2 2 Payroll 0 1 0 Cashier 0 1 0 Areas Under Store Manager Receiving and Marking 2 1 3 Wrapping and Packing 3 2 0 Warehouse 2 5 l Housekeeping and Maintenance 0 U l Telephone 0 l 0 Traffic o 0 1 Delivery and Shipping 1 0 0 Supplies 0 0 0 Stockkeeping 1 1 0 Oarage 0 1 0 Other Areas Alterations Workroom 1 1 0 furniture Workroom 1 0 0 Workrooms 2 0 0 Sales 1 1 0 All Areas 0 0 3 Area Not Qiven U 1

S

efforts on the part or most stores, it can be expected

that greater and more widespread applications will be

found In the future. Methods studies and workplace layout

studies. In particular, are needed in many stores*

In Chapter IV It was pointed out that the term work alspllflcation was probably misinterpreted by some or the respondents* A more precise meaning (see page 93) was used in the Investigation of practices In the thirteen

"progressive" stores* Results from this survey substantiate the previous observations or a misinterpretation. Regular

Work Slmplincation programs are employed In seven or the

thirteen stores* Almost all or these programs have been

Installed during the post World War II period* Results have generally been gratirylng, and the adoption or work slmpliricatlon by other stores is likely to grow. further considerations or some specific characteristics and problems

Involved in work slmpliricatlon are reserved Tor Chapter VII*

Trade Association Research- Since World War II, trade association research has been broadened and strength­ ened* In 19M3, Tor example, the Controllers' Congress of the National Retail Dry Goods Association organised a

Research Committee rrom among Its members. Since that time It has been actively engaged In research concerning productivity measurement in the nonaelling functions or department and specialty stores* In all, seven surveys have been undertaken covering accounts payable, accounts 1

receivable, addressing and mailing, sales auditing, credits

and collections, cash office, and payroll activities. By

June, 1951# reports have been published only for accounts

receivable and accounts payable activities. Included in

tuese repo r t s are detailed descriptions of systems and methods employed, comparisons of employee output per man-

hour, and an analysis of total employee paid hours. This

pioneer effort is to be commended for the impact it has u n ­

doubtedly had on store managements with a "per cent to sales'*

complex. It is hoped that this focusing of attention on

productivity and its measurement will stimulate managements

to a greater understanding of the necessity for, and value

of, a scientific approach to problems of productivity and

operations analysis.

Another aspect of NRDGA operations that has focused attention of store executives upon problems of expense management has been the annual meetings of the various

Groups that sake up the association. In particular, the meetings of the Controllers1 Congress, the Store Management

Group, and the Personnel Group have been enlightening. In

some metropolitan areas the local controllers1 groups have also engaged in worthy research projects. 15*^

MECHANIZATION

The first significant mechanization in department stores probably occurred with the advent of the cash regis- t#r. Up to World War II, however, the use of machinery In stores was limited* The postwar pressures of growing costs coupled with the tremendous strides that have been made In the development of office and materials handling equipment hss awakened the Interest of many store managements*

Materials Handling- The development of materials handling equipment In department stores has taken place primarily In warehouses and in receiving and marking de­ partments* Some of the leading stores, following the ex- aaple of the wholesaler* have built modern one story structures for bulk merchandise storage and are employing the unit load principle. fork lift trucks, and other aechanical devices*^ One of the most recent Installations of this type has been at the F* A* R* Lazarus Company of

Coluabus, Ohio* This warehouse was laid out. In the words of one of the constructing engineers* to provides

"(1) that the flow of merchandise from the time It hits the receiving platform must be always forward, toward delivery; (2) that the building's

One of the few published discussions of the application of the unit load principle and the use of mechanized aaterlals handling methods in marketing institutions Is found Ins T* N* Beolcaan and II* H* Engle, Wholesaling. Principles and Practices. (Mew York. The Ronald Press Company* 19597* Ctapfcer~2 3 * pp. 13)4

function la primarily one of service to the customer end must be geared to render maximum service at mini­ mum cost; and (3) that the building must be readily adaptable to changing requirements as the quantity and character or merchandise to be handled changes from season to season, and year to year..*ln the warehouse there is never any occasion for the mer­ chandise to travel much more than 2l±Q feet from the moment it comes in until it is distributed to the appropriate spot In the delivery department for loading on a truck."5

One of the most completely mechanised receiving and marking operations was installed at The Hecht Company,

Washington, D.C., in I9I4.7 -I9I4B. In this system all merchan­ dise is moved by conveyors with a dispatcher operating electrically controlled dlverters that shift merchandise on and off the main distribution line. The individual employee remains at a fixed station to which merchandise is divert­ ed for checking and smirking. Internal communication is maintained by both an "intercom" system and a pneumatic tube system.^

Mechanised Paper Work- Probably the outstanding inno­ vation in the handling of figures and other information in department stores has been the application of mechanical tabulating and sorting machinery. These systems can be In- r — ------Stanley H. Cowell, "Engineering Warehouses for Better Customer Services and Lower Costs," Gearing Operations for dors Sales and Lower Costs. (New York, fetore management Croup, National Retail Dry Goods Association,1 9 U 9 ) * P* 57* 6 Nslaon P. Greller, "Mechanised Receiving and Marking at The Hecht Company," Stores. June, 19&9# P* ^3* 155 stalled to tabulate and record Inventory conditions, sales and transaction volume, posting and billing of accounts r«c#ivables, tabulating of accounts payable together with the printing of payment checks, and the maintenance of pay­ roll records. Increased use of machines together with new concepts of service have fostered aueh systems as floor audit and cycle billing. The distinguishing feature of floor or register audit is the recording of all sales of any nature on the cash register. Actually, then, the cash register becomes a sales register. The use of this system reputedly

Improves customer service while at the same time reducing 7 auditing costs. Cycle billing has been made possible by the development of high speed billing machines and an economical method of copying information from sales checks by aicrofliming. Under oycle billing the original sales checks are filed until time to bill the customer. This date varies throughout the month depending on the number of cycles used and the alphabetical rank of the first letter

In the customer's family name. All bills are posted at one

T ~ ------In a panel discussion sponsored by the local Controllers' Group of Milwaukee, in early 1950* It w*a reported that savings of auditing coat in some stores were running at 50 per cent or more of former levels. At this same nesting many comsents were given as to the improved supervision and favorable reactions of sales personnel to the system. The proceedings of this panel discussion *re found in. The Balance Sheet. (New York, Controllers' Congress, National Retail Dry Goods Association) March, 1950, p. 20. 156

tine *nd tlie original sales slips, which have been micro- filmsd for the store's records, are included wltn the statement sent to the customer* The major advantage of this system Is the reduction in time required to complete the posting of credit transactions and the mailing of bills* The periodic monthly peak of work is smoothed out in the billing section with both better personnel and macnine utilisation ordinarily resulting*

As with other techniques previously discussed, there is s grave danger that these mechanised systems may be In­ stalled without adequate consideration being given to the specific conditions that make one store's operation differ­ ent from another* For example, a highly mechanized re­ ceiving and marking system requires certain specific con­ ditions if it is to be effective* One etore management, with a proper attitude toward the adoption of Innovations made elsewhere, considered the installation of a cycle billing system for two years* During this time they were deciding exactly what changes would have to be made in a standard cycle billing operation to adapt it to problems peculiar to that store. More of this type of approach should be encouraged in department stores* 157

SUMMARY AND CONCLUSIONS

Since about 191*-5 there has been an increased interest in and effort by store managements to find a solution to the high costa of distribution through department stores*

The numerous control innovations that have been made high­ light this increased awareness of management to expense problems* The greater emphasis on top management review of costs, the expanded areas of control, both in terms of expense classifications and organl sational uni ts, and the more frequent review of the expense picture all attest to the increAsed awareness of expense management needs *

Variable budgeting has not had wide acceptance among

"progressive0 stores, although in the few stores where it

Is used it appears to be o p e r a t i n g successfully* The r e ­ action of many execut!ves is that variable budgeting is likely to be more widely adopted in the future *

Among the stores where a "progressi ve" philosophy of expense management is found, there is a definite trend away from the use of "per cent to sales" as a control unit * The change has been toward the use of physical volume-time relationships* There are still many managements, however, wno are Imbued with a financial accounting attitude with its sales ratio approach to expense problems* Since World

War II there has also been an Increased use of the responsibility concept of expense charging* In this concept 138 expenses are charged to a specific executive who is account­ able for the management of the costs. Predetermined costs are being used in several stores. While other executives expressed their approval of this accounting approach, the technique appears to be ahead of most present department store thinking.

Along with the shift to work units has come the use of production standards. While they are widely used where their applicability is most obvious, in many other areas there are still opportunities for further applications.

The manner In which these standards have been developed shows a need, also, for more accurate standards as well as more scientifically determined standards. While standards set by untrained personnel may be better than none at all.

It Is Important that Increased effort be made to set standards more scientifically. This tendency to set stand­ ards in an unscientific manner probably stems from a lack of appreciation for the basic principles underlying sound standards development.

Since 194+5 many “progressive" stores have set up a research or methods department. Except in several iso­ lated examples, the primary function of this staff has teen the analysis of methods and procedures. It will

Probably be a few years before many stores have a research

^apartment that will engage In the more general types of marketing research in retailing. 139

The mechanisation or operations has caught the fancy

0f • number of retail executives. This awakening of retail­ e r s to the possibilities of mechanisation Is likely to continue at an unabated rate. Here, at least, la a concrete solution to certain cost problems. It has achieved excellent results In some instances and will probably overshadow, for the present at least, many equally Important but leas spectacular approaches that can be made to the expense dilemma feeing department store retailing* CHAPTER VI

AN APPROACH TO EFFECTIVE EXPENbE aANAGEMENT

A business philosophy has beer defined as a "system

'f thought that explains certain business problems and

suppli®8 the f 0** ah intelligent approach to their

solution."* The aim of this chapter is that of considering

the nature and background of the department store expense

problem and to suggest what appears to be a rational ap­

proach to its solution. To an extent, the primary task

in molding such a concept is to synthesize what has been

acne and what has been expounded in the field of retail­

ing, as well as what has been done in other fields of

endeavor.

SETTING OF THE PROBLEM

The department store is a business Institution and as auch is charged with a definite obligation to society.

Vnder a system of private capitalism the profit motive of

t::e entrepreneur is an Important consideration, but the

true measure of a business institution must still be its I —------Halph Currier Davis, in an unpublished set of reading notes prepared for a graduate seminar In The Theory of Business Organization and Management, The Ohio State P51 ver , Ft?; B 1 9 U 7 ------11+0 ervlce to the community. This strvice is chiefly In the

■ ■ rm of economic values, which may be called primary service 2 jecti ves ♦ On a more specific level, what are the primary service

tjectives of a department store? Considered thought to

tr.is question offers a number of answers, each of which may

it present in any specific consumtr-institution relationship,

.-irst, there is the service of having a wide and complete range of merchandise for consideration by the customer,

Kith the possible exception of the larger general mail order firms, the department store has performed this service to a

.Tester degree than any other single retail institution,

\ t only is it necessary to have merchandise available,

:>jt also it is necessary to offer it under attractive sale

ronditions, to have it in proper quantities, desired qualities, at the proper time, and at a price that is acceptable. To achieve any one of these objectives to a

-aximum degree means that many of the others are lacrl -

Meed or at least made more difficult to secure*

To attain these objectives a store searches for goods

from the many markets of the world, attempts to time oper­ ations carefully, creates a suitable atmosphere, and assumes many risks rising from such sources as the need to make purchase commitments far in advance of sale, and

~~ _ Ibid. 11,2

scf'SPt untried fashions that may or may not bt success- i'"l. In addition, it is necessary to engage in both price fcrK n o n p r l ce competition with other stores selling the same types of merchandise in the market* The result of t-.eee and other requirements has been to exert increasing

.reSflUre on costs of doing business while at the same time decreasing opportunity to achieve a satisfactory gross rrargi n* Secondary Pus1ness Objectlves- In addition to the primary business objectives mentioned there are secondary ru sine as object Ives# These are "economy and effectiveness

In the creation of the primary values."^ These secondary objectives are values that must be achieved to a substan­ tial degree if an organisation is to attain the primary objectives* In the past, there has been a tendency to slight some of the problems of securing these secondary values in department store retailing*

In the large department store the major emphasis

.as been on merchandising* The best minds In retailing nave been directed to merchandising and khe top executives in most stores have advanced from the merchandising part or the business* The major emphasis has been on buy and

^ell. The phenomenal growth of many of our leading retail

R. C. Davis, o p * clt * Hi 5 institutions has sustained this tendency to submerge or

' zncre management aspects that have not directly involved

^ e scramble Tor the consumer dollar or the disbursement

f the merchandise purchase dollar. It is not to be denied

♦ nat this approach is basically sound, for the main arena cf a department store operation Is merchandising. It is

be regretted, however, that managements have often

'vnored many other Important problems or have attempted to solve them with the same intuitive managerial techniques t .at have been used in merchandising.

In recent years the growing expense problems fostered ty higher taxes, higher pay levels, shorter work weeks, and increasing rigidity of costs have focused attention on the internal scene. Many managements have started to rut their house in order as a result of these high ex­ penses and the hue and cry that has been raised against

"high costs of distribution.** Competitive pressure from

ther retail types, which have either not developed the huge structure of nonprice competition or else have trimmed it to a much smaller stature through the use of self service, the reduction of "free" services, or a limitation of primary service objectives, has also awakened department atore managements. NEED FOR A CONSIDERED APPROACH TO EXPENSE MANAGEMENT

The practical executive la typically a man of action wno la not prone to consider the philosophical aspects of a problem unless It can be done with the greatest of dis­ patch. In many of the subjective problems of merchandising t.e ability to manage by intuition has been of great value.

The solution of problems that demand quick, subjective, and intuitive evaluations, and in which success or failure Is known soon after, has fostered this lack of a sound approach.

As a result, a large share of department store management's expense reduction efforts have been piecemeal, sporadic, and 111 advised.

One example of such an approach came to light recen tiy in an interview with a major executive of the leading store in an Important trade center. Management, feeling that ex­ penses were too high (the store's expense ratios were not as low as the "typical” in the NRDGA figures) decided to reduce costs 10 per cent. The method employed was to make an across the board cut in the expense budget to a level

f 90 per cent of last year's actual costs. Since the reauction was achieved with no decline in sales it was c :ns 1 dered a highly successful maneuver.

Several questions might arise in the reader's mind

'oncerning the validity of the conclusion drawn as well as 1U5

• he action taken. It need not be denied that there probably existed an ample opportunity for expense reduction. It is doubted, however, that this opportunity existed in various organizational areas in 10 per cent increments or that the opportunities were equal in magnitude among the various areas. If there was an expense management philosophy evi­ dent it would have to be considered as an essentially nega­ tive one in the best of "traditional" thinking. Surely expense in this case was looked upon as an antithesis of profit.

Interchange- The importance of Interchange Informa­ tion in the eyes of most department store executives is another example of the Intuitive approach to expense man­ agement. It also shows the need for a reconsidered point of view. This is not to say that Interchange is unde­ sirable, for surely it has been of great value to almost all stores. It does, unfortunately, act as a standard

•nlch usually does not take environmental peculiarities

’ nto consideration. Even the latest In physical productiv­ ity measurements are now being Interchanged by some stores.

In these cases the excellent position or the unfavorable

,-oaItion of a certain work center Is frequently due to

unusual situation which distinguishes It from other stores. The major danger of such Interchange is that. In the one case, it will foster complacency and, in the other. 1 i| t

•t nay foster dissatisfaction and revision where none should

:e. In either circumstance the development of a sound abroach Is retarded*

The survey of department stores discussed in Chapter

;V nafl highlighted the widespread existence of the trad­ itional attitude on the part of management. In Chapter V

't was shown how, in what manner, and how recently some of the major stores in this country have moved to correct the oversights of previous years* In several of the leading

• tores in the country, executives have shown very keen

Insight into the philosophical aspects of expense manage­ ment. They are the innovators today and department store retailing owes them much for their leadership* In general

It is believed that the following discussion summarizes tne basic elements of a more progressive approach to problems of department store expense management*

A SUGGESTED APPROACH

Expense is often considered to be more of a dissipa­ tion of assets than anything else. While it Is recognized that expense must be incurred it Is often felt that It snould oe strongly curtailed* In many stores this view Is

^eld for most nonselling and selling expenses, while at tne same time management holds a separate view for others such as advertising and promotional expense. In the latter li|7 cases they have long ago recognized that cost should be measured In terms of value received. In these expenses

have come to realize that an expendl ture, while super­ ficially or technically an outgo, la actually an invest­ ment (or in mechanical terms, an input). They are only now coming to the conclusion (and this. In a limited number of stores ) that all expense is of the same cloth.

It Is all an Investment or input and should be evaluated in terms, not of the dollar cost alone, but of how well tnat dollar cost returns value.

Proper Expense Measurement- The propriety of any expense outlay should be measured in terms of the values received frost such an expenditure. This has been ex­ pressed, in many areas, as a ratio of return (or output) tc outlay (or input). This ratio is commonly stated in terms of both output and Input In physical units. Such an approach, of course, differs substantially from the per cent to sales concept of expense management. This latter concept has frequently been criticized by leading students of management and cost accounting. The real weak­ ness of the sales ratio is that It does not, In most casts, accurately picture output. There are other In­ stances, such as the judging of advertising effectiveness,

* ere it might be proper to use sales as the output term

'tcause the logical and expected product of advertising -s sales volume. lijK

For many expenses tne use of sales as the measure of

-utuut is not only of little value, but also is often

-Is leading. The expenditures for wrapping ana packing activity, for example, are only indirectly assooiateu with

.tore L-alea* The expense of wrapping a package is a function

:f the type of wrapping material, type of merchandise, cost

f supplies and labor, wrapping method, and certain environ­ mental conditions* A realistic standard by which to evalu­ ate the efficiency of expenditures for wrapping a package

.must be in terms of as many of these factors as Is practi­ cable. To break this situation down furt-ier, the cost of cup'lies for wrapping is surely not a function of sales i>lone but of the type of wrapping, number of packages

.rapped, type of merchandise, existing prices for supplies, cs • the efficiency with which the supplies are utilized in

*.nr wrapping; process* The control of the wrappln supplies expense by a per cent to sales ratio has little real value

:t meaning.

hven in selling it is often realized that tne per

:■ .t to sales concept has cert In weaknesses. One of the

-fijor dangers of expressing an expense in such terms is

-t*t the vagaries of price movements may have a pronounced

•*:'ect on the standard. To offset this many managements

.avc given consinera11 on to the transaction as a better

T.easure of the output of a salesperson. In fact, of the 1149

■progress! ve" stores discussed In Chapter V, one half now jss the transaction as a measure of sales output and sales cost • The use of "per cent of sales this year to last year"

Is another concept that Is open to question. The use of a relative comparison for the purpose of showing improvement or decline Is a worthwhile objective. To assume that last year is a logical or rational standard, however, is not

Justified* There are many exceptional situations occurring

"tnie year" and more probably occurred "last year" than can

De remembered or accounted for. It is Impossible to neutrali ze the effects of these variations on the expense- sslea ratio since the possible disturbing factors that could enter into the relationship between two semi -lndepend ent variables are legion. As a result, the validity of the "per cent to last year" comparison is not only questionable but also may be misleading • The use of some other standard which more completely and more directly measures the ratio of expense input to value output is necessary.

This dependence on the per cent concept has been attributed to the financial accounting viewpoint which nas emphasized the reporting of financial conditions and results,The use of this "balance sheet and profit and r;------A Reexamination of Standard Costs", N,A,C,A. Bulletin. Section Three, February 1, 19^8# pp, 150 lcsa statement- type of approach la necessary for the prep­ a ra tio n of financial statements and for financial manage­ m e n t , but a transfer of the technique, lii toto, to problems of expense and operations evaluation has been a disservice to scientific expense management.

Abandonment of the financial accounting technique In the management of expense does not mean that the retailer must strike out into a virgin forest of concept in search of a solution. It is advisable to search, rather. In other disciplines and in other economic Institutional types for assistance. In manufacturing and engineering Is found a widespread use of physical production standards and unit cost standards. These concepts, and other research tech­ niques that have been developed In the shop, have already proved to be of substantial assistance In the management of department store expense. It must be cautioned, how­ ever, that the lifting of a technique from one environ­ ment and its placement In another is no assurance that It wi 11 bo successful. All of the industrial engineering concepts have their weaknesses and limitations. Unfort­ unately all stores have not applied them with the proper caution and understanding that an enlightened use of such valuable tools requires. As a result, these techniques nave sometimes been discredited In the eyes of retailers.

What Standards To Use?- A physical production 151 standard is actually a ratio between the Input and output

In some physical process. It Is a measure of efficiency*

In fact, Webster's New International Dictionary, <^nd edition, defines mechanical efficiency as, "Ratio of work or energy from a machine to energy put In." By i liberal substitu­ tion of "man", "activity", or "department" in place of

■sechine", a definition with direct application to depart­ ment stores Is secured (e.g«, how many saleschecks are audit­

'd per mant)* To give the effort of man some measureable meaning a time unit la commonly added (e,g9, how many sales­ checks per man-hour) * For the proper analysis of expense it la desirable to reduce the situation to as few elements as possible. This usually means that measurement is made in purely physloal terms, without the inclusion of monetary units. This Is particularly desirable when problems of

•zpense management must be explained and carried out at the operative level. As one authority has put It, "Analysis of physical output per man-hour is useful primarily as a refinement of technique aimed at eliminating the vagaries cf money as a means of m e a s u r e m e n t • "5

Eventually, the concepts of measurement must be re­ interpreted in terms of the common denominator--money. Only

5------Charles E. Young, "Concepts and Measures of Productivity •t the Plant and Company Level", Summary of Proceedings of Conference on Froductlvlty. October 2 b-2 9* 19h& ^Washing­ ton, u. S. department of* Labor, Bulletin No. 9*3, P* in this form can the combined expense picture be visual - lied, snd only by this combined picture can alternative approaches and procedures be evaluated. To date, the

2*Jor developments In department store expense management nave been In terms of physical and cost standards. Other typee of useful standards do exist, however, and should be applied where practicable. Standards of usage and standards of condition, for example, may make Important contributions to problems of expense management.

ASPECTS OF EXPENSE UANAQEME>TT

As has been previously stated, the problems of ex­ pense management may be oriented along two general axes.

First, there is the problem of reduction of an expense to the minimum level commensurate with the degree to which management has determined to achieve service objectives.

This is essentially a problem of static relationships In­ volving the scientific analysis of procedures, situations, policies, at cetera, with the aim of making the expense least costly. The second problem la that of maintaining the expense efficiency achieved in the static analysis.

This problem Is essentially dynamic and results from the olghly variable tempo of retailing and business in general.

What is a Sound Expense Reduction ApproachT- Perhaps

H should first be said that the problem Is not always one of reduction. It is quite likely that there are situations. 153

least in the short run, which require more rather than less expense. Excluding expense Increases resulting from changes In management policy, the long run goal of static expense studies should be the reduction of expense. With respect to this goal, the easy solution of forced reduc­ tion, which considers only one half of the picture, must be guarded against* Forced reduction gives little attention to the output aspect of expense efficiency*

In general it is believed that a sound philosophy must have as its roots, objectivity and optimism* Objectiv­ ity demands Justification that is logically defensible, v :lle optimism opens the mind to Innovation. An approach to the problem on these grounds comes with a conviction that lower expense must result from greater efficiency*

This greater efficiency of expenditure may lie in revised policies, functions, environments, methods and procedures, and In addition, a better utilisation of personnel, equip­ ment, and facilities. Such an approach, to have a maximum opportunity for success, can not be undertaken sporadically or In a piecemeal fashion. It mu a t be planned, organized, and carefully controlled* It should be carried out in conformance with sound principles of management which reoognlse the community of Interest that exists between business objectives of the firm and personal objectives of the people employed* i^U

Those firms where this approach has shown greatest re­

sults have operated on the theory that Increased output and

efficiency must come from active participation at all levels

in the organization, It Is particularly important that the

operative employees and supervisors at the first level have

both an understanding and an Interest in the success of the

reduction effort. The human factor Is of key Importance

and no amount of "experting* from the top down will, in the

long run, be as effective as active participation from the

bottom up* This means that responsibility must be decen­

tralized and given only for conditions and activities that

the accountable person can adequately control. It is necessary to educate employees to the point that they are acutely aware of expense and are equally aware of the ad­

verse effect that excessive costs will have on the achieve- xent of their own personal objectives. Probably the great­

est difficulty to be overcome In a program of expense management is the education of personnel at all levels,

"Production standards", "unit costs", and other terms

represent a new language to most employees, and it Is one

that they do not readily accept or understand. The un­

savory past that some of the industrial engineering tech­ niques have had in manufacturing makes It even more diffi­

cult, and also more imperative, to secure active participa­

tion from personnel* lt;5

In this concept or expense reduction it must also be realised that the level of expense is set by a framework of

policy, environment, operational patterns, the state of the arts, employee morale, certain fixed expenditure commitments, a given set of competitive conditions, and miscellaneous other factors. Many types and levels of expense are either fixed or at least restricted by this framework. To change

this framework, e.g., to change a policy. Is to open new and previously unavailable avenues for reduction. Within this framework there are also further opportunities for re­ duction of expense through the elimination of inefficiencies, closer control of certain cost elements, minor variations in procedures, et^ cetera.

What la a_ Sound Expense Control Approa chT - Once the problem of expense reduction has been successfully attacked there still remains the dynamic aspect of expense manage­ ment with which to cope. Again, as with the reduction of expense, the crux of the problem revolves around the se­ lection of an adequate standard by which to evaluate re­ sults. The answer Is to control in terms of output ratio to Input, where the relationship between these two measures

'£ as direct as possible.

Expense must be evaluated with little regard to

"last year.* Nor should the budget of expense for many departments, particularly the nonselling departments, be 1^6 set in any but flexible terma. Such departments do not set the amount or tempo of their activity except within very narrow limits. For example, the selling departments determine, by the nature and amount of their sales, how active the delivery department will be. To require the delivery department to operate on a fixed budget Is unfair and may require that unsatisfactory service be given or the budget overspent if the load happens to be heavier than planned* If the load is lighter than planned then the budgeted expense amount may be excessive. To adjust tne budget up or down, or to shorten the budget period is one way to attack this problem* This approach Is neither an equitable or scientific way to solve the problem because such adjustment is usually done in a subjective manner using some simple allocation base that Is not adequate*

A better way is to control expenditures in certain depart­ ments on a flexible or variable budget* With the use of this technique, long employed in manufacturing and more recently Inaugurated in sore of the more progressive de­ partment stores, the problem of expense budgeting and control is not only greatly simplified but also is

proached in a more rational manner*

Some expenses, which are not adapted to techniques of variable budgeting, can frequently be determined only as a dollar amount and budgeted in that manner. Each case 1 c7

sould be considered carefully and possible lines of ap-

.roach aimed at reducing the rigidity of the expense should

:e investigated. in the long run all expenses are variable and at some time or other management will have the opportun­

ity to reconsider a particular cost which might at the c.oment be a classic of fixity.

Adaptability of Existing Expense Clasrlflcations- The most commonly used expense classifications follow the nat-

j?al-f\inctional formula that has been usea and advocated by

:ne Controllers 1 Congress of the National Retail Dry Goods

Association, and the Harvard Graduate School of Business.

Tr.e great bulk of statistical information on department store expense is available only in the form of natural- fjnctlonal expense ratios to sales. The major weakness with this classification, as it applies to the suggested approach to expense management, is the functlonal concept, while it may be satisfactory for interchange purposes, although even its use here has been criticized by some ieaoln^ store executives, it is a very unwieldy concept

I r internal cost control. It seldom conforms to organi­ sational lines or to areas of responsibility* Any truly

ofective approach to the management of expense must, of necessity, he in terms of res pons Iblll ty areas. Only when responsibility is definitely placeu and only when this res­ ponsibility Is accompanied by the required authority to ,trig?e and control can a just stanaaru of ex^eiue ei'f'icitncy

oe determined. An executive s .oulc not i.e riven i n rts-

j^sibility for tioe level or variation of an expense in his

,-ta of management unless he ties tne autnor 11 j a no the

^ortunity to determine what that expense shall :e ana

,■ 3t shall be controlled. To j^ive responsibility It., jut

■ :: jr.ensura t e authority makes it very difficult t<- nolo an

•. j.ccutive accountable for the oiL’ciiaryc of his responsibil-

i + ^ . c , * - * O •

Another weakness of the present available aata on

nvoense and its classification is tnat tne physical terms

tne output-input ratios have riO t been s tanoarci i zed, One

jT-e buying group has recently taken a pioneer step in

t.hs direction by setting up a number of standardized

•enter ueflnitions as well as definitions of measurement

i-rms. This is an important step toward the aoo^tion of

l t .mdara i zed measures of expense tnat are cast in a nonmone-

t cry form,

PKKtKSiUlSITfc^ Gr‘ TiilS is ArfhOAC::

The acceptance of, and tne implementation of, tne

uc-L.pt of expense management as presented here re iuir«-o

e o::.e departure from past management practices. ..usi tally,

* -at is required is a program of plannea expense engineer*

-nc, it means the development of an objective approacn to 159 tne problems of expense management as they fit Into the

verall management problem of securing adequate profits, snd into the overall social problem of reducing the costs

distribution* Such an approach must necessarily be a slow cumulative process during which the immediate short run benefits may not be all that are desired.

As a minimum it would mean that a research department

:e set up for the study of these problems. The fear held b\ some managements that research is a costly practice and that a research department is an unprofitable venture must be allayed. It is the long run profit that must be emphas­ ized. It is not suggested that large staffs be employed to engage in a number of simultaneous projects. Several firms have already tried this technique and have been great­ ly disappointed with the results. The research department should promote the development of a cost consciousness In executives and employees, offer technical assistance where reeded In the Improvement of specific expense problems, and investigate problems that are beyond the scope of the

.erative employee or the first level supervisor.

In terms of expense management concepts this point of view would appear to require that the producti vity or efficiency approach to expense problems be expanded con­ stantly In terms of work centers, other organisational units, and activities within work centers. It means an expansion ^ the productivity concept beyond its present occupation w4 tn. the man-hour basis into other measurements that may

better adapted to the problems of evaluating selling efficiency, promotion efficiency, as well as the efficienc cf aupplie* utilisation, delivery, housekeeping, and many others. Some consideration will be given the nature or tnese problems in the following chapters. CHAPTER VII

APPROACHES TO PROBLEMS OF EXPENSE REDUCTION

One of the greatest potential sources of cost re­

action is the waste that results from an inefficient util-

iietion of time, motion, energy, and materials. In a

department store, where most operations are still essentially manual, many of these types of Inefficiencies exist*1 In m a n u fa c tu r ing, fractional differences in cost per item have a profound effect on profits. As a result, industrial engineers have developed many techniques by which waste can

be ferreted out, reduced, or eliminated. Since the end of florid War II growing interest has been shown in these methods by department store executives. As a preliminary

to an exposition of applications, it is advisable to explain

tne basic characteristics of these investigative techniques*

I------In an address delivered at the 2 9 th Convention of the Controllers* Congress of the National Retail Dry Goods Association, Mr. David C. McIntosh, well known manage­ ment consultant, stated that, "Experience in the depart­ ment store field has demonstrated that AS MUCH AS THIRTY PER CENT of the labor effort time on many of the major operations of a store » WASTED ON NON-PRODUCTIVE EFFORT." For the complete address see, "Application of Industrial Management Principles to Non-selling Departments", Yearbook. 29th Controllers' Congress Convention. (New tontrolleri* Congress, National Retail Dry Hoods Association, 19^9), P«

161 1 62

INVESTIGATIVE TECHNIQUES

While the techniques employed In the analysis of op­ erations have been fairly well standardized, different names are frequently applied to the same method. Generally speak­ ing the term methods analysis covers a wido range of specific approaches to problems of waste reduction. It ordinarily includes specific methods known as flow process analysis and operation and motion analysis.

Flow Process Analysis- The purpose of a flow process study is to analyze a series of events with the aim of re­ ducing the time, motion, or energy that is expended for which no productive good Is secured. In this approach a complete sequence of steps or events In the processing of material, merchandise, or a form is studied. Each step or phaae is recorded, along with the time or distance Involved, and subjected to close scrutiny to determine the step's contribution to the entire process. Ordinarily a special 2 form Is used to record the elements of the process. In such an activity there are generally three broad stages; preparation, operation, and clean up. The most frequent savings are found in the first and third steps which are supplementary phases in which no production takes place.

It is also extremely important to challenge the operation

7 ------k copy of one of the most common forms used in this type of analysis is shown in Figure 1 6 3 stag* f°r ^ ^ 1 * can be eliminated It will eliminate the other two stages. In challenging each step In a process It Is common zo follow a question check list. One widely used check 3 list is* 1. WHATT What Is done? What Is the purpose or doing ltt WHY la It done?

2. WHERE? Where Is It being doneT Where Is the best place to do ItT WHY should It be done thereT Where else could It be doneT

3. WHENT When Is the detail done? When Is the best time to do ltt WHY should It be done then?

WHO? Who does the detail? Who should do it? WHY should this person do It? Can people with lesser skills do it?

3. HOW? How Is the detail performed? WHY la It done that way? Can we make It easier to do and safer for the people who do it and for the equipment they use?

The challenging of each step or detail in this manner usual­ ly locates several possible areas for Improvement. The next step Is to work out Improvements. In this attempt It

Is Important that a complete elimination of the step be considered first. This is obviously the most expeditious solution if it Is possible. If the step can not be elimin­ ated, perhaps It can be combined with another In a way that a net saving will result. It Is also possible to change tne sequence In which the steps are completed and eliminate

^Allan H. Mogensen. "Carry Out a Methods Improvement Program" # Factory Management and Maintenance. July, !%-9. P . 1 backtracking# Additional opportunities for improvement may be found by changing the place where a given step la completed, or by having someone else do the work. After considering all of these there Is a further opportunity for waste reduction by an Improvement In the way It Is now oeing done# The use of a different tool, or a alight re­ arrangement of the manner In which the step is carried out may be the source of this additional savings*

Activity Analysis- This type of analysis is especially valuable in a study of the relation of a man to a machine or work space, of a group of men or machines, or of the relation of men, machines, and work space# Such an analy­ sis la commonly made with special recording forms known as san-aachine charts. and multiple activity charts * One of great values of this type of study is the ease with which ldla time la discovered# It may be found that a problem of

Increasing capacity of a work center can be solved by a sore complete utilisation of machinery and equipment, or a greater utilisation of manpower during a machine operation or an operation involving a number of people# In many cases the results achieved parallel those secured from a flow process analysis#

Operation Analysis- This type of study, frequently called "right and left hand analysis", is actually motion study. There are waste motions in alsiost all cases where a person Is performing a task involving movement of the 16S

various parts of the body. To eliminate these motions is to cut the fatigue and time associated with a task. In tils vs; a worker is able to produce more without addition­ al expenditure of energy or time.

In the analysis of operator movements primary atten­ tion Is given to the fundamental hand motions. They may be divided into five general classes:

1. Finger motions 2. Motions involving fingers and wrist Motions Involving fingers, wrist, and forearm i*. Motions Involving fingers, wrist, forearm. and upper arm 5« Motions involving fingers, wrist, forearm, upper arm. and shoulder

The lowest classification is the finger motion, with the other four classifications increasing in effort require­ ments in the order given. One of the fundamental rules of motion economy is that the lowest class of motions should be used when possible. To perform hand motions effectively

It is better to arrange work so that it may be done in the normal working area (the area that is within reach if the elbows are rested on the edge of a table and swung in an arc with the elbow as a pivot). It is desirable to have all work within the maximum work area limit. This maximum ares ia described by the area within reach when the class

^Ive motion la used.

Micro-Motion Study- At times it is useful to break an operation down to what might be called the elemental or oaaic motions* The Gtilbreths. pioneers in motion study. 1 o 6 first employed motion ploturea In a study or basic motions or thsrbllga. In this type of analysis, called ml cro-

-otion study, a "wink counter" or other timing device la usually placed within the camera viewing field In order that the time required for each motion may be recorded,

Studies of this type are practicable only when a given opera tlon Is completed In a short time cycle* The cost of this type of study usually limits Its use to an analysis of work that is done on a wide scale*

Memomotlon Study- Memomotion study la a technique that has been developed by Professor M. £. Mundel of Purdue

University* A movie camera is employed in much the same way as in micro-mot Ion analysis except that a frame of film is exposed every second rather than every l/lbth second. It la reputed to have all of the advantages that movie techniques have (e,g*, greater flexibility of study, permanent record, et> cetera) but is much more adaptable for the study of motions in long cycle operations, irregu­ lar operations, crew activities, and work or material flows over large areas. Since It requires an exposure of less than one half that needed for regular motion picture photo­ graphy, it can be made with much less light,G

4 For further inforswitlon concerning this technique see E, Mundel, "Memomotion Study Technique", Factory Management and Maintenance. June, 191+9* P» 1 6 7

Work Simplification Program" While work simplifica­

tion can be achieved in many ways, since World War II It

ofts coma to mean a specific type of approach to problems

of wait a that has bean developed by Allan H. Mogensen,

■ell known Industrial engineer* Mr. Mogensen and his

isaoclates first developed the program for use by the armed

forces during World War II* It is defined as "the organ­

ised application of common sense to find easier and better

■ays of doing work." Basically it means the training of

supervisors and operative employees in the rudiments of methods analysis and the use of tools such as the flow proc- ess chart. Everyone in the line organisation is encouraged to apply these techniques and principles to his own particu­ lar work situation in an attempt to eliminate uneconomical employment of time, effort, equipment, space, and mater"

ials. As an incentive for suggesting improvements, the employee often receives an award set on some relative basis tc the savings resulting from the improvement*

Personnel Considerations- In the application of most of these techniques it is necessary to create certain attitudes on the part of the personnel involved If maximum results are to be achieved* The presence of a stranger intent upon studying a person's work makes that person 1 rained -

*ately suspicious and probably uncooperative. Since the

-■enepal motives that prompt the research are misunderstood, the workers often fear that management is "checking up" on 1 6 3 them# It is necesamry to allay those Tears by explaining trie purpose and nature of the study. The aims of the re­ search should be stressed from the positive aspect that such studies may have a profound effect upon the ease of their tasks and the efficiency with which they can dis­ charge them. It is, of course, desirable to create an expense consciousness In their minds, if possible, and to secure their active support and assistance. In many cases the workers and first level supervisors can offer many nalpful suggestions*

APPLICATION OP REDUCTION TECHNIQUES IN DEPARTMENT STORES

When the application of expense reduction techniques

Is first considered It is necessary to determine the man­ ner and scope of the investigation. This decision should ce made In the light of the tendency for most managements to react more favorably if encouraging results are scnleved quickly and economically. For this reason it is desirable to select study areas by the criteria of: (1) the apparent possibilities for prompt improvement, (2 ) ease of analysis, and (2) importance of the activity in taros of costs. Experience in stores where many of these

-nvestlgative techniques have been applied shows that

-t la desirable to defer the finer detailed studies in

^svor of flow process analysis and similar studies. Not

-nly are the results likely to be more obvious, but also 169

ths improvements of some of the a* activities nay eliminate

operations that might have otherwise been scrutinized with

the f i n a r research techniques*

plow Process Analysis- One of the simplest and most

easllj demonstrated techniques is flow process study. The

uae of a flow process chart, first developed by the

jilbreths, is Illustrated in Figure 5* This type of study

hes a vide area of applicability In department stores,

tinea much store activity Is concerned with a sequence of

operations, or with movement of merchandise, formis, and

personnel. With this method It Is possible to chart each

step or element and then to challenge its necessity*

usually movements or operations are of four distinct types;

operation, storage, transportation, and Inspection*

This analysis la especially valuable where the activ­

ities have a rather long cycle and occur with irregular

frequency* It has been found that the sales check and

the aerchandlse invoice are major work producers. Many

special forms, generated from the buying and selling activ­

ities, may be eliminated, or at least substantlally reduced,

if their flow is charted and analyzed. The activities of

messengers, Information searchers, pick-up boys, checkers,

•s well as many other types of personnel offer fertile

fields for flow process charting. A study of Incoming and

outgoing merchandise and the Internal handling of such ssrchandlse shows that there are frequently many excessive 170

candling* that serve no useful purpose. Finally, a given

task or function may be charted and analyzed by means of

the flow process chart* The placing of an order or the

looking up of certain Information are examples of this

type. Another advantage of the application of flow process

analysis to department store activities Is that the study

can be made by nonspeelallsed personnel. Any operative

employee or supervisor can, with a minimum of training in

the use of the chart, make an effective analysis. No

special equipment Is required other than the chart form,

although in many studies it is desirable to measure the

time taken by each element as well as the distances involv­

ed,

The application of flow process analysis to a simple

selling floor situation is Illustrated in Figures 5 and 6,

This study was made in the silver section of a large depart­ ment store, where a card file is maintained of prospective

brides and their chosen patterns of silver. The mainten­ ance of such a file is a rather common practice since it nelps the store sell more silver as gifts, while at the same time the bride is more likely to secure a balanced

£lft selection. The needs of a given bride were determined by going to a vertical file, taking out the drawer, and thumbing through the cards until a particular card was located. The merchandise that had been sold for that bride n O D R E 5 ■Present" Method of Securing Information frcm the Bride's File in a Silrer Department

;cb securing information trt Method pros* prop'd earing Operations the Bride's 2 & S______Transportations 3vcragoa Subject obarted . . _ .. Inspections Minutes Sale* PiTKMl DIatanoe

Cfcii'ted by ______

Department Silver Ssotlon Dots

present DETAILS METHOD BPIABIM M l l i i Approach the cost a— r | 0 T 3 I or teleph< while' ootnser givei Stand still 0 T S I needed information t lain ■may rum— 1. *alk to fils ■torling !>!• to fill

2 , Jpon drawer 1 so that othara can ha t o . i . Lift out fils box te Uli fill a. Place on counter S 1

Thanh through oards S X

v Pick out corrsot card 3 I

[1. List sold merchandise 3 X

Put cards back in box s Xt^; ;

3 1 9. M box back in drawer i± Cloea drawer 3 I!

ItLt to cua tower I p. jo or telephone 0 T 3 I

•*_t* ~ leas than 10 seconds 0 T 3 I source 1 Confidential FIGURE 6 •Proposed" Method of Seourln g Information from the Brtd*1 a Pile In a Silver Departaent

Job Scouring Information from tint hod pres. prop *d aa'ring C» orations 9 _ S the Bride '■ File ______Transportations Z b'^ragoa Surest charted Inspections Minutes _ Sales ptrioo Distance "ST & CMrted by

Department Silver Section Date ~T~ T « P< • details m e t h o d REMARKS proposed MT Approaoh cue 0 T S I or telephone je custosMr gives Stand still 0 T 3 I

6. lalk back to one or teleph< % O T 3 I

0 T S I

0 T 8 I

0 T S I

0 T 8 I 0 T 3 I f— less then lo seconds O T S IJ

Source i Confidentiel 175

was then copied be Tore the clerk returned to the customer.

If contact wee made near the "sterling Isle", this activity

required an average of eighty feet of walking and approxi­ mately eight minutes of time. This department has about thirty clerks and a survey showed that each clerk used the file an average of eight times a day. Thus, about thirty tvo clerk hours were being consumed each day merely In the looking up of Information concerning the silverware that hed been purchased. Of the eight minutes In the operation,

the largest single time unit was three minutes spent In finding the p r o p e r card. A new filing system that would en­ able the oorreet card to be selected with greater speed vaa the obvious need. Installation of a patented Kardex

system, costing $35l4-*50* was recomaended. With it a standard card could also be employed so that the time needed for copying the Information could be reduced. These improvements, plus the elimination of several other smaller elements, resulted In a reduction of the number of operations from nine to four, and the minutes per opera­ tion from eight to two. Since this operation occurred about 26,300 times a year It was estimated that 2I4.OO clerk hours of time were saved by the Improvement. The invest­ ment In the new filing system was returned in Increased salesclerk efficiency within several weeks.

Flow process charting in a more complex situation is shown In Figures 7 and 8 . This case concerned the FIGURE 7 "Present” Method of Recording end Filing A Carpet and Rug Service Claim

;ob IT1 rillng Method pres, prop'd earing Operations 20 • i m T ^ ,arTlfM cLalja Transportations Storages ^bjeot charted f t f i — 1 ham- Inspections aling of a C A H sera.ee claim Minutes senior adjuster. Oistanoe

Cbu'ted by

Icp.irtffleat Section Date

present DETAILS METHOD REMARKS

*• New claims plaeed in file salesclerks A buyers, up- box on adjuster’s. d— A flit ,tf>y -U i airig flf d««* Adjuster takes olaia from flit fett Adjuster numbers eaoh claim at top right hand corner of the olalm Adjuster detaches claim atu From back of service claim hr- i •>. Adjuster records olalm In 11ste customer name, ad- a i dTfVn nmtur». t 6, Adjuster puts recorded: ol losrer file tray on I h side In file boat of adjuster'a desk 7. Adjuster files stubs in right hand side of control stab fils ' s. Claims wait in the file box until adjuster has numberec *ordsrir datanhad- and filed stub on all new olalms

! 9. Adjuster takes ol aims” from from lower file tray on 1 U & ± S S L i.iA 111 Adjuster reads claims determine disposition,housef-

ppnd claims, and claims to fitt. Adjuster fliee housecalls after contacting customer t— , folder In the desk A w r i n g i n g rfafinite ^ • Adjuster attaohes claims to which is left lying on be worked ctq a d i p board tffl flX Places all v o r h M A pending located on top of control completes duringurxngday f stub file on rt side of aaaM 1 FIGURE 7 (Continued) "Present* Method of Recording and Piling A Carpet and Rug Service Claim

Job Method pres, prop'd saving C^-T’atlcno T.*<*n«trior t-atlona Storages iubjejt charted Intpectlv-ne Minute a Distance

by

Cc.p atr.* at Section Date fit ■KAILS ______METHOD REMARKS ’Ju Claims wait In file box until following AM when y^TT'wmA\ ^ adlnater 1$. Besovas pend and oaagileted

!l6. Sorte claims into oloaed and pend Bi to« ...... - jl7. Ketches closed claims with Trtm a tab file |l8. Jliea oloeed claims In In alphabetical order-file t o ------i>. ESfibS&iiii in file adjuster reaorea twice a tfr to sVflrr *n ----- [go. Matcbea pami claims with

?1. Sefiles pend claim atob after noting on pend atub

f2. Piles pending clala in alphabetical order In lAnfllnf ntol■ In f11f located Iji U drawer file In office ■3. Pending claims wait In file until action required Is u by someone other than star gii. ArHn«t-a-r r * a < w H . ^TV->'1t I adjnatasnt ledger

Source* Confidential F I G U R E 6

" Propoaed- M attaod o f B coordlng and i* lllag

A C arpet and Rue S arrlca C laia

p r o p ’ d J o b I f f * ^ 1 i n g * ______Knt'sod prea. aa^ln 3 C t 3*1C 2 0 1 7 ___ 2___ etrpat and nxg a a rrlo a o la ia ^ T * ir K ^orb •* blons _ 2 ^ 'tfOiT u gO 3 iub.'ejt oharted P hysical ban- 2 ■■n a iling by the Sanior Adjuatar ~ kinutea :ss: J Z £ 3 £ Z 4nd th* work control olw k D istance ______

b y

U 7.u S e c t i o n D a t e 10 CJh a a* DUT/TLS METHOD ct rd ejl rj REMARKS or-.Try r -red______

1 . New olalm a plaoed In flU " S I box on work contro l c le rk 's II by aalaaclerka and buyera d e s k o 1 !

2 . NC clerk tak e a ollalm a ltr< S I f i l e b o x [ 3 .~k! elark m ubara aaoh o iala' S I,2 t o p r i x c o m a r o t c l a i a

j I t . #k'clerk dataohaa olalm * 3 1 ■tuba froa back of claim t !"!). I! eladc" H la a o la la a tu b e In co n tro l a tub £L le—io ea- S X _t ad on ledge behind WCC | h . I\! takee 'num bered o laiaa o< | Senior adjuster 1 a o f f l o e a n < 1 plaoa in D( S X

hr A djuster taJcee olalm a ihrom 1 b o y ______| located on lb alI d a o f

I" 8 . idjuatar raada the elalm e ] to dataraiiM d iv p o s l t i o n S I n

T9. Adluater dlaptMM of L ocated on ledge In ad— S X ' _ by p u ttin g In flla boat .1 tlb te r *a o f flo e — f Ile a

m arked pend, ao tire, to

. and oloeed uj. ICC w ill file clalaa to S I ‘ta r placing num bered work In tick ler file c l a i m s 1 n ad ju ster's file

p 7 " « i 6 fila i actlye claim s In in L draw er file in * M U w tP m ad lu sterla offloe ______r l 5 . HOET iak erp aad and oloeed ' q^alme and ratunxa to her

d e s k

13. WCC matches oloaed clalaa ■ T S ______w ith a tuba ______In atttb oontrol flla LU. WCC file a oloeed olalma wltt^^^_ _ > in oloeed olalm a tub file — «*«»■______I p f * 3.... to unit charged |

15. *B£ mm4elaae pemi eXSOSe e r v d f i l i n g a --- lini ‘iDd pres. prop '<1 Zt ~r-I*.; 3*).c 20 _ 17 ____ ;arpat anti rug »«rrle« ol*l« T - trrr^or r.tlons 2 t ^ C* g O 3 'eot charted Physical han­ - p j.-.t: no dling by the Senior Adjuster ------KlnMten 3 1 1 j S3l jS 3 tn(i t-Se work control el«rk Liatance

. t-5d by

_____ Section Date

I Vo tj^ b • Oi•• • -*■’ Di.tV IV5 METHOD o ra O cc. ri rj REMARKS fjT' r ■ r^d______|1 •.-r’. f- - h r.-i -*■» t—•'l' *--■d --i» "1. New claims plaoed In fila by »*i* aclerka and buy* rm

2. »C clerk takes claims Tiro* fiX* b oat ---- ' 3 . t*C clerk nuabars ••oh olaia top rS» corner of claim"

j It. 1C clark dataohea olei* 3 X frc back of claim 1 RC elaric files olala stubs in oonirol aiu^> file—loci TP S X id on ledga behind WCC b. lHiC takes miabered alalae to Senlor• aditu s fr 1 • offloe and k plaoa l_n be s X; ?. Adjuster takes claloa IT 3 I _k2£ *-1 located oo Ita aide of deak ! 8. Adjuatar r a a ^ the clal ms to dataralna disposition S X. w 1 •s fila i T 3 I' Jll. liCC fiias actire olal AS in in U drawer fila in

15. *OC tikee pend and oloaed > -j 1 I .iaiee and return* to her ' Arli | 1 daak of.T 3 ij j j .3. WCC aatohaa oloaed elalaa I with stubs t o * S TJ2 in stub control file It. WCC files closed claims with In oloaed claim stub file —' stubs accordine to unit charaed i against , A T 3 I 5>. W3C matches penc^ claims with 3 X stubs 2 in stub control file 6. WCC notes action taken on 1 bend stub and files 3 X2 in stub control file ! 7. WCC records errors on daily 1 error elimination report 3 1 i 8. WCC files closed claims tdhke* o TP in completed claims file ° in pending claims £ile 9. WCC files pend claims • K s x; O. Pending olates wait in file until action is taken by ■t seasons other than adjuster O T 3 Ij

i O T 3 ij lo T 3 I ! | o T S l|

Source * Confidential 177 handling of a carpet and rug service claim* In the "present" method all work was done by a senior claims adjuster, and

involved a total of twenty four distinct operations and four storages* The average cycle of this series of elements was

fifty eight minutes. In the proposed procedure the total number of detailed handlings was reduced from twenty four

to twenty. This revision eliminated six and one half min­ utes or eleven per cent of the time consumed. Over a year

the savings would amount to 119 M n hours, the equivalent of almost three weeks of full time employment.

Several other improvements were effected, however,

in addition to the time saved. In the "proposed1* procedure much of the work was done by a work control clerk rather

than a senior adjuster. By such a change, a large share

of the work is performed by someone with a clerical pay

rate. Thus, while the amount of time to do this work was

not reduced by a great amount, the level of labor skill

used was downgraded, reducing further the cost of the oper­

ation. Another valuable result of the study was the elimin­

ation of the adjustments ledger and its replacement with a

control that requires less work. A daily claim error re­

port was also instituted in an effort, through preventive

measures, to reduce or eliminate claims.

Other examples of actual case applications collected

from the files of department stores show similar problems 176 and similar savings. Reductions or as much as 70 to 80 per cent of the man-hours required to do a given task have been reported. In other cases the elimination of the task has resulted In complete savings. The nature of the work studied varied from that of a highly routine task such as the typing of report forms and delivery of house mall, to such tasks as the tracing of lost receiving aprons, and the selection and procurement of new merchandise samples for newspaper promotions. In the latter case the department buyer select­ ed and secured samples of new merchandise for newspaper advertisements of costume Jewelry. It was also necessary to secure and maintain control of stock until time for its release to the sales force. In the new procedure, devel­ oped as a result of the application of flow process analysis, the time given to this task by the buyer was re­ duced 76 per cent, and the distance walked by 7<^ per cent. Over a year's time this will result in an estimated saving of man-hours of buyer's time and a saving of about 16 miles of walking. In addition to these savings the chance for confusion in the ordering, receiving, and holding of the merchandise until the sale time was reduced substan­ tially.

Actlvlty Analysis- The typical activity analysis is a measurement of an operation and its elements against a time scale. It is common to employ a chart much like that shown in Figure 9* 1° the example shown, a study was made FIGURE 9

Activity Analysis of Wrapping Good* After Sal* In a Department Star*

ACTIVITY Job Wrapping Good* After Sal*---- CHART Pr*a*nt Method ♦ Proposed Method _____ Analyst Georg* Morris Tie* In OPERATION OR STEP Second* Not**

1. Salesperson carries goods to wrapping desk. lO Sauntered

20

30 2. Salesperson idle while Wrapping Clerk waiting far goods to jj0 appeared to be wrapped. be skillful and fast. [SO

: 60

3. Salesperson carries package back to customer. I 70 Sauntered

U. Salesperson hands package to Effective "part­ customer. ing remarks."

SUMMARY No. Total Time Transportatlone 2 19 Idle periods 1 53 Operations 1 7 Inspections 0 0 E 19

Source: H. S. Hall, Putting Work Simplification to Work,, Business Management Serrlo*, University of Illinois, p. U2. lfc<0 of a salesclerk taking merchandise to a wrapping station.

During the wrapping the salesclerk la idle. While no

Improvement was given for this example. It is not difficult to see several possibilities. One change would be for the salesclerk to escort the customer to the wrapping desk where the merchandise is turned over to the wrapper. At that time the salesclerk could make his effective "parting*” remarks and leave. Such an arrangement would eliminate the salesclerk's idle time only if the clerk has other customers to serve or other word to do. If there is no other work, the solution would be different. A study of traffic flow through the department might show that during large parts of the day the clerks are not sufficiently occupied. Dur­ ing this time they could easily wrap the merchandise they sold without an adverse effect on customer service. By this arrangement the wrapper could be eliminated for the parts of the day when traffic Is light.

While no use of regular activity analysis has been made in the stores studied, there does appear to be areas where it can be employed with success. In selling activ­

ities, it could be adapted to a study of the manner in which personnel spend their time by changing the time units on the scale to minutes or fractions of an hou r .

Man-Machine Activity Analysis- This chart, used where man and machine are employed together, is somewhat

similar to the chart in Figure 9• Its use is Important ltfl where substantial man or machine idle time may be found In combination (i.e., when the man is idle, the machine works and, when the machine is idle, the man works). By the addition of a second machine. Increased man utilization may be achieved.^ The application of such an analysis is rather limited in department stores because there are few situa- tions where idle machine time is of such great concern, or where an operator is idle while the machine la operating.

If tabulating equipment or other automatic machines are used, this analysis may have value.

Multiple Actlvlty Analysis- It is not common in a department store to find activities in which a number of men are engaged simultaneously. In bulk warehouses where several men are required to place or pick merchandise, or in the receiving activity, a study of the multiple activity type might show that substantial improvements can be made in employee time utilization. Brief observations in the receiving department of one store showed that part of the work force was idle many times during the day. Some idle­ ness must be expected since the flow of work is, to a large degree, set by the delivery patterns of transportation agencies . 5------H. S. Hall, Putting Work Simplification to flork.(Business Management Service, College of Commerce and business Administration, University of Illinois), Business Manage­ ment Service Bulletin No. 603. P* i+2* id2

Othtr Actl vlty Study Technique*- An adaptation of multiple activity analysis would appear to be well suited for a study of sales force activity. Several techniques of unique nature have already been employed in such studies.

By using memomotion analysis it is possible to collect data for a number of hours on a single magasine of film. Ex­ periments in one department store with this technique brought out several disadvantages. First, the equipment is somewhat expensive and bulky to set up. It attracts a great deal of attention, ordinarily, and thereby creates somewhat of an artificial atmosphere. To gain the maximum value from an analysis of the film it is necessary to secure a special projector. If a regular projector is used the pictures move so rapidly that nothing can be seen in proper perspect­ ive, while if the frames are shown Individually the continu­ ity is lost* In spite of these criticisms, this is one of the best ways found to highlight waste movements of a sales force. Studies have shown that improper location of stock, cash registers, pneumatic tubes, or O.K. telephones force salesclerks to make many steps and motions that could other­ wise be eliminated* In one study, made in a leading depart­ ment store, it has been found that frequently less than I4.0 per cent of the salesclerk's time was spent in selling*

Another technique which may be employed in an analysis 185 of multiple activities ie ratio delay study.^ In the stores studied no use was f o u n d of regular ratio delay analysis by a supervisor, although in one store a similar type of procedure has been employed in a selling division.

A summer employee was assigned to observe the amount of traffic in various areas of the division. This observation was carried out on a fifteen minute schedule (i.e.. every fifteen minutes an observation was made at a given post).

The results did not show the nature of the sales force activity, but rather, the relationship of sales volume to traffic quantity during different periods of the day. A similar technique, which combines the preceding type of analysis with that of sales force activity analysis, has been tried in one store. In this study, still camera shots were taken on a similar time schedule. Both of these tech­ niques have been applied only on an experimental basis. As yet there are no conclusive results concerning their relative merits•

It is commonly recognised that a tremendous variation

In traffic flow in department stores at different times in

the day. week, and season. It is also recognized that a rather inflexible work force is used to serve this variable 5------For a complete description of ratio delay study and its application see. R. L. Morrow. "Ratio Delay S t u d y " . Meohanlcal Engineering. April, 19M-. P* 302. 181* traffic* In the light of these facts it la believed that most department stores have an excellent opportunity for reducing costa by giving greater attention to the analysis of the sales force. That ao little information is avail­ able concerning this problem la surprising when it is realised that many executives know that auch mis-matching of work force and traffic takes place. This particular aspect of expense management will be considered in detail later in this ohaper and in Chapter IX.

Operation Analysis- Even in department stores where industrial engineering techniques have advanced farthest, there has been little or no organized study of motions.

At least two explanations can be advanced for this apparent failure. First, since the application of industrial engineering to retailing has been so recent, there has been little time or opportunity to make such studies.

So many m o r e obvious applications have been apparent that there has been no need to study motions in fine detail.

It is also felt by some that there is little opportunity for an application of such techniques in department stores.

As one of the leading engineers in retailing has put it,

”1 do not believe that motion study, and particu­ larly micro-motion study has much practical application to department store w o r k . " ? 7------David C. McIntosh, "Application of Industrial Management Principles to Nonselling Departments", Yearbook. 29th Controllare1 Congress Convention. (New York, Controllers1 Congress, fTatlonal Retail Dry Goods Association, 191+9) P. o2* 16^

The targets Tor analysis have usually been those tasks that could be most easily studied and where It was more likely that quick and obvious Improvements might be made. One of the chief dangers facing a research man Is that management sometimes becomes discouraged and critical before an adequate time has been given for results to be­ come apparent. After the correction of these obvious defects. It Is probable that motion study will be used In stores. The primary requisite for such study Is that the work involve frequent, repetitious movements of various parts of the body In a short cycle operation. In view of these requirements, motion study should be an appropriate tool of analysis for such tasks as those of sales audit clerks, accounts payable and Invoice clerks, sorters, stuffers. file clerks. billers, markers, wrappers and packers, stock clerks, typists, and other clericals engaged in routine operations. A fine motion study will probably not be widely used In department stores within the near future.

If the motion study Is rather simple, most supervisors could, with brief training, make such an analysis. This training might well be a part of the regular work simplifies tlon training course if the store has such a program. If it Is desired to break the analysis down Into therbllgs It will be necessary to use a trained motion analyst. A study by a person not well trained in this type of analysis will 166 frequently result In a failure to record or Interpret motions correctly* Any standards set as a result of this study vould be as Incorrect as the original analysis*

When a motion study is made It is often combined with a timing operation. While at one time the advocates of motion study and those of time study were at loggerheads*

It is now recognized that these are really two complementary techniques* In a time study the analyst must segregate specific motions or he can not assign times* On the other hand* a motion analyst will find his study of Increased value if he timed the motions• By so doing* it is possible to measure the savings that are secured by the elimination or revision of a motion* Experience with time study in department stores has shown that regular study techniques are applicable to many nonselling jobs* One difference that has been found is the need for more timings in order to assure that all variations of operation are included and that their rate of occurrence is properly established*

Work Simplification Programs - Work simplification programs have become increasingly popular in department stores since 19U 5 * order to secure a maximum benefit* experiences In several stores show that such a program should not be Installed until the work force and the super­ visors have been made "productivity conscious". To Install the progras before the employees are conscious of a need for Improved productivity Is to Instruct them In the appllca- 107 tion of tools to a problem of which they are not yet aware.

A work simplification program should not be confused with a suggestion system* Although the mechanics in the operation of the two are somewhat similar, a difference is found in the training under the work simplification program, the type of suggestions made by employees, and the ratio of acceptability of these recommendations. Under work simpli­ fication it is recognised that a person employed in a given job or a person whose duty it is to supervise the discharge of a certain function is in an excellent position to im­ prove it* Most jobs are a summation of a number of details.

It is by the elimination or Improvement of these smaller details that an overall task is made shorter and easier*

Under a work simplification plan the typical operative employee and supervisor is trained in the various investi­ gative techniques that will enable him to make the best possible improvement of his activity*

In the stores studied there Is a general pattern to the work simplification training program. These training courses are usually given to first line supervisors, al­ though in at least one store the course has also been given to operative employees. The total length of training varies from seven to twelve hours. In some cases two hour sessions are suggested, while in others, one and one half or one hour weekly sessions were held* In all cases, the procedure Is first to teach students the application of lbS basic principles of motion economy and fundamentals of flow process analysis to specific types of work typical of selected store operations. The remainder of the course is given over to a consideration of flow charts which the students have made of tasks from their own departments.

Group discussion concerning improvements in some of these

tasks Is fostered so that experience is gained In the actual consideration of specific work. In such a training course it is necessary that manuals be developed for student use. These may be paper bound pamphlets, but they are needed as a text and as a ready reference for the employee after the course is completed.

Visual aids have an Important place in the training pro­ gram* In one store as many as five different films have

been used* Under a suggestion system there is usually

little or no training activity*

The type of recommendations made by the employees are

different from those made under suggestion systems. In

the latter case many of the recommendations are for in­

stallations of new equipment, advantages for certain groups

or individuals, et^ cetera. In the work simplification program as much as 75 Per cent of the recommendations are reported by one store executive to be suitable for flow

process charting. The emphasis in work simplification is

on suggestions that bring savings without cost or new

equipment* 169

The number of recommendations and the rttlo of accept­ able to total recommendations Is substantially higher after a course of work simplification. In one store it Is report­ ed that under a former suggestion plan recommendations were about 10 per cent acceptable. Under the present work sim­ plification program almost twice as many proposals are re­

ceived, of which about 90 per cent are acceptable.

Examples of work simplification projects have already been given in Figures 3 to 3. In both cases the analysis was made by a regular employee in the department rather

than by specialized research personnel. A number of other examples of work simplification results can be found In the published papers that have been presented before groups of the National Retail Dry Goods Association. Typical of

these is the case cited where packing room operations were

improved:®

"A third example of work simplification was a suggestion from a packing room supervisor to break down a small packing operation from a meth­ od whereby each packer checked, selected packing materials, packed, sealed, and labeled the package, to one where one person checked the order and selected the packing medium--another person or persona packed, while a third person sealed and labeled. This new method, resembling a line production operation, increased production of packages from an average of 95 Per day to an average of 162--an increase of 6? packages per day per employeeT^

Robert E. Brown, "Savings Through Work Simplification", The 191+9 Expense Problem. (New York, Store Management Group, National RetallTDry Goods Association, 19^9)# P* 9* 190

In a talk before the 27th Controllers1 Congress Convention,

one controller reported that, after nineteen months of op­ eration, approximately JOO proposals for work simplification had been accepted with a recorded saving of over 470,000 man-hours. The man-hours saved were accompanied by a re­

duction of over 50»000 mil®* of unnecessary walking, truck pushing, at cetera, by employees. During 194*> it was

estimated that savings from the work simplification program

amounted to almost $23,000 in the Accounts Payable and Order q Checking Sections alone,' Examples from other stores show

that similar savings can be achieved. In one case a depart­

mental supervisor suggested the consolidation of three

separate adjustment files and a revision of the customer

call tag so that it combined with the credit form. These

resulted In annual payroll savings of an estimated$1 7 ,6S0 .

These illustrations show that the many small details of

store operation are fertile fields for expense reduction.

When considered as Increased profit, this $17,650 saving

would have required (at the 1949 typical net operating

profit of 3*15 Per cent) about $560,000 in additional sales

volume,

“9------Paul A, Barkmeier, "Work Simplification and the Controller Yearbook. 27th Controllers1 Congress Convention. (New Ifork, Controllers * Congress, National fie ta il Dry Goods Association, 1947). PP« 75-°2 * 10 Robert E. Brown, op. clt.. p. 9* 191

OTHER AVENUES TO EXPENSE REDUCTION

In addition to those that have already been consid­ ered, there are other expense reduction possibilities open to a cost conscious store management.

Policy Revisions- The cost structure must be consid­ ered within the overall expense framework. An Important change in this framework will result in a new set of cost conditions. One of the major elements in the cost frame­ work is the type of policies that are laid down by manage­ ment. Managerial policy, in one of the stores studied, required that all merchandise be marked. A relaxation of this policy could cut marking costs and would not endanger service standards to any important degree. There is little need to mark itesis which are sold at a fair trade price and which have the price printed on the package. The mark­ ing of small and inexpensive items as well as the marking of bulk merchandise can often be eliminated*

While the reduction of service standards is another way to secure savings, it is often possible to maintain these standards and still eliminate some waste that accompanies the service. In one store, maids and porters were formerly assigned to decentralized operating units in order to assure high cleanliness standards. It was found, upon study, that excellent standards of condition could be melntained if the maid and porter staff was controlled by 192 a central authority. Under the new arrangement a more effective uae has been made of these employees. Policy changes as to what will be delivered, where, and when it

*111 be delivered can make substantial differences in delivery costs. A decision by management to change many other requirements can also change the cost picture.

Forms Analysis- This type of study Is frequently combined with flow analysis and methods studies. In many other oases a separate investigation of forms usage and design can uncover possibilities for savings. In one store it has been the practice for the receiving clerk to make out a receiving apron In triplicate. One copy was sent to the Invoice office where a blind check was written, copy­ ing lnfora*tlon from both the receiving apron and purchase order. A study of the apron and blind check showed that a new combination quadruplicate form would serve the purpose better. While this systeip has not yet been installed It is expected that substantial savings will result from a lower supplies cost and less transcription of Information by the clerks. When the new form was designed, special code designations were included which will often simplify the entering of merchandise descriptions.

Some stores have found it worthwhile to set up a regular forma audit system much like that described at an

Expense Saving Forum held at the ^9th Convention of the 193

Controller* 1 Congres*.11

"All forme coming up for reprinting ere reviewed by the Controllers Division with the following points In mind: A, Eliminating the form completely B* Reducing paper quality C* Reducing number of copies D. Reducing number of colors of ink E. Increasing Utilities'* Studies made to determine the usefulness of certain reports have also proved successful* One controller was asked to withhold several reports to see what reaction there would be. When none occurred, the recipients were called to* gather and asked to justify the use of these reports* When no adequate justification was found the reports were elimin­

ated* The reproduction of forms by ditto, mimeograph, multillth, and other methods has resulted in substantial

savings in paper and printing costs. In one of the stores

studied in the sunsner of 1 9 !?° a two color report was In use* Thereport consisted of a large number of pages with as many

as seven ruled columns per page* when this store was again visited In 1 9 5 1 , this set of forms had been replaced by a similar set that was totally reproduced from a preprinted ditto stencil* A substantial savings was reported from this

change *

n ------"Expense Savings Panorama**, Yearbook. 29th Controllers 1 Congress Convention. (New York, Controllers1 Congress, Nation iT ft#'tail "Dry Goods Association, 1914.9 ), P* 19k

Supplies and Other Expenses- Many stores can find other opportunities for lower supplies costs If adequate

consideration is given to the new types of wrapping mater­

ials that have become available. Packing costs have been reduced by following one of several different approaches.

It has become common practice to wrap certain nonbreakable

items in heavy send bags rather than boxes or corrugated

containers. Savings of 17 per cent in the costs of gift

boxes, and savings of as much as 75 P e r cent of the time

needed for setting up folding boxes are examples of what 12 has been achieved In one store. New one piece corrugated wrappings give ample protection to merchandise, but cost

leas and can be packed more quickly*

Substantial savings can also be made by the salvage

of manufacturers' boxes and wrappings. The possibilities

for salvage become more obvious when a careful study is

made of unit packing costs and the large amount of usable

peeking material that can be reclaimed. One of the best

expositions of a complete salvage program was given at the

Wrapping and Packing Clinic, 30th Annual Convention of the

National Retail Dry Goods Association in 1 9 1 + 1 * ^ At that 12------"Specific Economies Reported", Expense Reduction. (New York, Store Management Group, National Retail bry Goods Association, no date) p. 7 0 .

^ E. I. Wilson, "Supply Sal vaging-Pact or Fiction", Pro­ ceedings of the Wrapping & Packing Clinic. (New York, kanagernen£~blvision, Natlonal Ratal1 5ry 'Goods Associa­ tion, 191+1) PP* 11-19* 195 meeting, a salvage expert estimated that during a twenty year period, one store had salvaged approximately $ 4 Q . ° ° 0

In umbrella boxes alone.

A concentrated attack on supplies costs following the same general questioning attitude suggested for the analysis of payroll, should result in worthwhile savings. Failure to secure these savings In some store appears to stem from a lack of attention to the many small wastes that exist when no satisfactory criteria have been set by which to measure utilisation.

Travel, communication, housekeeping, unclassified, and other costs offer further areas for rese|trch and saving.

Here again, the problem appears to be that store managements and employees have not developed an adequate consciousness of expense management problems, or how to approach them In a scientific manner.

The Fitting of Man to Job- Another management weak* ness has been the failure to match employees with jobs.

In many stores no job descriptions are available, nor are specific man descriptions set up for given jobs. Personnel are placed in positions for which they are not well adapted.

A good example of this failure was found in a study of account billing operations. Over a five week period, three experienced billers maintained an average of li+O to 175 postings per man-hour. One biller, with adequate experience, averaged approximately 100 postings per man-hour. Not only 196

was tha latter'a production lower, but also she spent an

average of 5*7 hours a week searching for billing errors

as compared to 2*2 hours per week for the other billers *

While thle may be called an Isolated example, other cases

have been observed where similar inadequacies have been over- .

looked In the employment process. The high annual labor

turnover in retailing Is further evidence that stores have

not been successful In solving the problems of hiring and

maintaining a work force*

Standardlsatlon of Method- One of the reasons for the

frequent lack of a training program In department stores

h^s been the failure to standardise methods* This failure

Is typified by the condition discovered In a recent study*

An Invoice clerk was engaged In the task of identifying* matching* and pasting a copy of a receiving apron to the

appropriate invoice* A short study of the operation led

the observer to believe that as much as one half of the

time and effort required to do this work could be eliminated*

When asked how the work method had been determined* the

clerk replied* "I Just had to figure it out for myself when I took this Job*" Sufficient other examples of this

lack of standardisation have been observed to warrant the conclusion that many stores are missing an excellent opportunity to reduce wastes of this type*

Maintenance is one of the biggest problems facing management after standard methods and procedures have been 197

developed. Time, effort, and no small amount of expense

is required to develop the "best ways” ana to train the

employees in these ways( One of the main disadvantages of

using outside consultants for efficiency ana cost studies

is that too often their proposed methods are not maintained..

Too many bound volumes of standard procedures have been

seen stored away in lower des't drawers to underestimate

the importance of this aan^er, The method may be correct,

and it may be the best that can be developed, but often it

will still not be used unless there is a frequent auditing

process to assure conformance to the standard procedure. In

one store there is a staff member whose sole job is the

conduct of periodic audits of methods, procedures, and

standards, much in the same way that accounting records are audited.

A supervisor often fails to cooperate because the

old method has worked well, end he sees little reason why

any "expert- should change it. recause the old method has

proved workable in the past is, of course, no valid reason

for failing to consider that It can be improved. One well known industrial engineer, during his first department store study, reported that hie was "amazed at the flagrant use of personnel in department stores." The supervisor, in defense of an established method, often overlooks the fact tnat the store is now several times larger than it was twenty years ago, and that the days of tne |>12 a week clerk are gone. 1 9 6 r e d u c t i o n o f s e l l i n q c o s t s

While many or the approach*a mentioned to thla point have vlda applicability. thara ara aavaral coat reduction aspaeta that ara unique to selling activities* Thaaa aspects ara not, for tha most part, of major concarn In this study, but ara mentioned hara for complatanass•

Factors In a Sailing Situation- Thara ara five major factors to consider In analysing a selling situation. These ares

1. Merchandise sold 2. Physical facilities 5.•Salesclerk 4. Salesclerk’s Job 5. Customer

A cost reduction sty be achieved by changes in one or more of these, although tha potential for savings varies widely from one factor to another*

Thera Is probably least likelihood that a reduction can be secured by ohanglng tha merchandise sold. Soma effort has bean mad* to Incraas* quantities sold through suggestion selling, and this offers a fertile field for study. In addition, stores have experimented successfully with tha sale of prepacked assortments. These assortments usually contain mora merchandise than tha typical sale unit.

From the previous study of investigative techniques

It Is obvious that department layouts can often be Improved.

By these changes in layout and physical facilities It Is 199

possible to reduce the Inefficiencies of space utilisation

end waste movements of salesclerks.

The Salesclerk and His Job- The opportunities for

improving typical salesclerk performance are many and have

been well covered by current authors. The average sales­

clerk Is usually not an efficient selling ami chine, but his

performance can be improved by proper selection, training,

and motivation* Much can also be done to reduce costs by

changes in the salesclerk's Job. These changes stay mean

giving the clerk certain nonselling tasks such as stockwork.

wrapping, wt cetera, or It may mean an Increase In selling

area to cover. It Is also possible to change the clerk's

Job by giving him less to do. This might mean the elimina­

tion of some of his functions, their transfer to others In

the store# or their transfer to the customer.

One of the major changes In the salesclerk's Job has

been the transfer of some of his functions to the custossr.

This transfer has been through the inauguration of self-

service and self-selection swrchandlslng. In self-selection,

merchandise Is displayed so that the customer can Inspect

and choose the goods desired without assistance from the

salesclerk. When the selection has been made a clerk at

or near the display point completes the sale In the usual manner.

In self-service the customer eliminates most of the

clerk's sales functions. Recently this merchandising 2 0 0 method has been tried, at tha Wlaboldt stores of Chicago*

In tha sales or housewares, auto accessories, and similar

itemsIt has proved so successful that It has been in*

stalled In three of the chain's six stores and will be In­

stalled in the remaining stores. The development of this

type of operation In large downtown stores is not likely to be widespread, because of the large apace needed for self-

service and because the downtown department store has typi- eally been a service Institution. If these stores move to self-service they will destroy their service appeal. Cus­ tomers, faced with self-service, may choose to buy more of their department store merchandise in neighborhood and suburban stores.

MECHANIZATION AND EXPENSE REDUCTION

Output per worker in manufacturing has doubled since

1900* In marketing there has been no similar output in­ crease. Further analysis of this productivity trend In manufacturing shows that the gain In output per man-hour has been closely related to an increased use of power and machinery* During the last fifty years output per man-hour h«s corresponded closely to the product of an installed m ------For a detailed description of this installation see, P. W. Schaefer, "Wleboldt's Expand Self-Service Opera­ tion,* News Bulletin. Store Management Qroup. NRDQA. Fourth Quarter, 1$^6, p. 1. 201

hors* power Index and the length of work week.higher

productivity and lower ooata are to be secured, it la

Important that oonalderatlon be given to the uae of machinery

In atore operations.

Although the number and variety of mechanical devlcee

that may be uaed In retailing are almoat legion, moat of

them concern two dlatlnct activities, materials and mer­

chandise handling, and papers and Information handling.

There stay be opportunities for mechanised vending, but

the most Imediate concern la nonaelllng activities where

vork is standardised. The problems Involved In mechanisa­

tion are highly technical and specialised. For this reason,

only a generalised discussion of Important aspects will be attempted here.

Mechanisation of materials handling has involved prim­ arily the use of conveyors, monorails, fork lift trucks, and similar transporting devices. The exact type of In­ stallation varies widely from store to store because of differences In layout, slse of operation, type of merchan­ dise handled, management philosophy, and other reasons. The marked successes that have been claimed for Installations does suggest that greater consideration should be given to JT5 Charles S. Young, "Applications and Problems of Productiv­ ity Data", Journal of the American Statlatlcal Associa­ tion. December, p. 1+51. 202 mechanisation. In some caiet, however, it is found that many of tha economies that have been attributed to mach­

inery are in reality the result of methods studies that were made when the machines were Installed*

In office activities many specific machine applica­ tions are possible, ranging from small desk devices to massive installations of electrically operated tabulating equipment* The continuous development of new types of equipment makes any detailed discussion of them almost lmedlately obsolete*^ To a large degree the choice of office machines is dictated by the accounting system and general operating procedures* A study of the existing machines and ways that they have been applied in department stores suggests that the use of mechanical devices in office activities offers some excellent opportunities for expense reduction*

Considerations in the Installation of Machinery- The installation of machinery in a store represents a substi­ tution of capital for labor* or for other capital Invested

In present equipment* The primary consideration in such a substitution Is whether the new equipment will prove to be a genuine economy. This economy must be measured not only in what the savings will be over the existing costs, but also in savings over the costs of other alternative possl- r s ------Some of the latest types of equipment for office use are known by such names as, "multi-poster," "multi-matic", "vericon", "conve-fHer", and "robot-filer•" 203

bllltles. An example might Illustrate this point* In an

Interview with a store executive, the discussion centered

on a highly mechanised systep that haa been Installed,at

considerable cost. In another store* In commenting on the

excellent savings reported from this installation, the

executive said, "That Is because their system was so poor

to begin with* They could have installed a much simpler set

up and secured essentially the same savings with much less

Investment•" While this Is merely an opinion, the executive has observed the system In use, has an engineering back­

ground, and Is closely connected with the development or mechanisation In his own store* If his evaluation is

correct, the management of the store in question failed to

give proper consideration to alternative solutions to its high cost problem*

In evaluating the desirability for a given Installa­

tion It is necessary to consider whethersufficient sav­ ings can be obtained to repay the initial capital outlay*

While there Is no complete agreement as to the time that

It should take to amortise such an investment, three years

Is often used* Of course nonmonetary considerations, such as a need for customer services or to meet competitive pressures, might force the Installation even If the cost could not ordinarily be amortised within three years*

In considering mechanisation there are certain pit- 201+ falls to guard against. The following Hat, although for receiving activities, is an excellent summarisation of these dangersi1?

1, COST PITFAIXS - Be sure you know how much the new system must save to pay off.

2. UNCOORDINATED PAPER FLOW - Successful mechani­ sation of receiving and marking calls for expediting the flow of Invoices, tickets, etc.

3* INADEQUATE LAYOUT - Provide straight line flow, short marking lines, back-up and storage space for peak days.

1+. POORLY DESIGNED EQUIPMENT - Take pains to assure that the equipment is designed for optimum worker comfort and efficiency.

5* INADEQUATE WASTE DISPOSAL - Arrange to have the debris from incoming packages removed mechan­ ically from the checking area.

SUMMARY

One of the most promising avenues for department atore expense reduction is found in enhanced operation efficiency. For the most part this increased efficiency must come from a reduction of waste time, motion, energy, and materials in the conduct of store activities. It means the finding of "a better way to do the Job" by an organised study technique.

The analysis of work flow is one of the most valu- 17 Richard D. Elwell, "Will Mechanisation Pay Off For You", Stores. December, 1949. P* 25. 2 0 5

able types or studies* Results show that flow process

charts have wide applications, both in selling and non-

selling areas* Activity analysis, which has not been

widely used in department stores, also appears to have

applications, especially in selling areas and in the study

of man and machine capacity* The surfaee has hardly been

scratched in the application of camera study techniques

in department stores, either for the analysis of activ­

ities on the selling floor, or for the study of specific motions* From a study of work in stores there appears to

be a limited opportunity for the use of siicro-motion study*

At present, however, need for the more general types of

investigation has restricted the use of detailed motion

studies•

Work simplification programs are finding favor where managements are anxious to reduce costs* These programs, whioh have widespread applicability to all areas of store operations. Involve the training of personnel in the rudi­ ments of swthods and motion study* The submission of

Improvement proposals by employees is formalised with some reward frequently being given for an accepted proposal*

Substantial savings in dollars and man-hours have been reported by stores where such programs are well developed*

In addition to these so-called Industrial Engineering techniques, there are other expense saving possibilities* 206

Policy revisions, closer control end analysis of needs for various forms and reports, and the organised study of supplies usage, utilities, and other controllable ex­ penses ordinarily uncover many savings opportunities*

More scientific employment practices, standardisation In methods, better training, and higher caliber supervision, oan also have an effect on high operating costs*

The tremendous Increase in productivity experienced in American industry in the last fifty years Is largely due to the application of machinery* While it is doubted that there can ever be suoh a widespread use of machines in re ­ tailing, insufficient attention has been given to the possibilities for mechanisation in department stores* CHAPTER VIII

MEASUREMENT TECHNIQUES IN THE MANAGEMENT OF DEPARTMENT STORE EXPENSES

In addition to reducing «xpen>« it la ntcentry that

accurate measurement techniques be used to determine the

degree of cost reductions and to provide a method by which

expense can be better controlled. This chapter Is concerned with the various types of measurement techniques that have an application to department store productivity and expense management problems.

Measurement has become essential for proper expression and understanding. Exact information implies the use of objective measurement in terms that clearly and adequately express the characteristics of that which is being measured.

This generalisation should apply as rigorously for costs as for distance, time, or other attributes.

Labor, the siajor expense in department stores, is

commonly measured and purchased on a time basis. Stores are committed to pay for time, while actually the purchase la of the production that results from the application of labor during time. A measure that recognizes both the time and quality of time spent (or output) would be more equitable from both the firm and the employee points of

view. This quality measurement can be expressed In

207 206

quantitative term* or output or production units.

To pay for result* In output units requires some

means of determining what the correct output Is* The more

carefully and the more scientifically this unit of output

can be set and controlled, the more equitably will all

parties be treated* An attempt to put the incurring of

cost on a more scientific basis should accrue to the benefit

of the worker, society, and management* In essence, this

concerns the almost perpetual problem of giving a "fair

day's pay for a fair day's work.* In the past, work stand­

ards have been challenged with the charge that management

has used them to exploit workers. As a result, there has

been a substantial amount of antagonism to overcome In the

development of scientific work measurement• Some of this

antagonism Is sure to be found in marketing Institutions.

Types of Measures- Output study in an economic

Institution need not be confined to labor alone, but may

also be applied to other aspects of a firm's operations.

The measurement of labor costa, however. Is usually the most fruitful area of application* The most Important

yardstick of employee activity Is the production standard*

This standard has two aspects, quality and quantity* The relative importance of these varies widely under different

conditions, from a situation where quality Is the all

Important determining factor to conditions where quality 209 aspects ere not considered* In addition to production standards there are standards of cost* usage, condition, service, and possibly others*

Quantity Standards- The use of quantity or output standards can serve many important purposes* One student of the subject states that these purposes are:^

1* "To measure the individual and collective productivity of the working force* (Standards establish the content of a fair day's work)*

2* To reward employee performances that are above normal* (Standards establish the base points for merit rating and incentive plans*)

3* To control the size of the work force* (Standards determine the number of labor hours needed for a given volume of work*)

ip. To budget payroll expense* (Standards provide the basis for unit payroll costs*)

3* To control indirect and 'other' service and supply expense* (Standards relate service and supplies to direct labor*)"

While quantity standards would appear to be desirable

In almost any work situation, they are not always appli­ cable* A valid work unit, the first crlterlan of effective work quantity standards, must meet certain tests* A com­ prehensive statement of these requirements Includes the following:

I------David C. McIntosh, "Application of Industrial Management Principles to Non-selling Departments," Yearbook. 2Qth Controllers 1 Congress Convention, (New York, Controllers' Congress, National Retail £>ry 3oods As aoclatlon, 1 9U 9 ). P. 59. 2 1 0

1. The work unit must be countable. Unless it can be stated in quantitative terms that can be expressed clearly, it Is of doubtful value.

2. The work unit must express output. It should be the most reasonable measure of output quantlty •

3. The work unit must reflect worker effort. Unless It does there is no value in using it as a measure of worker efficiency. Results may not be a fair measure if there are many times when a given operation can be only partially completed because of some factor beyond the control of the worker. Thus, in a job where the clerk matches invoices with receiving aprons a good share of the time is spent attempting to match an apron to an invoice that is not available yet. In such a case "invoices matched" would not be a fair measure of worker effort.

The work unit must have consistency. It must have the same meaning throughout the organization and during different periods of the year. If the content of the work unit changes an adjust­ ment should be maae to correct for the change.

5« The work unit must be expressed in familiar term­ inology. Otherwise the workers will have diffi­ culty in understanding it*

As long as work units are expressed in specific terms it is not possible to compare efficiency between activities with different work unit terms, or to consolidate productiv­ ity ratings into an overall Index. These alms can be achieved through the use of the standard hour. For example, if the standard for package wrapping is twelve per hour, one standard hour represents the completion of twelve packages. Actual production is then expressed In the number of standard hours produced rather than in the number of packages wrapped. When the production of the wrapping de- 211 pertinent Is expressed In standard hours It la additive with all other production from different departments where the standard hour Is used, regardless of the specific work units used In each department*

Where the number of employees is not determined by volume of work there Is little to be gained from using work standards* In research and intellectual activities, super­ visory and committee work, and where an employee is placed in a specific position for service or customer convenience rather than for productive effort there is little oppor­ tunity for production standards* Even if the work is measurable, the Job may be so small with relation to the cost of setting production standards that it would not be profitable *

How Are Standards Set?- There are three basic methods by which quantity standards may be set. These are:

1* The engineering approach of time and motion study

2* Subjective evaluation

3. Statistical or production data analysis

Each approach will be taken up 1n turn, with a brief dis­ cussion of the nature and general requirements for Its use*

Time and Motion Study Standards- Time and motion study of work involves the analysis of elemental motions, the order in which they are mada, and the time consumed in making each* After the data are collected, the Job is revised and the new method taught* A restudy Is then made 2 1 2

so that a revised time may be determined. To this is added

a fatigue element and certain other delay and leveling

factors to secure the production time standard. This is the

most accurate type of standard that has been devised. Time

and motion study is ideally suited to the analysis of

routinized, repetitive, short cycle work of large volume.

As the frequency of repetition decreases, as the work cycle

becomes longer, and the work declines in volume, this ap­

proach becomes less valuable. At some point, which must

be determined in the light of specific conditions, the value

◦f time and motion study diminishes to the point that It is

no longer useful as a standards setting technique.

Statistical or His tori cal Production Standards-

Statistical standards are developed by a collection and analysis of past output records to determine what has been a reasonable performance. In setting the level of a

standard a subjective element enters into the decision. To

select the median or mean of a group of production statis­

tics is to secure a standard which has been equaled or surpassed about one half of the time. This does not make a ?ood goal for further production Increases. Exactly at what level the standard should be set requires agreement of all parties concerned. Determination by the statistical method obviously is less concise than by time and motion study. In many cases, however, it is the only feasible say that standards can be set. 213

Subjective Standards- A third way In which standards are determined Is through subjective evaluation by the supervisor or other person with adequate authority. This is ordinarily the least desirable of the three methods.

While subjectivity enters into all standards to some extent, the sole determinate should not be as completely controlled by the decision factor as in this type of standard. The only advantage is the speed and ease with which it may be set.

Quality and Condition Standards- If quality of output is important, it may be desirable to use quality standards.

The limits within which a given unit of output is satis­ factory must be determined by policy. In so doing, consid­ eration should be given to the costs of inspection and the

Importance of repercussions that defective output might have on customers and operations. In Inspecting for quality

It is sometimes possible to use the statistical control techniques that have been developed for industry.

A standard of condition is a special type of quality standard. Here again, the condition that is to be consid­ ered standard and that which la considered substandard must be determined by policy. Standards of cleanliness, state of repair, ejt cetera, are examples that may have Importance.

Standard Coats- The development of scientific man­ agement In Industry brought the need for more significant 21k cost relationships. This need resulted In the translation of physical production units into unit cost standards. The next stage In this evolution was the development of esti­ mated costs* whereby management attempted to determine what costs should be in the light of past experience and their own knowledge of the situation. While these are pre­ determined costs they are not Standard Costs.

"Standard Costs are predetermined costs...estab­ lished by a process of scientific fact finding which utilizes both past experience and controlled experiment...the process of setting standard costs generally Includes:

a. A careful selection of materials b. Time and motion studies of operations c. An engineering study of equipment and other manufacturing facilities."^

Although this statement concerns the use of standard costs in manufacturing this is almost equally applicable to marketing.

When classified by the level at which standard costs are set. there are three different bases or types. These are: ^

1. Expected actual costs 2. Normal capacity costs Ideal conditions costs

2------Theodore Lang. Editor. Cost Accountant1s Handbook. (New York. The Ronald Press Company, , p. 59*

5 Ibid.. p. 270. 215

Standards based on expected actual costs are those which management believes can and should be attained. Failure

to realize the standard Is treated as a variance resulting

from a failure to achieve expected efficiency, expected

volume, or a failure to secure materials and services at

the expected price* Standards based on normal capacity are

set at a level which represents an average over a period

long enough to cover one or more operating cycles* "Normal"

Is a vague term that may be Interpreted In an infinite num­

ber of ways, depending to some extent on the statistical

techniques employed* Ideal standards are those based on

the best performance that can be secured If the most favor­

able prices and conditions exist. Because of the common

Inability to secure the moat favorable conditions, ideal

costs are seldom secured*

QUANTITY STANDARDS IN DEPARTMENT STORES

Since 19U5 department store managements have moved

rapidly to accept the use of measurement techniques for

output analysis. From the surveys discussed in Chapters

IV and V It was learned that a large number of stores now

employ quantity production standards. The nature, quality,

type, and area of usage of these standards vary widely.

In a number of cases the standard Is merely an expense per

cent to sales. In some stores they are total department

standards, while in others the standards are set for each 216 individual or job. Historical data provides the most widely used source of* material for the construction of these stand­ ards, although there Is a liberal subjective element in many cases. Only In a few stores, or in Isolated cases, have true time studies (In the Industrial engineering sense) been made ♦

The areas of greatest usage are the wrapping and pack­ ing, receiving and marking, sales audit, accounts payable, and accounts receivable departments. Standards also have been commonly employed in other office and materials hand­ ling activities, but there has been little use of them In selling areas. The nature of standards usage also varies widely among stores. In a few cases they are used as the basis for Incentive plans, but In at least one leading store the employees do not even know what the standard Is,

Standards are sometimes used to evaluate past production performance while In other cases they are the base for planning work load-work force relationships.

The Determination of Measurement Units- In develop­ ing quantity production standards, the first problem Is to determine If output In a given activity can be measured

In an accurate manner. If production is measurable, then it Is necessary to set up specific measurement terms. The more accurately the measure describes the actual work, the greater will be the value of the standard. 23 7

A s applied In department stores, many production stand­ ards do not measure specific work. Within a department a number of different jobs are done at different rates by different workers, but the standard used as an estimate of departmental production often do not properly summarize the work. This type of production standard lacks the sig­ nificance, conciseness, and usefulness of those that have been developed in a more specific manner. For example, in one large store the production measure used for the credit department was total charge sales transactions. Although such a measure may have great interest to management. It can hardly be defended as a true measure of day to day pro­ duction within the department. Total credit sales have little direct relationship to work performed except, per­ haps, over an extended time period*

The Intended use of production standards should deter­ mine the work units, organizational units, and the manner

In which the standards are developed and applied. If the aim is to increase the output of a given department, it will normally be wise to employ a department standard that is a summarization of intradepartmental standards. Those that are the most useful should picture actual production in specific tasks, measured by specific production yard­ sticks* It Is often not difficult to select the obvious measurement terms. For credit author!zers, the measure­ ment ought to be the number of authorizations completed. 218

In one store studied authorlzers also rough sorted sales checks* In this situation a production standard In terms only oT authorizations was no longer acceptable unless the time spent in the two Jobs could be differentiated. This was not feasible because the sortJng was done between calls for authorizations* One way to set production standards for this particular work center is to use two measures, the number of authorizations, and the number of sales checks rough sorted. Since there are two or three employees

Jointly engaged in this authorization-sorting work It is impractical to secure individual production figures. To combine these two types of work Into a work center pro­ duction summary it is necessary only to convert them to standard hours, A count of daily authorizations and sales check sorted, divided by the standard hour count for each gives the number of standard hours of work completed per day* A comparison of standard hours completed to total hours worked gives, for a particular time period, the index of productivity*

Many types of work can not be measured, or are not important enough to warrant the development of standards.

The time for this nonstandard work must be segregated from other time* When production goals are not being met there may be a tendency for a supervisor to put some work, normally on standard, on a nonstandard status in 219 order to improve the apparent production rating of hia department. To control the relationship of standard to nonstandard work it is necessary to maintain records or charts showing what per cent or total work has been done on standard and what per cent has been nonstandard.

Measurement Units in Selling- Dollar sales and transactions are the work units used for production stand­ ards in selling departments. From the salesclerks' view­ point the former 5s the most meaningful. On the other hand, consultants in the retail field have been recommending the transaction as the proper unit of volume. To say that one or the other of these is the correct measurement unit is to oversimplify the problem. Experience in stores today shows that either can be used with success and facility.

The clerks best understand production when expressed in dollars, while the planning of work force-work load re­ lationships is often carried out in transactions. One advantage the transaction does have In planning la that its use eliminates the unpredictable elements Introduced by monetary terms. If the aspects of what constitutes a successful sales performance are considered, a more precise measurement is probably Impossible at the present state of knowledge. It Is obvious that a "transaction" seldom describes the same conditions in two separate sales situa­ tions, A more precise measurement unit would allow 220 variable weights to compensate for the fact that trans­ actions, involving different dollar amounts, sales con­ ditions, and types of merchandise, will not have the same work content. The further study that is needed may show that a combination standard with allowances for the number of transactions, sales volume, type of goods, and perhaps the season will give the most accurate picture of the work content in a sales production unit,

THE DEVELOPMENT OF PRODUCTION STANDARDS

Having determined appropriate measurement units for productioh standards, it Is then necessary to collect data and develop the standard. The common industrial engineer­ ing procedure is to study the work and improve the methods and layout before setting standards. In retailing this approach is frequently not followed for two reasons. Stand­ ards are often developed in an empirical manner without

considering the need for methods or layout Improvements.

This is an attempt to secure the advantages of standards without investigating other aspects that affect output of a given person or work center. There Is also the philosophy

that standards of some sort should be set before methods

studies are undertaken. While realizing that this approach represents an inversion of the typical investigative pro­

cedure, it is believed that department store personnel and managements are often not sufficiently conscious of 221 the importance of productivity to make methods studies feasible* The use of a preliminary type of production standards, it is believed, increases awareness of the im­ portance of productivity* When productivity consciousness has been developed in this manner, greater benefits can then be secured from methods and layout studies* After these studies are made, the standards must be reset in as scientific a manner as possible*

Statlstlcal Standards- Production records, the base for historical or statistical standards, must precede the setting of standards* In some cases an analysis of past records will give adequate information, but It is usually necessary to make work counts. Sometimes this information can be secured by having the employee record time and pro­ duction for each day on a record similar to that shown In

Figure 10,^ The collection of production data was simpli­ fied by a counter on the billing machine which recorded the number of postings* Where there was no counter, a cardboard scale was used to estimate the number of posting media in a stack*

In collecting production statistics, counts should be made for a sufficiently long period to give some measure of stability to cumulated results* There has been a tend­ ency for managements to settle on a relatively short base j------Prom a study of the work it was determined that the proper unit was the number of items (charges, credits, e£ cetera) posted. 222 7ICKJRX 10 K Dally Production Record of 40 Accounts Receivable Biller

Mine Elflio Cornwell Dept. Bookkeeping Dete 10/3/50

Store ------Section Ac count a Repairable j o b Footing Clerk

1 Operation {Production! tart 1 Renarks Ledaer - Ja-Tal _ t !

Ulsce] laneous 9*30 L0*0< 30

Poeting 10*00 io*5! 55

Adding book 10*55 jii«05 10

Checking 11*05 jixdso h“ — - Posting lltLO 1 3100 do

1*00 100 10

1*10 1*30 20

Lunch 1*30 2*30 60

Miscellaneous 2*30 2d0 10

Posting 2»U0 1 3tf5 U5 Posting - 275 Min

Miscellaneous 3>2S 300 5 mao. - 55 *

Posting 3130 1*00 30 Checking * 35 N

Relief IttOO ue0 30 Adding - 10 " 1 Taking Posting u«?0 5i5 U5 TRtm* . l< «

Totals 5 as 5 0 d 15

1 1

1

1 Souroet Field Study by C« *• ^ory, October, 1 9 S i 22 3 period, although in one of the stores investigated the departmental production standard is developed from data for a six-months period. In the sales audit work center, for example, 2 ,3 1 ^ , 0 0 0 items were handled with an expendi­ ture of 2J4., 628 productive man-hours,5 This amounted to an actual production of items per productive man-hour,

A more common practice in setting standards is to base them on production and time reports for periods of from six to fifteen weeks.

Another problem in setting statistical standards is the determination of the proper standards level after his­ torical data have been collected. To select an arithmetic mean or median is to set a standard that has been equaled or surpassed In about one half of the cases. To select the best performance is to set a standard that may be unattainable* For example, a clerk that achieves the greatest production in a given type of work often has developed short cuts not apparent to other clerks. Fre­ quently these short cuts can not be discovered without fine motion analysis.

The selection of any particular work level as the standard rests primarily on a subjective decision. In

?------A productive man-hour excludes time paid for, but not worked. For the most part this time was for vacations, holidays, and absences. 2 21* one store the supervisor arbitrarily selects a goal based on actual output of the preceding period. An effort is usually made to set this goal at a higher level than actual production in the previous period. In several cases the median of the upper quartlle has been used on the theory that, although it 3s attainable, it will not be reached easily. It is also high enough that any later revision probably would be down. Employees may react unfavorably if standards are revised upward, but a reduction would have a more favorable impression.

The Refinement of Standards - A refined production standard la based on more than historical production figures.

The most common method of refinement is a stop watch study,

A trained observer times each distinguishable element of the Job and averages his observations to determine the typical time for each element. The frequency of occurrence is ascertained and the average time for each element is weighted In proportion to this frequency. Other leveling and fatigue factors are then Included with the data to give the final standard.

An Illustration of a time study in a housewares tel­ ephone order room is found in Figure 11, The general routine was for the order clerk to answer the telephone when a call came In, take the order and write it in a stenographic notebook with all necessary customer informa- FIGURE 11

Tii»* Study Shaat Showing Timings of Transcription of Information to a Salas Chsck

C T 0 1 E S

ELEMENT AND/OR SUPPLEMENTARY INFORMATION P* F l 2 3 k 5 6 7 6

_ •— " — ---

— ----- k Raad Crdsr U3 .17 .1? * 9 9 .oe • LIS A3 L Writa and ConDlata 113 .1|6 1,5* >ili« -72 3 ■ 4 t

ITallr Sala H3 ♦05 .05 * 9 $ *Q$ •05

.------L-Tdar Off and DLapoaa 113 .10 .12 .17 . 2 1 — — — ■ ...... - -

Total L82 lift 2f20 L|62 17? irft i

------AUaa Dally Information Shoot

-—-

BlUm Houaawaraa Flyar 1 , 1

. - tUna Stoak Book 113 i S - XM ta Sohadula and Attach 113 ---

— ' '-H - — -

-

1i iJ1

Souroat Confidantial c

ascription i

0XO1JB

F 6 total l 2 3 k $ 7 6 9 10 l i 12 13 Ill 15 S 3 m i til

—S1*59 fg~ J•17 •12 .02 .06 •13 .13 •13 •07 •06 *1? •21 •21 10a l A ,_ j a L .E6 .U m 20. IT 3 •k6 1.5 1.3k UK) 110 1/1 lk i 73 3 *0$ •0? •06 •06 •06 •05 •06 •0k •0k .08 . 0 L 100 1 / 1 TT

— - 1.01 3 •10 •12 •17 • n .13 .21 .17 100 1/2 6 - ■ - ■ . .„ ,

• - .... -82 1-74,L a b a r hi? Lflk kSL b S L k6L u ? Kr?2 — , ' ” 1 __„i

- - - - - ■ - » ------— - - —

— ------— — --- H ------... _ — L a — — - — — ------—— — _ ------i2« 3 •kk 110 2 — - - — — - -■------— ■ - — 3 10? ------■ •3k *

---- - — — — ■ ■ .- - --

1 1 1 2 26

tlon. When an opportunity presented itself, the clerk

transcribed the information from the notebook to a special

telephone order blank and sales check* The illustration in Figure 11 Is a sample of the timing of the transcription process* There were four regular elements in the trans­ cription and four more elements that occurred infrequently*

The timing was done by the snftpback method using a watch that measures time in one hundredth^ of a minute*

In the first element, that of reading the order, the time study engineer failed to secure readings for the eighth and eleventh cycles* If the standard were to be set f r o m this series of observations alone the average time for this element would be slightly over *13 minutes per occurrence. In the writing and completion of the sales check several interruptions occurred. These are shown by the multiple readings in cycles one, three, and eight.

Element number f o u r occurred only once in every two cycles because the book has a double sales check on each sheet*

The sheet is perforated down the middle to enable the sales ohecks to be separated when completed* During this particular series of timings neither the housewares informa­ tion sheet nor the flyer were used*

The engineer continued to take observations until sufficient data had been collected* Generally an attempt should be made to take timings at different days, differ- 22 7

ent times of the day, and under different conditions. It

is important also to make sufficient observations (not

necessarily all timed) to assure that proper occurrence

rates have been determined. In the right hand columns of

the time sheet are entered the leveling factors, allowances

for personal time and fatigue, and the frequencies of

occurrence. The leveling factor is a subjective evalua­

tion by the engineer as to whether the employee was work­

ing at a normal rate. To give a leveling of 110, such as

was given In element number two. is to report the effort

at 10 per cent above normal. The personal and fatigue

allowance of thirteen per cent is now standard allowance

in this store for office work.

The elemental time that enters into the computation

of the final standard is a combination of average time,

leveling factor, personal and fatigue allowance, and fre­ quency of occurrence. For reading an order the standard allowed time would bet

- .1325

.1525 a 1.00 x 1.1;5 x l/l « .1497 allowed time in minutes

Vhen the timing has been completed and allowances deter­ mined, a Standard Practice Bulletin is drawn up. A copy of this bulletin for writing a housewares telephone order is shown In Figure 12. The total operation consisted of six basic elements in addition to four supplemental ele- OB ad rcie Blei fr Writing for Bulletin Practicea dard hc i te . . . oswrs hn Room Phone Housewares S. S. P. the in Check

Division Casta— r Service Section P. 3. S. H o b s — arte Phono Eocn Location _

Description Operation Write Orton sal— ohscfc using notebook

Quit of Production Oho ooooptod croon salte chock IOE 12 PIGORE Standard Mo. ______Iffaotive ______. 19 Void Provisional Standard bC.2______if tar

Sid. O o a n v Sid. ill'4 Win. Per" Mo._____ Ha— ntal Description of Standard Ti— ranca Unit or Production

1. Answer the phone (eradla style) and write basic information in a stano notebook 1.536 1/1 1*533 a

2. trite costa— r'a na— , address, city, Salee Green phone, house type, etc. 1.019 1/1 1.019

3. Complete in notebook and terminate conversation .3U5 1/1 -3U5

li. it so— ti— later in the day, read data in notebook .133 1/1 .133

5. trite green check completely 2.000 1/1 2.000

6. Tally, tear, and dispose .232 1/1 >232

Supple— ntal Ele— nte

1. Use daily information sheet 1.98L U/23 .3U5 1. Answer tbs phone (cradle styla) and urlta basic information in a stano notebook 1.588 1/1 1.588 2. Writs customer's nans, address, city, pboos, housa typs, ate. 1.019 VI 1.019 3. Complete In notebook and tominata conrsrsatlon .345 VI .345

4. At s o b s tins later in tbs day, road data In notebook •188 v i .188

5. frite green check completely 2.000 1/1 2.000 6. Tally, tear, and dispose .232 VI .232 Supplemental Elements

1. Use dally information sheet 1.984 4/23 .345

2. Use housewares flyer 1.918 3/23 .250

3. Use stock book .787 12/23 .410 4. Go on floor for merchandise information 1.972 8/28 .563

Sourca and Control Total Allowed 6.595 of Output Count Minutes

Accuracy Control

Bs donors Allowance Hours None Granted

Standard Hours per 100 Units ______11.00______Hourly Output___ £

Source: Confidant!*! 2 2 9 ments of occasional occurrence. Total allowed minutes for each unit of production was set at 6.995, making the standard nine orders per awn-hour. In setting this stand­ ard only 2b cycles were used. In a regular time study this would usually not be enough cycles when such a small percentage of occurrence is found among the supplemental elements. In this particular case, however, the standard was only a provisional one, so It was not felt that fur­ ther studies were justified.

In setting time studied standards in other opera­ tions the task, while similar to the example shown, may be more complicated. For the most part this complexity re­ sults from a need to consider more variables and to set a number of different standards for combinations of these variables. One such task concerned the setting of pro­ duction standards In a wrapping and packing work center.

The variables In this work resulted from differences In the type of merchandise, type of packing, number of pieces, and whether it was a gift wrap or not. As finally develop­ ed, close to forty different standards were required, each 6 of which was set by time study.

5 ------Fourteen basic standards were set for different packing materials and methods. Fifteen different standards were set for various gift packs, and many other standards were needed for different merchandise types. In addition, a standard time was set for each type of order, and a supplementary time was set for each piece In the order. 25 0

Standard* Developmsnt In Selling- Production stand­ ards in selling activities nave been determined from his­

torical production figures and a subjective evaluation of what constitutes a proper work load for a salesclerk. In

one store these two methods have been combined In a unique manner* Dally records were kept for a period of five weeks

showing the number of transactions and the number of sales­

clerks used. In addition, a composite opinion was secured as to how many salesclerks should have been used each day*

This composite was usually the averaged opinion of the de­ partment manager, the floor supervisor, and the member of the research staff conducting the study* The compiled in­ formation was correlated and a line of best fit was computed*

From this computation was developed a table which showed,

for a given department, the number of salesclerks that should be used for a given number of transactions. In addition, an estimated basic work force, necessary for adequate floor coverage, was determined* In setting up the table on personnel needs for different transaction volusies. consideration was also given to the fact that the transactions per salesclerk will usually Increase as customer traffic increases* In one department it was estisiated that the dally transactions standard per sales­ clerk should be fifty six when departmental transactions were 1000 per day. and seventy three when departmental dally transactions were 5 0 0 0 * 231

Standard* Flexibility- One of the basic requirements for a sound production unit Is that It have consistency.

The development of standards with a consistent work content is a difficult problem In many store areas. During differ­ ent periods of the year the typical transaction varies widely*

Adjustments are also required in production measures that are expressed In more specific work units. For example, a higher production can be maintained by account billers during periods of heavy volume because of the shift in work content of the billing operation. This shift results from there being a higher number of items per customer account during periods of maximum volume. The Increased output results from the fact that the time required to select the customer's bill, place It In the billing machine, position It. and then remove it and return It to the file is an Important part of the total time required to complete a billing work cycle. In periods of high volume, more transactions are posted at one time to each bill, reducing the importance of the preparation and clean up phases In the total cycle time. The use of untrained personnel in periods of high volume may reduce the level of production per man-hour. The use of facilities at uneconomic pro­ duction rates may also have a negative effect on output rates ,

Several methods can be used to make allowances for these conditions of flexibility. It is possible, through

careful study, to determine what effect a given volume

should have on production rates. From this information

different standards can be developed for application at var­

ious times In the year* The same effect can be achieved by maintaining only one standard throughout the year, but recognising, in some formal way, that during particular times in the year the output should vary from standard by a given amount*

STANDARDS INSTALLATION AND MAINTENANCE

Installation and maintenance is an Important aspect of all standards programs * The supervisor is a key in­ dividual who should be consulted throughout the entire period of development. Without his active participation and support it is almost Impossible to achieve substantial benefits. Where this support is secured, the best results are obtained* It is common to find that while the super­

visor does not resist the progrem, neither does he promote it.

Explaining the standards, their purpose, and use to employees is also a major problem. Supervisor assistance st this point is essential. It is desirable to develop a short manual explaining the standards, how they have been determined, and how their use will benefit the employee* 233

Sole dependence, however, should not be placed on such a

manual. Indoctrination preceding and during the develop­

ment of the standards will greatly Increase the degree of

employee acceptance.

Time and Production Recording- There have been criti­

cisms from both employees and management of the time needed

to maintain records for a standards program. The use of a moderate amount of time for this purpose is part of the

price that must be paid for the many benefits that accrue

from the use of standards. To allay employee criticism

there Is no reason why record keeping itself should not be placed on standard and production credit given for the time

consumed. In some instances where the employee does only

a single job, his time on standard will be the same as

total time at work. It is then necessary to secure only

• work count. For many tasks, however, the record keeping

is more time consuming. The maximum time that may be spent

on production records should be determined in the light of

the total time saved in using standards. In one store it was estimated that, at most, it has cost about one seventh of total savings to keep the records necessary to make standards effective.

While in some cases production data can be secured only by a manual oount, short cuts are often possible. Measur­ ing the hfrlght of a stack of paper or the length of an 2 3 4 adding machine tape, weighing the merchandise or papers to be processed, the use of mechanical counters, and a system by which one count measures work for several Jobs are short cuts which simplify the counting task. In activities such as marking, the Job ticket which is frequently used to re­ lease work to markers can double as the production record.

Standards maintenance is necessary to guard against the use of inappropriate or obsolete measures. Revisions are frequently required to reflect different work content at different times of the year, or to adjust for a change In an operation.

IISES FOR PRODUCTION STANDARDS

As pointed out earlier in the chapter, there are five

Important uses for production standards. In department stores, however, no case was found where all five are used to any significant degree. In the stores studied, the primary purposes of standards are to control work force size and budget payroll expense. The rigor with which these alms ars achieved varies widely among stores, more or less directly with the degree of standards refinement used.

The control of work force through production standards is maintained within rather wide limits. No apparent fixed criteria are used by which to Judge whether a given varia­ tion from standard is within an acceptable range. On the 255. basis or past sxperlsncs and personal judgement a variation

Is concluded either to be reasonable or excessive* Whether these limits can be determined more precisely is not known, but It is felt th^t sufficient consideration has not beer given to this possibility* Standards are not employed for a day to day control of work force as much as for a weekly or monthly evaluation of work force-work load balance* More use for day to day planning and control would enhance the value of the production measures*

Unit Costa and Production Standards- Standards of pro­ duction offer an excellent basis for the development of unit payroll costs and variable payroll budgeting. To date, most variable budgeting of payroll is based on past work force-work load relationships rather than standard production measurements* If scientific production standards were the foundation, it would be possible to determine more nearly what the unit cost should be rather than what it has been in some past period* The accuracy of the determination, obviously, rests on the accuracy of the production standards*

Those set by time study will give the most dependable unit costs* It is possible, nevertheless, to have high costs and in excellent production record in the same operation at the same time* This is not a weakness of production stand­ ards as much as a failure to realise that an excessive pay rate, or an inefficient overall operation is not compensated for by production measurement* The production standard 2 3 6 shows how well s given task is performed, but la not con­ cerned with whether the job should be done, whether the method Is correct, or whether the labor used Is too expensive.

When production standards are employed It has been found that charts of productivity keep employee attention focused on output* Examples of two productivity charts are found In Figure 13. The top chart In Figure 13 Is posted. In a much larger size. In some conspicuous place in the department* The lower chart Is frequently not posted, but Is used by the supervisor and expense control office as a visual control showing department volume, total hours of direct labor, and hours on standard* Experience has shown that people often produce more when they know what pro­ duction Is expected of them* A maintenance of production records frequently shows not only wide differences in pro­ duction rates among workers, but also for the sante workers at different times* Without production standards, workers tend to set their pace by the urgency of the task and the backlog of work* If standards can be substituted for these output determinants, production should Increase and remain higher than before*

Although time studied standards give the best measure of a fair day's work, carefully determined historical standards give a goal by which productivity may be eval­ uated* This type of standard does not measure what a given FIGURE 13

Productivity Charts as Used In one Department Store

Section Productivity in Per Cent Dir^ftt Labor Productivity

1 2 0 -

100

0 0 --

21* 3 10 17 21* 31 7 li* 21 28 5 12 19 26 2 9 Feb. March April May June

Houro Week Ending Vol 500 50, 000

1*0 0 -- ■ - 1*0 ,000

300 ' --30, 000 r'

200 * “ ' “ 2 0 , 000

10O-- ' * 10i 000

0 0 21* 3 1 0 1 17 21* 31 11* 21'28 12 19 26 2 Feb. March April May June Week Ending ______□ Vol Hours Worked 0 Hours on Standard

Source* Data hypothetical, Forms From a leading department store. 2 3 6 combination of machines, men, material, ana methods ought to do, but it does show what is reasonable in the light of past experience. The selection of the level of a standard is of basic importance in an evaluation as to whether it is a fair productivity goal,

Incentiyes and Production Standards- It is unlikely that tight incentives will ever be as widely used in depart sent stores as in factories. Operations fluctuate too widely to maintain an adequate work backlog and It is too difficult to control quality of many types of output. Un­ less a backlog can be maintained and quality control se­ cured, a strong incentive system can not function. Some systems have been installed, however, and are working with success. Mild incentives of a measured day type with periodic merit rating have worked well, while individual

Incentives based on the attainment of standard have also been used. In the latter, a bonus of one per cent of the worker's rate was paid for each one per cent of production over standard.

The use of incentive pay systems in the selling departments of a store has been common for many years.

For the most part this Incentive has been straight commis­ sion or some quota-bonus arrangement based on a clerk's ?59

"selling oost".^ No situation was found where incentive compensation for salesclerks has been basea on transaction­ time production standards, nor is it felt that such a system is desirable. The transaction may be very effective for the planning of the work force needed for a given load of traffic, but it must be remembered that sales in dollars is the best measure of the success of a salesclerk.

The failure to make greater use of incentive pay sys­ tems in department stores can be traced to the newness of the production standards concept, fear by some managements tnat such devices may foster increased unionization, inade­ quacy of existing production standards, and to a general inertia in managerial thinking. Much of this inertia, of course, is due to the fact that the development of standards, methods studies, variable budgeting, work simplification, et cetera, must necessarily be carried out only as rapidly as they can be absorbed. Greater use will probably be made of incentives in the future as it becomes more apparent that labor compensation should be determined more by production than by time.

It is possible also to use production standards in the

^------Kor a salesclerk to make "selling costs" means to achieve a specific sales quota. This quota is the volume which, when multiplied by a planned payroll expense per cent to sales, is just sufficient to cover the clerk's wage. 21^0 control of other expenses. In the store studied, however, no application has been made of them for this purpose.

Supplies or the materials In store manufacturing activities probably offer the best opportunity for control by production standards. In department stores, this function of pro­ duction standards will probably never be as Important as the others mentioned.

QUALITY STANDARDS IN DEPARTMENT STORES

While some form of quantity standards are now used in many stores, it 1b still unusual to find more than a limited application of formal quality measures. Since retailing has high customer service requirements, more attention than presently shown should be given to quality considerations.

Why Are Quality Standards Needed?- An important type of waste in any economic activity is that resulting from errors or Improper performance of work. Not only is there a tremendous potential for creating customer ill will from failures to maintain quality of service or product, but there is also a direct operational waste. This waste is primarily of man power. Any activity that is performed incorrectly must be redone, resulting In a double perform­ ance of work. If this error or failure to complete a given step properly is not discovered promptly, there is another waste in the performance of further functions which will later be scrapped when the original error is discovered. 2J*1

In many cates It is also Important to have some form of quality control in conjunction with quantity standards.

This is particularly necessary when the quantity standards are used to stimulate greater production. There is then a danger that quality may be sacrificed in order to achieve higher output. It la primarily for this reason that sta­

tistical quality control is now used In department stores.

Where Can Quality Control Be UsedT- There are sev­ eral ways that statistical quality control may be applied in department stores. One important form is the analysis of errors made in clerical and materials handling activ­ ities. Periodic Inspection of work produced in some selected sampling proportion will give a ratio of incor­ rect work to total work. Since errors will almost always occur, it is necessary to set a standard within the limits of which no corrective action will be taken. One common form that can be used Is illustrated in Figure II4.* On the chart is recorded the number of errors found per sample of 100 orders handled. Periodically throughout the day these samples are selected and Inspected for errors.

Maximum number of acceptable errors per 100 units has been set at five.^ If the number of errors per sample ^oes as

5 ------In this operation an "error" may be anything incorrect about the order or the way it is processed. In many cases it is not a type that will result in a claim or adjustment* 2i|2

r pr o ik

Q aalitj 0«tM l Okart flknlag tlw ■taofeor off Krrm o p ar 100 (M ara U r oaro p ar 100 G N v a

30 -

lO —

io u 12 Tiiwurp

Sooroot Data hppotkatlaal, bat appUeatloa Om a 2U3 high as five or more (as happened on the l+th and 11th of

January in the illustration), an investigation is made to determine the cause and the required corrective action.

Similar charts can be maintained on the number of

claims received in order to control more closely the prob­ lems that cause these claims. With periodic samples of claims and their ratio to total transactions for a period, any increase in the number of claims can be discovered quickly, and both preventive and corrective action can be taken promptly.

Another area where quality control may be used to good advantage is in wrapping and packing. In this depart­ ment, specific standards should be set up determining the quality characteristics of a proper pack. Sampling, rather

than 100 per cent inspection, is essential in this case because the inspection of a package is usually destructive.

Quality control in this instance would assure proper packaging, reduce claims arising from damaged goods, and at the same time prevent wasteful use of packing supplies.

If production standards are used it is important that sampling inspections be made to determine if the workers are packing properly and are honestly reporting production.

Where different time allowances are made for the number of pieces packed and type of packing used, there is a tendency to inflate production reported. 214h

In any of the manufacturing activities in a department

store, such aa restaurants, candy kitchens, or workrooms,

further applications of quality control are apparent. In a restaurant, for example, the quality characteristic of a

portion should be set up and sample inspections made in order to determine if the food Is satisfactory, and whether portions are of proper size.

While these quality control applications are most obvious, they do not exhaust all possibilities. One market­

ing concern is reported to be using statistical quality control for checking vendor reliability, A study of vendors

Is made to determine those who always ship merchandise

that meets quantity and quality specifications. Since

100 per cent inspection is costly and time consuming, the shipments of the more reliable vendors are sampled at ran­ dom. This sampling Is sufficient to catch any changes in vendor reliability, and saves much inspection cost and effort. The use of quality control analysis also facilitates the determination of assignable causes for

the failure of other vendors to meet standards, thus helping to attain quantity counts and quality specifications.

When and How Should Quality Control Be Used?- Wo matter how applicable statistical quality control is to a given activity, there is no reason to use it unless there is a quality problem. Where and when quality control should 2l4.5 bo employed la detennlned by the specific needs in each store. If there la an activity where excessive incorrect work la being done, an application of quality control is in order*

It la then necessary to determine what the quality characteristic of this particular operation Is, and whether there la a convenient way to test or measure for it. For example. In the typing of a letter, the quality character­ istic may be a typographic error. In warehousing it might be a unit damaged* After determining the quality character­ istic a list la made of the possible assignable causes from which a quality failure may result. The type of con­ trol chart to be used will ordinarily be obvious from the type of data collected. In store operations this cuart will usually show the number of defectives per 100 or 1000 units, or the per cent of defectives. The final step is to determine what sample will be used and how It will be taken* A routine is then set up for gathering the quality 7 data *

Taken from the files of a store Is the following illus­ tration of these steps as applied to a stenographic operations 1, The Operation - Typing personal shopping letters 2, The quality characteristic - A typographic error 3, The chart to use - Fractional defective Ij.* Possible assignable errors- a* personal shopping Jacket error b. shopper error c* typing manual error d. typist error (continued next page) 21+6

Service Standards - A special type of quality standard

Includes what are commonly known as service checks. For the most part these Involve studies to learn If customers are being forced to wait for service, or whether cleanliness In rest rooms is being maintained. The determination of a proper level for the standard Is primarily a problem for management decision. In some cases where no standard is set, service checks are made and the results merely report­ ed to management. This type of study has been used to measure how long customers wait for elevators, for service from cashiers, et^ cetera. The application of such checks on the selling floor should be by the executives respon­ sible for maintaining proper sales force size. A policy of making Inspections throughout the selling areas at certain intervals during the day could be of great value in showing where understaffed and overstaffed conditions exis t,

Sales Efficiency Standards- In stores where studies or Interviews were made, no efficiency standards are In use.

While on the surface this may seen to be an oversight of management, further consideration of problems Involved in the development of sales efficiency standards shows why they are not used. There Is a widespread belief that the

The size of the sample-one hundred letters, five times a day 6. Basis for sample selection-random selection of letters typed from all employees. 247 selling situation can not be standardized. To a large ex­ tent this appears to be a valid assumption. In addition, the problems of collecting necessary Information for such a stanuard are many and difficult, for who can tell when a sale should have been made and waB not. The only primary source of Information Is a customer Interview. .Jot only would this be costly and time consumlnp, but might also affect adversely the store's relationship with many customers.

The problems of proper sales performance, however, are so Important, that further consideration ought to be given to the development of a standard that measures efficiency in selling. It is not felt that standards can ever be developed as concisely as in some of the nonsell­ ing departments, but it is believed that meaningful re­ lationships can be developed cetween sales opportunities and sales success. Attempts have already been made to deter mine the extent of lost sales opportunity in Pittsburgh department stores. In these studies the data have been p collected by two methods. In one case a consumer panel was surveyed concerning where they failed to make purchases and why they did not buy. The second technique was to

B ------Information secured Dy interview froin Mr. liarrie Lewis, formerly on the faculty of the University of Pittsburgh. ?kQ

Inquire of customers 1 a vinf stores wiiat deferln.ents t:.ey had teen In, and what merchandise might tney have purc.ased tut did not. It was found that In many cases the potential sales lost were equal to or greater than the purchases made.

Although of great interest, these approaches do not appear to be appropriate for continuous Intrastore use.

A study of the relation of sales to customer traffic may prove to be of marked value In t.oe det^rn4 nation of store or departmental "battincr averages." The comparison of transactions to traffic would probably snow tremendous variation frorr one season to another, from one part of the business cycle to another, and In many other different sets of conditions. For example, during a sale In a de­ partment the ratio of traffic to transaction may he sub­ stantially different from that found during normal periods.

It is Impossible to say what form these variations might take, but there la a need for more Information concerning such relationships. In many fields it has been found that seemingly erratic variations, when subjected to cartful statistical analysis, show clearly discernible patterns.

Studies of transaction-traffic relation could be carried out by an Intensive observation cast: analys'? rif specific departments. A more economical way might be tc use a movie photographic process that takes a single frame exposure at given time intervals. For such a study tne 21+9 sixteen frames a second speed of the ordinary camera is ot- vi ous iy not needed# The frequency of frame exposure probably should be no more than once every minute to f5ve minutes. With this frequency, part of a roll of film could record the activities for a nvmber of hours. If a record was kept of the number of transactions per a short time period it would then be possible to determine what per cent of the traffic was being sole. Similar information could be developed by the floor supervisor or department manager through delay-ratio time study* These observa­ tions should be correlated with the number of transactions made within a short period of time after the observation#

A detailed analysis of selling activities might also show other investigative techniques of value. It is hoped that after stores have developed the use of standards furtcer, an approach will be made to the study of sales efficiency and a development of better production yardsticks for selling activities*

USE OF STANDARD COSTS IN DEPARTMENT STORES

While production standards are of inestimable value in reduction of waste and expense, it is also necessary to have standards for costs. Even if a trl ven activity 3 s being carried out efficiently, from a productivity point of view, the costs Involved may be excessive. A further consider­ 2^0

ation if the relationship Detween costs and volune is Riven

in Chapter IX. Here it is desired only to discuss the use Q of standard or predetermined costa in department stores*

Of the thirteen stores discussed In Chapter V, only two

stores are now using predetermined costs.

Why Are Standard Costs bsed? * It has 1 onbeen com* mon practice to prorate expense to departments in orcer to

secure a departmental net profit figure. In most stores*

and for a large share of the expenses, this has required

an allocation of costs that are not directly appli cable to

a department. Various bases have been developed by which

this allocation was made more scientific, but there has

still remained a large share tc be prorated according to relative departmental sales volumes. The inequity of such an allocation Is apparent when specific situations are

Investigated. In one store, the furniture department was

charged a prorata share of expense of the packinc room although no furniture went through tnis room. bulk candy was not marked, but the candy department still supported

the cost of the marking room in proportion to departmental sales. A thorough consideration of these and other similar

_ While technically there is a difference between "stand­ ard cost" and "predetermined cost", they are used interchangeably here. 251 situations suggests the need for a more logical basis for

cost allocation.

Another problem that faces store managements is that, when nonselling costa are allocated on the basis of sales, the selling department manager has no incentive to reauce

the share of these costs that originate in his department*

Some method of charging selling departments on the banis of the actual work generated by each department would be a more reasonable system. It would also be likely to stimu­ late a reduction In work flow from the selling areas*

How Are Standard Costs Used? Probably the best stand­ ard costs to use are those based on past actual or expect­ ed actual costs for a given period. A case example, applied

to delivery activity, will Illustrate the use of standard

costs based on past actual expenses* A revision is made of these coats every six months.

All delivery, in one store, is divided Into bulk and

package operations. Each of these Is handled in a sepa­ rate location and usually serves different departments.

A "typical package" for each selling department is arrived

at by an actual study of the packages processed. In the

package delivery department the typical package is ex­

pressed by average length and girth. In bulk delivery,

length and girth are multiplied by a weight factor deter­ mined from the actual weights of the packages.

The bulk delivery departmental expense is classified 252

Into three groups. In Inside expense, primarily for pay­

roll and supplies costs, the average cost per item delivered

is computed by dividing total incide costs by the total

number of bulk deliveries during the period. Average

overhead expense per Item delivered is determined by the

same process. Average truck expense Is computed by dividing

total actual truck expense by tne total weighted dell very

units to secure a cost per weighted delivery unit. An

application of this approach to selling department "X" is

as follows:

In each of these cases the weighted delivery unit Is different, although the expense per item for overhead is the same.

Truck Freight &• Parcel Post

Weighted delivery unit 115 1+6 Truck cost per WDU $.0 0 7 ? F. P.P. cost per WDU $.1323

Truck cost per unit * . « 3 9 ? F. 9r P.P. cost per unit $6 . 0 6 5 8 Inside expense per unit .IkOO Overhead expense per unit .3*57 .3657

TOTAL IT.3 652 w . k n t Per cent of total deliveries 9556

Weighted cost per bulk delivery for dept. "X" $1.6205

The standard or predetermined cost for each bulk delivery

for department ’•X * is set at $1*6205* For the following

six months the delivery charges to this selling department

are secured by multiplying the total bulk deliveries from 253 department "X" by the weighted coat per bulk delivery.

With standard costs it is possible to reduce the amount of expense that is charged to selling departments on a volume prorata basis. It is still necessary to use the sales base and other similar bases for the allocation of some expenses that oan not be otherwise allocated, \inlesa tne 10 contribution plan of accounting is used. It has been possible, with standard costs, to charge from dO to bS per cent of total expenses to departments on a direct or pre­ determined basis.

Where Can Standard Costs be UsedT- In selecting areas for the Installation of standard costs, there are several factors to consider. First, the most obviout application

Is where distinguishable services are performed for In­ dividual selling departments. It is also desirable to use standard costs to charge for those services that a selling department manager can control by restricting the number of units to be processed. The total cost of the service must be sufficiently high to warrant the expense of a standard cost system.

In practice, standard costs are used for charging delivery, receiving and marking, wrapping and packing,

TS ------For an explanation of the Contribution Plan see, Con­ trollers* Congress, Standard Expense Ac counting Manual for Department and Speclalty 5tores~ (New York, National Retail Dry Goods Association, 19U^). P* 1^5« ^54 adjustment service, layaway, advertising, and display costs.

It is felt that these are the areas of the greatest appli­ cability, While there may be other places where stan iard costs can be used, it ia not likely that the advantages secured will be as substantial as in the named activities.

Further refinement should come only after a thorough study is made to determine whether an installation will prove profitable,

SUMMARY

To maintain control of operations and output it Is necessary to use measurement devices. Without them It is impossible to determine if labor and capital are being utilized satisfactorily. Three important characteristics of operations can be measured. These are quantity, quality, and cost*

Quantity standards are most commonly employed In nonselling areas. The nature, quality, type, and area of usage differ from store to store. In many cases the standards are not cast in the most appropriate terms, and the rigor with which they are applied varies greatly. In their most advanced form, production standards are engin­ eered, time studied standards that are developed after careful methods and layout studies. This type of stand­ ard is used to measure individual and departmental productivity, reward employee performance, control the size 255 of the work force, and budget payroll expense. Standards are usually set from historical production aata ano are often used only to evaluate departmental performance and to budget payroll*

In selling activities there das been only a restricted use of formal production standards. lor tne most part this limited use appears to stem from the belief that a selling situation Is too unstandardized to be measured. While it

Is true that standards can not be applied in selling with the same precision as in some nonselling operations, there is an excellent opportunity to use them for the planning of work force-work load relationships and to measure cer­ tain aspects of individual and departmental product! vity.

Quality standards are needed because of the strong customer service characteristics of department stores.

Errors and the failure to maintain quality of service quickly result In customer ill will. Where quantity measures are used It is often necessary to maintain out­ put quality. In some types of work, statistical control techniques have a definite application. The limited use of quality control in department stores today not only attests to Its value, but also points up the need for

Its greater use.

Service standards are employed in some stores to check customer waiting, times at elevators, cashiers1 win­ dows, et cetera. A more widespread and a less sporadic 2 ^ 6 use of* them is to be desired, Sfilea efficiency stHndards have had little or no application in department stores.

The most promising approach to an analysis of sales efficiency appears to be a correlation of consumated sales with available customer traffic. Camera or ratio-delay study techniques are two ways that data may be collected for the development and maintenance of such standards.

In order to bring the control of many nonselling coats to the attention of the selling supervisors it is desirable to use standard or predetermined costs, i?y their use the inequities of overhead expense prorotion are reduced. The selling supervisor. In addition, is given an incentive to restrict many expenses which are Incurred elsewhere in the organisation, but which are generated in his own department. CHAPTER IX

DEVELOPMENT OF A FLEXIbLE EXPENSE-VOLUME RELATIONSHIP

Relief from the high expense problems of department stores can be secured by a reduction of costs to a minimum level, followed by an improved control of these lowered costs* In Chapter VII various approaches to reduction pro­ blems were considered. In Chapter VIII the problems of measurement were discussed. Once adequate measurement techniques have been developed, it is possible to attack the problem of maintaining a proper balance between volume and cost. This problem is made difficult by the existence of several types of variability.

Cyclically, seasonally, weekly, daily, and even for periods within the day, the ebb and flow of activity present problems that seem almost incapable of solution.

It has been reported that, in 1939# sales in December

(the month of highest volume during the year) were almost three times larger than sales in July (the month of lowest volume).^ The variation from week to week furnishes I------Controllers* Congress, Seasonal blstrlbutlon of Seles. Department Stores and Spec s n n . Stores. 1939."TNew York, National FvetaTl £>ry Gooas Association, 19d0), p. 33*

2 5 7 ?*Q another unstatilizing element. in one larpe store, within

a six week period during the spring of 1 9 5 0 , transactions

per week varied from as many as lip, 000 to as few as ui4,Q0 Q.

Within the week, further peaks and lulls of business occur.

Reports for one store's typical week snowed that daily sales were as little as 1 4 * 2 per cent of total weekly sales on the lowest day as compared to 21.9 Per cent of weekly volume on the busiest day.

Work loads are set by forces which are often oeyond

the direct control of management. Like trying to control

the weather, the best that can be done is to discover the regularities that occur in the apparent random vari­ abilities, and to do as much as possible to adapt to, and be prepared for, the most likely eventualities. One approach that offers some encouragement is to plan for as much of the variability as possible tiirough more scientific expense or personnel budgeting.

In general, expense budgets may be of three different 2 types t

1. Appropriation or allowance budgets, where the purpose is to establish a limit on expenditures for a specific activity.

2. Forecast or fixed budgets, where tne purpose is to provide a basis for planning and coordinating activlties.

2 ------Theodore Lang, Lditor, Cost Accountants 1 tiandbook. (New York, The honald Press Company, T^hitTI p"I IT*72. 259

2 • Control, flexible, or variable budgets, where the purpose Is to provide a set of standards wuich can be used in the measurement of accomplishments•

While each budget type serves a valuable purpose if used

under proper conditions, the test of aporopriateness is

not always met.

Appropriation i ud^ets- In a department store, as in

other business institutions, there are certain expenses

the need for which is primarily a matter of judgement.

Little can be done to control these costs except by an

advance arbitrary decision. Certain executive payroll items,

executive life Insurance, research costs, memberships and

dues, donations, and some advertising are of this sort*

This type of budget is more common, however, in govern­ mental organizations than in privately owned companies*

Forecast or F i x e d budgets- Forecast budgets are most commonly used for expense management. These budgets

are not always completely fixed. Often they are either

revised to correspond with actual conditions or a differ­

ence from the budgeted amount is recognized as normal.

In the latter case the difference is evaluated as to its

reasonability In the light of actual conditions.

In using such a budget it is necessary to estimate

a given level for fu&ure operations. Accuracy in the

expense estimate Is determined by the accuracy of the

original sales forecast. This uuaget serves a useful pur- 2b 0 pose by enabling management to predict a profit and loss position. To use it as a control aevice is a less defensible action. Since the forecast of volume and its pattern is seldom correct, neither can the expense budget be correct.

If actual volume is higher than expected, many departments overspend their budget or fail to give adequate service.

If volume is less than expectea, the budgeted expense is excessive. In one store, for example, a given level of expense was planned for a particular month. Little diffi­ culty was experienced in meeting the budget and achieving the planned expense outlay. Tne management, however, was completely unable to cope with a reduction of 0. 5 per cent in sales volume for the month. While It was felt that the expense budget should have been lower by approximately 0 . 5 per cent, it was not known how or where to secure this reduction*

The use of the "per cent to sales" criterion is open to the same criticism as that of the forecast type of oudget* A given per cent to sales may accurately describe a proper relationship at one given level of operation. The assumption that the same relationship exists at other levels of operation Is valid only if the expense is cornpletely variaole with sales volume. This is often the case for tne cost of merchandise, sales cornelssions, wrapping, and other supplies costs. r'or most expense it Is obvious that 2 61 there Is a less than complete variation with sales* The weakness of the expense to sales ratio Is demonstrated by the following data for a division of one department store;

PERIOD SALES PEIi CENT OF TOTAL NO. (In thousands) PAYROLL COST PAYROLL TO SALES (in thousands)

1 #2,095 7-U# Sit* 2 3.7C2 b.e 25 r 3 1.977 9.0 170 4 1,800 0.9 160 5 1.535 9*7 1U9 6 1,800 0.7 1 5 7 7 ' 1.609 9-0 145 8 1.655 8.3 137 to The Variable Budget- The third type of expense budget is most effective in the control of expenses which are less than completely variable with sales volume. It is recognized that most expenses have an element of direct variability together with a certain amount of fixity. In the overall relation to volume, this semi -variable nature is such that expense normally moves in the same direction as sales volume, but will not change by any fixed ratio.

The analysis of published department store operating re­ sults presented In Chapter III illustrated this relation­ ship clearly. To secure effective control It is desirable to determine more precisely the nature and amount of this increment with a given change In volume. The variable budget fills this need. It is a supplement rather than a substitute for the forecast budget, since It Is still necessary that a prediction be made in order to plan ?.b2 effect!vely.

SALuS VOLUME-cJCPENdE RELATIONSHIPS

The strong functional relationship oetween expense

and sales volume is clearly shown in figure 15* The data

plotted in this illustration represent the sales and ex­

pense indexes for all stores reporting to the harvard

Graduate School of Fusinees from 1939 through 19U9* The high coefficient of correlation for this relationship

{*rM = .9 7 6 ) Indicates the interdependency of sales and

expense* Such a correlation, however, is of little value

in solving managerial problems. These data cover a

period of eleven years, while a manager is actually faced with a specific condition at one point of time. For this

analysis a tool known as the breakeven chart has been

developed.^

The Breakeven Chart- A specific salea-expense

functional relationship exists at any given point in time.

Expense ia basically either a fixed amount irrespective

of sales variations, or a fixed ratio to sales volume.

A combination of these two types makes up a third class,

commonly known as semi-variable costs, Fixed expense

3 ------For an excellent discussion of the construction and use of the breakeven chart see, Walter Rautenstrauch and Raymond Villers, The Economics of Industrial Management. (New York, F u n k & Wagnalls Company" 1 9 U 9 ), p. B?. FXQTJRE 15

Indexes of Total Expense end Net Sales for All Department Stores, with Sales of at Least $1 Million, Reporting to the Harvard Graduate School of Business during yeare 1939-19U9

Index of Aotual Expense (1939 Sales equals 100*) Dollar CXitlaj 100

19U7

50 ” 19U1 1$U3 1939 19U2

I = 3.66 + 0.28557 1

100 150 200 250 300

Index of Sales

Souroes Operating Results of Department and Specialty Stores in 19L9,Harvard”University, Graduate Schoolo7 Business Actaini strati on. 2 6k arises from three sources: costs of possession, costs of capital recovery, and costs that arise from the operation of a business.^ Costs to possess are those of property taxes, rent. Insurance, and interest charges. Capital recovery costs are primarily depreciation. These two groups are commonly known as fixed charges. Constant costs arising from the operation of a business are in part deter­ mined by the organic nature of a business, and partly by policy decision. Examples of the first type are heating, lighting, power, and part of maintenance and repair costs of buildings and equipment. During any particular year these are fairly constant, with their amounts being budgeted over perhaps six months to a year. Ot^er expenses such as executive salaries and some types of advertising may also be budgeted well in advance. For any short run period they are rather constant. All of these are sometimes referred to as regulated costs.

The relation of these expense types to sales Is shown In the breakeven chart in Figure 16. Inspection of this figure shows that more than two thirds of the operating costs w e r e fixed. At the time this chart was developed the breakeven point was 8 1 per cent of total sales volume.

The problem of such a high breakeven point is of grave con­ cern to managements, since rather moderate fluctuations in c ------Ibid.. p. 6 7 . FIGURE 16

A Breakeven Chart for a Leading United Expense States Department Store, 19U6 and Sales 100* Profit Net h.9% Sales

80*

62.23$

Variable Expense 20* Fixed Costa 21.6$

0 20$ 60$ 80$ 100*

Sales Volume

Source* Confidential 266

volume can completely wipe out profits.

THE VARIABLE BUDGET

A second tool for expense analysis that can be more widely used in retailing Is the variable expense budget.

Tnis technique has been employed with excellent results by manufacturing concerns for a number of years, but only with­ in the post World War II period have department store man­ agements given attention to this approach.

The Variable Budget as £ Management Tool- management is constantly striving to earn a reasonable profit. In this attempt, the concept has developed that profit should be more of a fixed predetermined amount than a residual.

The use of the variable budget represents one effort to achieve this aim. With the knowledge of expense that should be incurred at each operational level, management Is uetter able to plan a profit and to secure it regardless of the activity level attained. Without such flexibility, it has been found that a failure to achieve planned volume re­ sults in dissipated profits.

Expense can be better controlled through the use of the variable budget since the supervisor, who exerts direct control of a cost, has a yardstick by which to evaluate It at ii.ore than one level of output. The previous miscon­ ceptions of the per cent to sales complex are wiped away and direct cause-effect relationships are more firmly 267

established. As a budget it furnishes a constant, up to

date control rather than the retrospective review that

Is so commonly found when a forecast oudget is used as the

control tool.

The ease with which decentralized control of important

expenses is achieved is another reason for using the var­

iable budget. Expense can best be controlled at its source

by tnose most directly affected by it. With a variable

budget only tnose expenses which are controllable are assigned to the executive concerned. This forces a careful

consideration of the nature of an expense and the respon­

sibility for it. The variable budget is also well suited

to graphic representation. Expense charting (e.g., figure

17J simplifies a somewhat complex expense-volume relation­

ship.

Another major value of the variable budget is its adaptability to management by the exception principle.5

Unsatisfactory performances are immediately noted and action promptly taken to remedy the situation, or at least to secure an adequate explanation. Effective variable budgeting also requires that careful attention be given to

5------Under management by the exception principle, aaequate controls are set up so that executives can concentrate their attention on exceptions or conditions of an un­ satisfactory nature. 2bh

problems of aligning expense responsibility so as to insure

single accountlbility for all variable costs.

Requirements for a Variable Budget- There arc certain

necessary preliminaries before a true variable budget rray /-• be implemented. One student gives these as:b

1. Proper department!zatlon

2. Adequate classification of accounts

3. Decision as to the unit to be used in measuring productive activity or volume.

A variable budget can not be applied in all areas of a store.

It is important that the activities and costs of a depart­

ment be closely identified with some measurable unit of

volume. Not all departments meet this criterion. In

addition, it is desirable to departmentize in such a manner

that a precise volume yardstick may be employed. Only in

this way can a simple workable relationship of expense to

volume be developed. Theoretical appropriateness Is not

sufficient. A budget must be understandable and capable

of application by work center supervisors. It is necessary

that departmental breakdowns be based on lines of respon­

sibility since costs are controlled by individuals rather

than by systems or classifications.

It is fundamental that a sound natural expense class­

ification be employed. This is not generally a problem in department stores today because of the excellent work of

5 ------Theodore Lang, editor, o£. clt.. p. 1277. 269 the National Ketail Dry Goods Association and its member committees in the development of standardized natural expense classifications. In considering the accounts that may be placed under a variable budget it should be remembered that a supervisor ought to be responsible only for those costs that he can control*

Care must be taken in selecting a unit in which the output of the department or division is to be measured* It is desirable, of course, to use units that are presently available, if appropriate. Certain types of bases will have a different content at different parts of the year.

This makes it necessary to revise the base used or make adjustments for this variability. A single base is more easily computed and understood than a dual or multiple base.

Finally, it is Important that the volume unit selected be such that it will offer the best explanation of a change in expense*

Where To Use The Variable BudgetT- The most obvious area for the application of variable budgeting Is the total store. In addition, there is little reason why this technique can not be carried out at the division and department levels In merchandising areas. none of the stores studied who now use the variable budget nave carried it to the selling department level* The main obstacle at lower organizational levels appears to be an Inability to secure active cooperation from section managers. While 2 ? 0 the budgeting system is quite simple, especially when pre­ sented graphically, msny section managers have neither the interest nor the aptitude Tor this type of analysis, Fur­ ther education is required If it is desired to Install variable budgeting at all organizational levels. In the nonselling activities, it has been common to carry variable budgeting to the work center level. Exceptions are made, or course, for those work centers where no adequate measure of variable volume exists or is needed*

What Expense Should Be Budgeted in This Manner?-

Payroll, the largest single expense, is probably the one best adapted to variable budgeting. Charts can be employed with success T or all payroll items that show a variation with volume. If supplies usage is substantial in a given area this cost can be treated on a variable basis. Any other expense that is sufficiently large to warrant study and which varies more or less directly with some measure­ ment of volume can also be controlled with a variable budget* In spite of the fact that a number of expenses are flexible enough to be measured, it is usually found that payroll alone is budgeted in this manner at the department level* It is commonly the only expense charged to departments that is considered large enough to warrant the effort required to set up a variable budget*

The Normal Expense-Volume Relationship- In developing 271 an expense-volume relationship, consideration must be given to two different expense characteristics. First, costs may vary directly and completely with volume. Charting these is of little value since they are always a fixed ratio to volume. The determination of a unit increment is the only problem. It can be set by keeping a record of historical coats for a given expense classification (e.g., payroll) and the production for which the costs were incurred. The division of production by total costs given a cost per unit of volume.

In the second type of expense-volume relationship part of the coat is fixed and part Is variable. Several different techniques are available by which this relation­ ship can be determined. In one method a formula of least squares Is used to compute a line of best fit.? The "a" of the least squares formula represents the fixed portion of costs (i.e., the amount that would exist at no volume).

The increment Mb* is the cost that is associated with each additional volume increment "X*. A computation gives a line of average or normal relationship. If the expense- volume point for any given period falls above this line the cost la excessive, while if it falls below the line a better than average performance Is indicated.

7 ------The usual expression of a least squares formula is: Y * a ♦ bX 272

A second technique used to develop a line of relation­ ship between expense and volume employe the least squares formula to a limited extent. In this case the relationship is usually computed, but the least squares line is commonly not accepted as the best indication of the proper expense- volume relationship, A line that lies below the least squares line is established, by inspection, on the theory that an average of past effort is not a good criterion or goal by which to measure present and future effort. The use of a lower line exerts pressure for improvement in that it be­ comes more difficult to achieve a below tne line (hence favorable or successful) expense-volume relationship for any given period. The level of this line is roughly where approximately two thirds of the points of past results fall above the line and one third fall below.

CASE APPLICATIONS OF THE VARIABLE BUDGET

In operating or merchandising activities the same budgeting problems and techniques are found. For sake of clarity, however, examples of actual applications in vari­ able budgeting are given for both areas. The material presented In the following pages represents the most ad­ vanced budgeting techniques found In the stores studied. 273

THF ADJUSTING DEPART..1LKT

Kor this department, aata were collected showing monthly total payroll expenses, monthly total claims processed, and total stanaard hours produced each month.

From this information a variable budget chart was made. A

copy of this chart showing the relationship between payroll and claims completed, is presented in figure 17*

Often a variable budget can be developed for different

sections within a department. In the adjustment department it was possible to segregate activities by four cost centers:

floor desk, mall desk, service improvement, and control desk. In each of these a budget chart was set up like that

shown in Figure 17* Some payroll costs appeared to have

varied directly witin the amount of work. This was the case

in claims adjusting, handling of misdirecteo parcels, furniture adjusting, ana claims resulting from clerical mixups. In each of these activities the total work com­ pleted over a period of time was divided by the amount of payroll (supervisory payroll excluded) to determine tne

cost per work unit.

In addition to these payroll costs there were two

other groups to be included. First, there were super­

visory and certain other payroll costs that occur irrespec­

tive of work volume. These expenses were determined, seg­ regated, and fixed. In addition, there were payroll nans it

mjMtwut ItoptttMrt Payroll ud Total fflaloa Proaaaaad vitk a U m of Balatioo- MJaafraat Dr- ship Vlttad ty iMpocttoo, far a T,oad1a< V. 8* Pap afloat Staro part— t Payroll $30,000

$2^000

U S , 000

Caopatod Payroll = $3,81*0 + $*627 par

$12,000 26,000 30,000 36,000 ro "j Z~ Total Claloa Prooaaaad Sooroai CcnfldaotLal 275 allowances to be charged to tne department from which no production is secured. A paid monthly absence allowance of vacation pay, holiday pay, and two hours per person per month shopping allowance were Included in the total payroll picture.

All of these data were i.et up for the guidance of the supervisor and those in the expense control office on a set of Expense budget L>ata Sheets. In Figure Id are several detailed examples showing the method oy which some of these payroll costs were computed. For example, the fixed floor desk payroll cost of $195 came from the employment of one clerk at $45 P®** week for an average of 4«55 weeks per month. An additional variable cost of 10.26^ per claim taken was determined by dividing payroll costs (In excess of the $195 Per month) for the period from July 2 6 , 1947 to January 10, 19lf8, by total claims taken during that per- iod. In the misdirected parcel unit It was determined from a study of operations that payroll expenses were completely variable. At the floor desk, on the other hand, it was necessary to maintain a minimum staff whether, dur­ ing a given period, there were any claims or not.

An bxpense Control Schedule was developed from these data. This schedule, partially presented in Figure 19 Is a one sheet reference that gives the approximate allowable expense for varying levels of work load. included are FIGURE 18

Excerpts from Detailed Expense Budgat Sheet for an Adjustment Department

" ” " Variable fidget Account Title and Detail of Fixed Days ______Expense Allowances______Budget Workload Worked

MISDIRECTED PARCEL UNIT Variable cost-monibly provision for payroll calculated as follows * $.001b Variable - Parcels and Parcel Post packages delivered Total paroele delivered (week ending 8/30/U7 to 1/10/U8)— 3,170,822 Total misdirected parcels payroll for sane period = $5,7LL $5,7UU r 3,170,822 - $.0018 per delivery

FLOOR DESK Vised and Variable-monthly provision for payroll expense calculated as followsi $195 $.1026

Fixed < W adjuster at $U5 weekly x L. 33 = $195 per month

Variable - Desk Clsims Taken Total claims taken, July 26, 19U7 to January 10, i?U8 - 11,361* Total Floor Desk Payroll, leas $195 = $1,167 month flxed-sams period $1,167 t 11,361* = $.1026 per olalm taken

Date Issued ______Page No. of

Date revised Date effective

Source t Confidential FIGURE 19

Lxcerpts fro* an Expanse Control Schedule of Monthly Expense Allow­ ance at Varying Workloads, for the Adjustment Department

rc = a 1 cvsar-i r Activity Percentage Portion 60% < Knormal; } \ - v n m T i s m & s ------“ ------5 6 ^ 1 Manager 1 1 2 Assistant Managers 1 ? 2 Senior Supervisors 1 1 Service Improvement Supervisor 1 I 5 Claims Supervisors 3 V 1 Confidential Clerk 1 £ Secretary i *■ 1 Receptionist 0 1 2f Traffic Adjusters 1 2jf 1 Supervisor Mixup-M.B.P. 0 1 ORAND TOTAL PER MONTH $ 2,573 $ 3,91*7 SEMI-VARIABLE EXPENSE FEoSr fjESK^No. ot claims taken 1 ,U26 1,710 ($.1026 per olalm taken) $195 $ 105 $ 175 MAIL DESK—Pieces of Mail read 6,778 11,296 ($.0325 per piece read) $ 60 $ 220 $ 367 SERVICE IMPROVEMENT— Claims completed 11,988 19,980 ($.01Ol* per claim completed) $31*5 I 125 $ 206 CONTROL DESK— No. claims completed— excluding furniture 10,381 17,306 ($.0233 per claim oaaqxlated) $110 $ 2l*2 $ 1*03 VARIABLE EXPENSE CLAlil AEjtJsfltoG— Claims completed— excluding furniture 10,361* 17,306 ($.1*2 per claim completed) $ 1*,361 $ 7,161* MISDIRECTED PARCELS— Total parcels delivered and parcel post 325,061* 51*1,1*73 ($.0016 per delivery) $ 51*5 $ 975 CLERICAL M U UP— Mixup claims completed 1*,296 7,161* ($.01*1* per mixup claim completed) $ 189 $ 315 FURNITURE ADJUSTING— Fum. completed 1,601* 2,671* ($.3196 per furniture claim completed) $ 513 $ 655 GROSS EXPENSE TOTAL $710 $ 6.31*0 $10.567 JTHER ALLOWANCES ------Training— Number of people hired and stages of present hires by week Paid absenee— average-(month) Vacation— Compute per vacation schedule Holiday Pay— 1 day's pay per employee x number of holiday's Shopping— 2 hours per month per employee______

Source* Confidential 2 ? 6 estimates of supervisory personnel required at various work loads and their estimated payroll cost. Ty reading from tne line "GROSS EXPENSE TOTAL" it can te seen that,

for an estimated "normal" month there would be allowed

657 °P fixed expense, plus $10,567 of semi-variable and variable payroll expense, plus any additional "G'ii'ER

ALLOWANCES" for payroll. At 60 per cent of normal volume, however, the fixed and standby expense woulo be reduced, to

$5*262 plus $6, pipQ of semi-variable and variable payroll costs, plus other allowances.

THE BUDGETING PROCESS

With the development of expense data for the adjusting department, the supervisor is in a position to operate under variable budget control. The first step in the actual process is to make a payroll forecast several months in advance. The department manager, after receiving a pre­ diction of the number of store transactions and dollar sales volume for the month, completes a forecast and analysis form. luis form, presented in Figure 20, shows the goal that the supervisor has set for his organization.

Column "2", in Figure 20, Is for his estimate of antici­ pated variation from the computer expense - volume relation­ ship. This is necessary because a coraputea line does not make aaequate compensation for seasonal ana other unusual conditions. Close attention is given to the relation of Budget Forecast and Analysis Rspart BUDGET FORECAST 4 ANALYSIS, OPERA THU L'lVlSiCS a POR THE MONTH Of s TSAR FORECAST SALESi ■ ■ ■ ■ l e s s c o n t r a c t E SECTION OR COST CDfTCR

SBLKDARD BOUtS PRODUCED % Of SRS. NUREED OH STD. TO TOTAL HRS, VARIABLE BUDGET REALIZATION % L_.

SECTION PORMUIA POR VARIABM", PORTION

H FORECAST END o r MONTH RESULTS

VARIABLE ANTICIPATED SECTION'S B.B. BUDGET VARIATION ESTIMATE OP ALLOV EXP,JSC OH KXPECTD.ntM. MONTH'S OH ACTUAL OPT ICE BUDGET DETAIL 5 EC.FORECAST VARIABLE EXPOSE SGRTLQAD USE SQRELQAD < / « - ) (i) (2) O) (4) (5)

1 - 6 1 A N T B T PAYROLL D 2«ALL0RAJKXS t BOLIDAY3

VACATION

ILLNESS OTHER (NAME)

r a i D pop: n o n VARIABLE PORHOX 3—VARIABLE PAYROLL TOTAL PAYROLL 1 II FORECAST RED OP MONTH RESULTS

7ARIAB1X AITXCZFATtD se c t io n ' s B.B. BUDGET FARIATI OK ESTIMATE Of ALLOW EXPANSE OK EXPECT'D. FRM. MONTH'S OK ACTUAL o m c E budget n cm iL 5 EC. FORECAST VARIABLE EXPOSE WORKLOAD USB WORKLOAD t/CR-) (1) (2) O) (4) f 5)

1-6 TAHIBT P i TROLL

2-4LLC«ANCESi BQUS4YS

VACATION

ILUBS8 fl OTHER (NAME) I fix ed top n o n I variable portion 3-VARIABLE PA TROLL TOTAL f t TROLL 4-OTHDt EXPENSES TOTAL EXPOSES

m ioc namest

FORECAST 5EC.ACR.EST> (INCLUDED IN VARIABLE ABOVE) THIS TEAR U S T TEAR OP MD'S EXP. (1) (2) (3) (4) (M TRAINING OVWTM

EXPLANATIONS! 280 last year's performance to the variable budget line. If, for example. It was Impossible to meet last year's computed expense by a given amount, and this variation was consid­ ered reasonable. It will normally be expected that a similar U variation will occur this year. During a period of very high volume it is commonly necessary to employ persons In positions for which they are not trained. In claims adjust­ ing It was determined that it should cost 1+2/ for payroll per claim completed. With the use of a large amount of extra help it is unlikely that the payroll cost could be held to 1±2/ per claim completed, A proper allowance for such a variation Is only a realistic consideration of what

Is certain to happen. As such, it is a proper part of a budget forecast.

The section manager submits a weekly Variable ludret,

Production and Help Report, This report is a day by day picture of the payroll costs and their sources. A copy is included here as Figure 21, The section manager re­ ports, by day, the work produced and the hours consumed in this production. In addition, a daily analysis of all

B------This condition is well Illustrated In Figure 17, In period *2" for 19^+8 the expense was higher than would have been estimated from the line of expense-volume re­ lationship. In the same period for 19U9* the expense point was still above the line. The 19U9 performance was considered satisfactory, however, because it was closer to the line than in • FIGURE 21 Variable Budget, Production and Help Report J- TOTAL TIME 2 - NOT WORKED STANDBY FOR 1PERIOD- ADD:I E S LOANEOLESS: D : (INDIRECT ALLOWED) ADO: ADD: T O T A LH O U R SW O R K E D CLERICALS SUPERVISION MANAGEMENT SHOPPING O D Y [ MONDAY U S A 1 TUESDAY THURSDAY SATURDAY | WEDNESDAY FRIDAY D A YO FW E E K TOTAL OVERTIME O P E R A T I N GG REGULARS E N E R A L S S O R R O W E(1 M D MD K S i T S I P A T R O LEX L P E N S E INDIRECT ACCOUNT r o s a l ( ______PEIM RATE) (PREMIUM

IA NYMU BMW M B U M Y N TITAL TITAL SEMI-MONTHLY (SI-WEEKLY) MOMTHLT V A R I A B L EP A Y R O L L AND m

------I) ME U M M E IM PRODUCED WORKLOAD ■TO. HR* HR* ■TO. - AVER. KMT) ■ ATE ---- HR. MON. -- ENP. ------T. MRS. STD. WORKED U SWED. TUES --- HOURS MONDAY _ PAYROLL RDCIIY 1 PRODUCTIVITY ECN | PERCENT 1 01 **> ■( % *> ■ MR. MO. THURS. ------R WRE |J| WORKED HRS NON-STD NON-STD TUESDAY O R PAY HOURS FRI. 1 1 s S t s s * I S i 2.-1

WIIKLY * TO PCRCIMT NON-STD. MAJOR PIECE COUNT TOTAL HOURS EXPENSE ITEM P M M C r i V I K M M . WORCCD UNIT COUNTED. PAID

1 • STANDBY FOR PERIOD (Monthly pay > ON STD * Mil. WK 2 - ALLOWANCES ipat for tins not worki Ht NON STD ■X- (TOTAL RI-WttKLY 3* VARIABLE PAYROLL FOR TIMt _* HRS WK WORKED) I NO * TOTAL PAYROLL EXPENSE *. HRS ALLOW £ I HD 4 - OTHER EXPENSE * TOTAL ALL EXPENSE

CLASSIFICATION OF INDIRECT HOURS

WED. THURS. FRt- SAT. TOTAL ACCOUNT MON TUES . . . - HOLIDAYS VACATIONS - PAID ILLNESSES OTHER PAID ASSENCES (ITEMIZE) INDIRECT TOTAL HOURS ALLOWED

DAILY HELP AND PAYROLL EXPENSE ANALYSIS )AY TUESDAY FRIDAYWEDNESDAY

NO. NO. CMP. HOURS CMP. HOURS IMP. HOURS PAYROLL HOURS VARIABLE PERCENT r * t o ACTUAL BUDGET VARIANCE HOURS EXPENSE ITEM REALIZATION 1 ALLOWANCE 1-2 ID 2 2-1

1 - STANDBY FOR PERIOD iHOk * ------

X * ALLOWANCES if»t for Tim hot worked* % ------I TOTAL RI-WIRKLV FAT. 3- VARIABLE PAYROLL FOR TIMS WORKED)

YOTAL PAYROLL EXPENSE % DW. 4 - OTHER EXPENSE *

TOTAL ALL EXPENSE SS %

IRECT HOURS

ACCOUNT | MON. TUES WED. THURS. FRI. SAT. TOTAL

IOAYS | - 1TIONS | — —------■ - --- .... i ILLNESSES ---- ER PAID ABSENCES ------NIZE) INDIRECT 1L HOURS ALLOWED

KPENSE ANALYSIS SATURDAY TOTAL THURSDAY FRWAY 1 touiv. 4 0 HR. NO. NO. NO. INF, HOURS PAYROLL ■ ■ F . HOURS PAYROLL CNF. HOURS PAYROLL WIIU HOURS PAYROLL

f S _« 9

9 S ? S

9 9 9 — HZ__ — SS S 9

S 9 9 9

S 9 9 9

S S S 9 s 9 9

s 9 9 9

s .JL. . . , 9 282 indirect hours (e.g., management, clericals, training, et cetera) Is Included, and the daily payroll costs are

computed. Tnese reports are useu to evaluate expense management In each department. From an analysis of this

complete cost breakdown thej are able to determine, specifi­

cally, In what manner the department manager has failed to keep payroll costs within proper bounas, From a more positive viewpoint. It enables management to determine what department managers have performed satisfactorily.

With such a system, a section manager is forced to plan carefully and control carefully the utilization of per­ sonnel. by so doing, a closer adjustment of personnel and

payroll costs to work load is achieved than would be possible under either a less formal arrangement or a fixed budget.

The successful utilization of these techniques requires some supervisory time and training, but it is a big step

toward raising the supervisor from a "head clerk" status to that of a true manager.

VARIABLE BUDGETING IN A SELLING DIVISION

By agreement with the division manager, a budget was set up and a chart developed In the same manner as for the adjusting department. in Figure 22 a line was fitted to

the bi-weekly data of a women's apparel and accessories division. Tne least squares relationship is: FIGURE 22

Bi-Neakly Payroll and Nat Salas of a Woaan's Apparel and Acceaaarias Bi-leakly Division of a Leading U. S. Departeent Store Payroll

$200,000

12 *

Computed Bl-Mcly Payroll = $52,000 + 5.5* of Net Sales $120,000

$1,1*00,000 $1,900,000 $2,200,000 $2,600,000 $3,000,000 $3,1*00,000

Bi-feekly Salas Volune

Source: Coofidential 28k

Bi-weekly payroll costs = $52,000 + Net Sales

The $52,000 represents what was believed to be an absolute minimum payroll for adequate floor coverage, even If no sales were made during the period.

In order to control expense more concisely, it was important for the division manager to record and budget expenses for each section, A budget Data Sheet, presented in partial form in Figure 23, was employed. At least three different methods were used to determine section payroll expense. The salary of the assistant manager was set at a fixed amount. The sales force was paid a straight b per cent commission, while the other costs were prorated from the division office. Other controllable costs, includ­ ing publicity costa, travel, salesoook supplies, and others, were also determined for each section. Some prorated, but not budgeted, expenses were Included on the Budget Data Sneet in order to present a complete picture.

With the necessary data developed for each section and for the division as a whole, the Division Manager submits a Budget Forecast and Analysis Sheet (somewhat similar to that in Figure 20) for each responsibility covered by a variable budget. This same report is also used, after the month has passed, to record actual results and to compare planned and actual expenses. From this comparison a per cent of budget realization is computed. In addition, a FIGURE 23 Kxo«rpti fro* Sxptnie Budget Data Sheet foar the Women's Shoe Salon

Variable Budget Acoount Title and Detail of Fixed Day* Expense Allowance Budget Workload Worked PAJROLL EXPENSES rvialon y provision for salary Of one assistant manager $306 The salary of the manager Is charged to the dirialon. There­ fore there Is no provision for this amount In the department

Co— lesion Expense Variable— Dependent on net sales Calculated as followst

Monthly net sales x oo— isslon rate of 8$ Stock fixed and variable— calculated as followst Head of stock none Stock boys— normally use one from 5«U5 FM weekdays and all day Saturday* Expense Is prorated from Shoe Division, monthly $ 91

Clerical Variable— Calculated as follows t Prorate from Shoe Division Total (10$ x Clerical payroll for Div.} Average month $233

Miscellaneous Variable— Calculate as followsi Mall order clerk— Prorate from Shoe Division— Average month $ 6 9

Date Issued ______Page No. 1 of 3

Source t Confidential 266

Sales Help and Productivity neport is also used to record

the daily personnel usage in merchandising divisions.

COMMENTS OW THE CASE EXAMPLES

Earlier in this chapter certain values of a variable

budget were enumerated. briefly, these values are:

1. Management can plan a profit with greater expectation that it will be achieved, irre­ spective of the actual volume attained in a given period.

2. The supervisor can secure maximum control of his variaule expenses, ana management can evaluate supervisor performance.

3* Control is current rather than an ex post review of performance.

k. Decentralized control is achieved.

5. Management of expense is oy the exception principle.

The variable budget is the only formal budgeting tool now

employed that takes into consideration the essentially

fluctuating nature of sales volume and work load. The

breakeven chart shows what profit (or loss) should be

expected at any volume, assuming that existing conditions

obtain. The variable budget, as applied in tne examples,

facilitates the attainment of this profit by showing how

certain expenses should fluctuate witn changes in volume.

While it does not assure achievement of a proper expense

level, failure to obtain this level is shown clearly and

the areas of failure can be pin-pointed. As a tool for 2 87 planning what these variations should be, and for evalu­ ating whether these expense-volume relationships are secured, the variable budget is effective. Actual application of the method described has proved over a period of several years, to be an effective aid in profit protection.

The Variable Budget, Production ano help Report forces the supervisor to give a day to day consideration to his personnel requirements. Vbnile such a report may require some additional time, this is not a major disadvantage. In many stores the supervisor should give more time to consid­ eration of managerial problems and less to his operative work*

Assuming that the basic data are correct, this budget and control plan gives management adequate information upon which to evaluate supervisor performance.

Current control, in both dollars and man-hours, en­ ables the section manager to watch the day to day expense picture. By dividing monthly standby costs by the average number of days In the montn he can secure a daily standby expense. With an estimate of the volume to be done on a given day he can determine the work force that should be used. By combining these for a short period of several days he can keep a running account of the degree of budget reali­ zation that his section is achieving. Failure to maintain an adequate budt et realization should act as a stimulant to further investigation. Thus, at the time that unfavorable conditions of expense are being generates, the supervisor 288 has a clear picture of what is happening.

The examples show clearly that decentralized control is achieved by the application of variable budgeting. It is also evident that the budget Forecast and Analysis Report and the Variable Budget. Production and Help Report are well adapted to management by the exception principle. The major managerial review of departmental performance comes from the single comparison of the per cent of oudget realization achieved to that planned.

Other Aspects- Several other aspects of these cases are worthy of mention. Some supervisors can not use such a system with effectiveness. This should not be construed as a weakness of the system as mucn as a lack of training or ability in the supervisor. A solution is to train super­ visors in the use of variable budget techniques or employ others who can understand and will use such tools.

Charts, correlation techniques, £t cetera. give an air of exactness to variable budgeting that is only partially justified. There are still many suojective factors that enter into budget determination. in the cases described, the manner in which the line of expense-volume relationship was developed can be questioned. The nature of the line is determined by the points selected, as well as the method of determination. While all available data were used in this store, shorter time perloas are employed in others. 289

For example, in one store the variable budget 13ne Is revised every six months in order to keep it in tune wit.i current conditions* While such an aim is a noble one, it has been found that specious correlations are sometimes secured. In one Instance, the standby payroll expense for a given de­ partment was computed, on six monthly points, to be a nega­ tive amount* Computing a least squares formula on so few points is a questionable practice. The use of a more or less permanent line, however, also leaves something to oe desired. There are ratner constant changes in payroll costs due to promotions, pay raises of a selective nature, "eneral pay raises, and labor turnover. To keep changing the charts for each of these would obviously not be advisable, but some more or less periodic revision would seem to be in order.

An inconsistency is notea In the level at which the completely variable expense is computed as compared to the line of semi-variable costs. In the latter case the fitted line presents a more difficult goal to attain than an aver­ age of past performance. This Is Justified as a mild in­ centive to more efficient expense management, but In the computation of completely variable costs an average of past performance Is accepted as a reasonable criterion. It would seem desirable to make an adjustment In the latter case for incentive purposes. While an arbitrary Increase would probably cause an unfavorable reaction among super­ 2 90

visors, it would appear reasonable to select somethin^ like an average of the best 5^ per cent (from a production per tnan-hour point of view) of the weekly production records as an index of what the cost per unit should be.

For day to day work force planning and control it is more desirable to work with non-monetary data. In essence,

this means a variable budget of work force in man hours rather than dollar sales. In at least one store this is done for a few selling departments. It is, of course, not difficult to convert existing variable nudgets from dollar- work load relationships to man hour-work load relationsnips,

VARIABILITY AND THE WORK FORCE-WORK LOAD RELATIONSHIP

One of the main characteristics of retailing is the high degree of work load fluctuation. This instability is

traceable, for the most part, to the major source of work in a store--the customer. The amount of work that originates from this source fluctuates widely for periods ranging from seasonal length down to those of only a few minutes. The amplitude of variation, together with its appearance at

various time levels, presents an extremely complex problem*

In selling departments the impact of tnis variability

is directly felt in frequent overstaffed and understaffed conditions. While this unstable work load carries over into the nonselling activities, there is usually a short 2 9 1 lag during which some preparation can be made for impending variations. Many store managements have not believed that much could be done about this problem. Since about 19ij6, however, more effort haa been made to correlate wort force more closely with work load. For the most part, these attempts have been rather sporadic and limited. In none of the stores studied haa there been a well-rounded attack on this problem. Various approaches have been applied in several different forms in scattered store areas.

The attempt to sell flexibility to management has been difficult for a number of reasons. It is often found that work load variations are simultaneous in a number of differ­ ent departments. This immediately limits interdepartmental work force shifting. A supervisor often will not risk sending a person to another department for fear that he will not be available again when needed. Then too, many employees do not wish to work at more than one task. They feel that they were hired to do "X* and "X" is all they should do.

Finally, as haa been pointed out, managements of department stores have long been traditionalists in their approach to nonmerchandising problems. Many have felt that work force scheduling is not workable.

NONSiXLIi^G ACTIVITIES

There have been widespread attempts to match work force with work load in nonselling areas. The development 292 of production standards, and the movement away from the per cent to sales concept are evidences of these attempts.

Although production standards make it possible to give great­ er attention to the routine planning and scheduling phases of production control, standards are still used primarily 9 for the comparison function* In none of the stores studied are Gantt charts or similar devices being employed for plan­ ning and scheduling. While many of these devices may not be applicable to retailing without modification, much of the work load in nonselling departments can be predicted with a rather high degree of accuracy. A large share of nonselling work results from consumated transactions on the selling floor. There is usually at least a day*s lag between the time a sale is made and the time that certain work is per­ formed as a result of this sale. It has also been found that short range forecasts (within a few days to a week before the date of performance) have teen surprisingly accurate. These might also oe used as a basis for planning work force.

9------The functions of production control are routine planning, scheduling, preparation, dispatching, direction, super­ vision, comparison, and corrective action. i'or an ex­ cellent discussion of these functions see, R. C. Uavis, Industrial Organ!satlon and Management. (^ew York, harper & brothers, l9l*b) * pp. 266-2^b, 293

Specific Suggestions for Increased Flexlbillty- A

number of specific suggestions may be made for increasing

the flexibility of work force in nonselling activities.

One solution Is to employ more contingent and part-time regulars* This Is not done to any significant extent in most nonselling activities, although it Is quite common in merchandising divisions. The success of part-time work

forces in war industries during 19l|.2 -19U 5 is an excellent

example of the potential possibilities along this line.

Since work in nonselling departments frequently requires

the possession of specific machine or clerical skills, it has been considered impossible to secure competent part-time workers* A partial solution to this problem would be to recruit former employees and other qualified personnel for this work.

While executives spoke of intcrselling in their stores, no mention was made of Interworking among nonselling depart­ ments. It is realized that there are obstacles to such ar­ rangements from employee and supervisor prejudices, different compensation methods, lack of training, e_t cetera. rut it Is believed that a study of the possibilities mignt prove profitable. In at least one store an interchange arrange­ ment has been successfully tried re tween selling and non- celling work. It was found desirable, however, to hire new employees with the express understanding that they would be engaged in more tnan one type of work. A stuay of operations at nigh activity lc\eli nay show

that a slight rt vision of method will enable relatively un­ skill ea workers to uo certain parts of a Jol with efficiency,

The more complex part of the work would then ue ass1 -red to a regular employee. During periods of normal work loed the regular employee would do both trie skilled and unskilled parts of the task, Tnis technique was employed during

World War II, One example of such an arrangement was founu in the adjustment department of a large store. After a thorough study of their bill aujustment operations tney separated work into two different classifications, .astd on the difficulty of the adjustment problem. They set up an employee classification of senior ad jus ter for those whose primary task was to handle difficult au justments , b.;t more simple aujustments and the preparation of all preliminary information for settling claims was assigned to junior analysts. A consideration of the many types of work In operating departments should suggest other tasks that may

Lt treated in this manner.

It has been the custom in retailing, us well as in most business institutions, to give vacations in two or tnree months during tne summer. ihere are also months

mring the winter wnen volume Is at low ebb. In fact, volume is often lower in rebruary tnan in several of the 10 summer months. If more consideration is given to this seasonality it should be possible to rive some employees either a regular winter vacation or extra time off without pay* These specific suggestions for Increasing the flex­ ibility of work force do not exhaust the possibilities.

They do represent, however, some of the more apparent oppor­ tunities that exist by which hlrh fixed nonsellinr work forces can be made more flexible. by an application of these and by a considered study of further possibilities, more stores can escape the dilemma typified by that found in one large store. When the sales audit department work force-work load relationship for the first twenty six weeks of 1950 wafl charted (see Figure 2lp), payroll for productive hours worked showed no correlation with work load, A study of the reasons for this incongruous situation brought out the fact that management felt that a hig^ fixed work force must be maintained in this department. Stymied by this philosophy no attempt has been made to make what would seem to be a very necessary work force adjustment, i-r.LLl.JG ACTIVITIES

The -reatest problem of matchlnr work forct wit)', work TU Controllers' Congress, Seasonal Pi 3 tr1butlon of Sales departmentepartment Stores and SpeSpeclalty clalty StoresStores" 193^.~T~New Yo IJatlonal Retail Lry Goods Association), 1%6, p. 33* FIGURE 2h

Weekly Output In Work Unit*, and Dollars of Payroll in a Salas Auditing Department of a Loading U. S. Department Store, 1950

Lwllars of Payroll or ■hundred* of Work Units

1200 - -

1 1 0 0 - -

1 0 0 0 --

700' ■

600 --

Uoo 1 5 10 15 20 25

Number of Weeks

Sourcet Confidantial 2 97 load comes in merchandising areas. here, customer service

Is of prime importance and the failure to allow enough per­ sonnel for a given work load may result in lost revenue and lost customer good will. As a result, there has been less effort and more scepticism concerning the possibilities for increasing work force flexibility in these areas. Since selling payroll is the highest single cost In stores, how­ ever, it should be a fruitful area for research.

One obstacle to a rational ana effective matching of sales force to customer volume Is the general lack of re­ search In merchandising problems associated with traffic.

Some studies have been made concerning general geographic patterns of customer flow but little is known of the causes and nature of flow volume. It is not yet possible to predict the daily peaks and valleys of customer traffic on any but a store-wide basis. This pattern generally consists of low customer traffic early in the morning and from mid afternoon to closing time. The peak, which is sometimes bimodal, comes in the late morning and early afternoon. In stores where interviews were made, few stable patterns have been distinpuishea for areas smaller than the total store. Weither has there been any reports of such research in available publisheu literature.

Several attempts have been made to set production standards In merchandising departments. T’or the most part 298

these standards have been set on a combination subjective-

statistical basis. Here again, little routine planning or

scheduling of work force to work load is practiced. The

sole scheduling activity is usually the assigning of days

off and lunch periods. In instances where formal effort has

been made to plan the work force in terms of estimated work

load, frequent opposition has been expressed by members of management and/or department supervisors.

One example, from published proceedings of the Con­

trollers* Congress, has been given of the planning of sales 11 force requirements. In the J. L. H udson Company, of

Detroit, Michigan, an attempt is made to plan the sales work

force for each day of the week. This plan, usually complete

by noon of the day before it Is to be effected. Is developed

by consolidating individual departmental plans into a total

store estimate. The major determinants of the planned

number of sales people are: (1) last year's sales, (2)

last year's work force used, and (3) last year's average

sales per salesclerk per day. With these records as a base,

sales are estimated for a given day this year, a planned

average sales per clerk per day is set, and from this Is

determined the number of clerks required. With another IT W. H. Hogan "Controlling belling Costs through Personnel

vention. (New York. Na 1 9 W ) . p . 79. 299 reeoa?d of the number of the regular force to be available for duty, the need for contingents can be determined* The greatest disadvantage of this planning system is that

“last year" may not be a sound criterion, either for the level of worker efficiency or for the balancing of staff to work load.

Specific Sug.estlons for Increased Flexibility- The most frequent attempts to balance work force to traffic involve the use of contingents and part-time regular employees. In thirty six stores recently surveyed It was found that seventeen have a ratio of part-time to full-time sales employees of more than 10 per cent. Six reported 12 having a ratio of over 20 per cent. The primary problem, however, Is still that of knowing how, where, and when these part-time salesclerks should be used. Careful ad­ vance planning for each day Is a partial answer. During the day it is also necessary to guard against overstaffed or understaffed departments. Executives should nave the authority to alleviate such conditions by shifting sales forces.

Another technique which holds some promise Is that of forecasting a day's traffic from a check of the actual cus­ tomer counts In the early morning shopping hours. It may 12------Alfred C. Thompson, "Controlling Selling Costs", Expense Reduct1 on. (New York, National Retail Dry Goods Associa­ tion, undated) p. 6. 300 be that stores will, before many years, nave electronic counters at entrances. Information could be fea into a central board that will snow, currently, what tne volume of traffic haa been. Until tnat uay, studies can be made by a visual traffic count at trie entrances. by 10:30 or

11;00 it co-id be determined whether some contingents in ight be released for the day.

It might also be possible to rearrange the ua sched- ule of the sales force so as to have a greater staff avail­ able at tie hours of heavy traffic. One approach is to eliminate the noon lunch hour for employees and add one half hour of thia time to the morning relief period and another naif hour to the afternoon period. bitner period woulc. then be long enough to allow the clerk to eat. This has been tried only experimentally ana the results are not conclus i ve.

There has also been strong agitation for interdepart­ mental selling. rrom the customer's point of view inter­ selling Is auvantageous, although it aoes present problems of equalizing departmental compensation systems, iving the training requirea, ana overcoming personal prejudices.

Little effort has been made to interchange nonselling and celling personnel. In one store several merchandising clericals are employed as salesclerks when needed. In another case some women have been hireu wit i the express 301 understandln? that they work on toe selling floor curing tne daily peak and in the telephone order room during the early and late parts of the day. While tne probit ms will oe many, selling-nonselling intercaange appears to hold worthwhile possibilities. in selling, proper timing Is essential* The customer is available for a very short time and It is necessary to have a clerk available or the sale is lost. In most nonselling work, the need for proper tim­ ing is less pressing. r'or many of these tasks there is almost no Immediate time pressure because nonselling work peaks lag behind or precede ciay to day sales peaks.

It Is also possible to Increase flexibility by giving nonselling work to be performed on the selling floor dur­ ing slack periods. In one store, cited previously, clerks are required to wrap their own packages until 11 A.P.• and after 3 Another opportunity for improvement lies in training sales personnel In the techniques of fast selling and the handling of more than one customer at a time.

Anile the latter situation may not be desirable the need for It frequently occurs.

There Is an urgent need for further research into the problems of work force-work load relationships. While such research may not bring Immediate monetary returns. It is the foundation upon which a better understanding of vari­ ability problems can be built. Although study In this field 302 is usually aimed at reaucinp an overstaffed condition, it

Is even more important to guard against understaffing* Too large a work force is a waste of man-power, but too small a force 1b a waste of customer traffic.

SUMMARY

having developed a program for reducing costa and measuring production and quality, it is then necessary to develop techniques with which to keep costs in proper balance.

This problem is aggravated by great variations in operational activity at a number of different time levels. Variable budgets have been applied in the solution of these problems, and are applicable in any area where expense varies with work volume in a distinguishable manner. Their use assists materially in planning and securing a profit regardless of the level of operations. First line supervisors have an improved control tool for adjusting expense to departmental volume, and management has an excellent yardstick by whi ch to evaluate supervisor performance. With variable budgeting, decentralized expense control can be easily acnieved. Then the higher level executives need give consideration only to those departmental expense situations where performance Is unsatisfa ctory•

Uraphic records are ideally suited to variable budget­ ing, and are a great help in simplifyinf w^at might other- 303 wise be a difficult system for supervisors to understand.

Charts are of most value in the analysis of costs which contain elements of flxea and variable costs.

Another aspect of variability concerns the maintenance of work force-work load relationships. Production standarus and variable budgets supply the measurement devices needed for effective management. Even with these yardsticks it is still necessary to develop techniques by which the desired balancing of work and personnel can be achieved. The most intense efforts along this line have been in selling areas where the widespread and growing use of contingent and part

time regular salesclerks is found. Even here there Is still an urgent need to know more about the manner in which traffic flows. It is in these selling areas where the maximum

variability is found, and where the least is known about the

very short run work flow fluctuations.

In nonselling areas there exists a similar problem of adjusting work force to work load. In many of these activities, however, there is a short lag between the time

that work is generated in a sales department and when it

is actually undertaken in a nonselling department. Even

so, much of the nonseliing work force is highly inflexible.

Little interdepartmental working has been instituted, nor has much effort been made to encourage a joint use of workers by selling and nonselling departments. This alternative would seem to present an excellent opportunity to relieve the nonselling department of some of their fixed work force, while at the same time alleviating some of the stress of daily and weekly peak loads on the selling floor. The greatest problems In balancing work force to work load appear to be: (1J the lack of sound research into the causes and nature of short run variability, and (2) the inertia on the part of management to innovate. CRAPTfcR X

SUMMARY AND CONCLUSIONS

High coeta In marketing have received much attention in recent years, both in the form of attacks on tne efficiency of the distributive system and defenses of this system. It is estimated that, in 1939# the cost of market­ ing goods In this country was about ;$29*l|. billion.^ Re­ tailing accounted for approximately /+1*5 Per cent of this total, more than any other single distributive level.

Among major types of retailing institutions, the de­ partment store has typically been a relatively high-cost type. In addition, large department stores nave tended to incur substantially higher expense ratios than smaller department stores. Because of higher comparative expense ratios It would appear that large stores are less efficient marketing institutions than their smaller counterparts*

A probe Into important cost-making factors shows that such a hypothesis is unfounded. In a given environment, large stores usually operate with lower expense ratios and high­ er net gain ratios than smaller stores. The major cause of the apparently higher expense for larger stores Is their I------P. D. Converse, “The Total Cost of Marketing," Journal of Marketing, Vol. X, No, J|, (April, 1946), p.

305 306 concentration in big cities. Payroll, real estate, adver­ tising, and delivery expense ratios all tend to be hi/her

In large cities for all store sizes, 'Die relative efficiency of larger stores would be even mere pronounced if adequate allowance could be made for the fact that they make a great­ er share of their sales in higher cost merchandise lines, incur higher customer service costs, and perform more wnole- salinp functions than do smaller stores.

Expense Trends- Dtspite the favorable comparison of large store costs to those of small stores, it is obvious that they all operate with high expense ratios. Since lQPO, the year for which the first operating results were publish­ ed, there has been a secular tendency for these costs to increase, For the stores studied, there waa an annual positive trend of .33 P©r cent per year during the period from 1929 to 19U1 * The primary source of this secular growth is to be accounted for by more and higher taxes, greater outlays for selling supplies, delivery services purchased, and higher payroll costs for salesclerks, "other” selling employees, and display workers. Following the low expense period from 1 9 to 19qb, the costs for selling, delivery, and uisplay have either surpassed or closely approached an extrapolation of prewar trends. It is sig­ nificant to note that these expenses are, for the most part, considered to be among the more controllable incurred in 507 ueHartiuent store operations. Vhe fa 11 ure to control the se cos ts la e vldence of a weakness In uepartment s tore expense management. It further points out a need for an lnvestlpa- tlon and appraisal of existing expense management concepts ana practlces. Such an investigation and appraisal coulu be a distinct contribution to marketing literature*

EkACTICES Id DEPARTMENT STChE EXPEwSK hA^AttE.

Expense management has both static ana dynamic aspects.

Static considerations concern the problems of expense man­ agement divorced from the influences of time. These are primarily problems of expense reduction. having achieved low costs under a given set of conditions, it i3 then im­ portant to control costs under the wide range of operating conditions that occur througn time. Any attempt to reduce or control expense raises a third aspect--that of measure­ ment. Practical expense management must include all tiiree to some degree.

Expense Heductlon- A rapid return of hl/h expense ratios from the low levels of VJorld war II has stimulated

Intensive expense reduction efforts In many stores. :«nile there has been but one foal, tne areas of effort, manner of attack, and techniques employed have variec. substantially,

..P.jor reduction effort, since 19h>, has teen In nonsellln areas of the store, and particularly in the processing and 30Q nandling of merchandise. rrtquent attention has also been

/iven to the reduction of costs in office activities. fhere nas been a conspicuous lack of specific expense reduction effort in selling and salts promotion areas, in spite of the fact that a large snare of total expense is incurred in these activities.

The most commonly uteu single ty^e of reduction effort has ueen that of detailed challenge or scrutiny of costs.

Systems or work analysis, work simplification proprams, and increased mechanization have also been employed. f.ethoas studies have received greater use in offices tn&n else- wuere while the installation of more or better equipment has been widespread in both warehousing and office activ­ ities. ..lost studies of layout nave been restricted to merchandise handling areas.

i.lany store executives nave come to reulize that there are two avenues to expense reduction. Direct attempts at reduction nave been typical of past efforts and are still too widely employed. A more fruitful method has been to approacn costs in an indirect manner by attacking the prob­ lems of more efficient utilization of the factors of proauction. The direct approach constitutes a challenge to effect (i.e., high costs) without adequate consideration of causes. hven in tne stores where more scientific re­ duction tecnnlques nave been employed, the application has often been haphazard and infrequent. with few exceptions, research departments have been too inadequate, 1.n tra ining, size, and function, to develop a well-rounded expense re­ duction program.

Measurement in Expense i.lanapement- "Expense ratio to sales" is more frequently used for the measurement of ex­ pense efficiency than any other tool. There has been, how­ ever, a tendency to give greater emphasis to measurement of costs and efficiency in terms of specific work or proauction units. Quantity production standards, in particular, have been rapidly adopted, since World War II, In routine office and merchandise handling activities. There nas also been a moderate use of standards In customer service areas. In almost all cases they have been set on the basis of either subjective evaluation or past experience. In a few isolated cases, time study techniques have been employed. Hesponsi- bility for the development of these standards has been about e-jually divided between line supervisors and staff personnel.

Cost standards, particularly predetermined standards, have been employed in a few stores. Eormal quality standards uavt also been applied in a very limited manner. :rom a study of the development and use of measurements for cost and production management, several conclusions may be drawn.

Specific work unit measurements have been successfully em­ ployed in expense management. m spite of the growth in $10 their use, they have not been adopted extensively enough, either among store# or within stores. Work unit terms nave often been Inappropriate for the work measured and have frequently been developed and applied In an unscientif­ ic manner by unskilled persons.

KxpenBe Control- While practices vary widely, there has been a prowing realization of a need for more effective expense control. This realization is evidenced by increased attention to expense problems from top management, by ex­ pansion in the activity areas In whicn expense control is exercised, and by a reduction in length of the expense bud­ geting period. Payroll costs are being budgeted for weekly periods rather than monthly. Nonpayroll costs are often budgeted monthly rather than semi-annually.

In almost all of the stores studied, expense fore­ casting and control are attempted with a fixed or single level budget* The primary bases for this budget are the sales plan and past expense experience. Several stores have

tried flexible budgeting in an attempt to achieve tetter

control under the highly variable coriuitions that exist at

various points in time. Since 19i|t, in particular, there has been a growing recognition of the value of controlling

In terms of work load rather than sales. In most stores tnis application has been restricted to nonselling areas where work load application possibilities are most obvious. Al­ 311 though tnere has been a tendency for store mana; e;i,en ts to aecentralize expense control responsibility and to re­ classify it along lines of executive authority, in many stores centralized expense control through functional expense groupings is stil? adhered to.

In the light of practices found in many stores it is apparent that there are a number of significant shortcorr.i ngs

in current department store expense management practices.

Dependence on past experience as the goal measure for ex­ pense is retrospective and inadequate. A fixed budget, while well adapted for forecasting, is relatively ineffect­ ive as a control tool. plore effective expense management would be possible with better cost and operations measure­ ments, and decentralized control that has been realigned along channels of executive authority.

A CONCEPT OF EXPENSE IdANAGEivIElJT

The typical executive, a man of action, is not prone

to consider many philosophical aspects of expense manage­ ment. When store practices are studied, however, tnere

emerge certain conceptual characteristics. There Is one

school of thougnt that appears to be dominated by tradi­

tional thinking, while a second group is more innovative and progressive. The majority of the stores fall some­ where between these two schools. 51?

Me ed f or a New Approa ch- That, there is -eneral lack of a premeditated philosophy of expense mana ement Is ob­ vious from tne wide ran^e enc variety of practices fount both witnin and amonp tie stores studied. Arbitrary ex­ pense reduction efforts, widespread dependence on per cent- to-sales interchange fipun.s, and tne use of intuitive man­ agement techniques all emphasize the need for a carefully considered apcroac . to expense management problems. The frequent attack on tnese problems by intuitive metaods is partly tne result of the development of executives from mer- cnandising posts wnere t -is type of management is ,:ore successful. Wnen applied to expense problems it has not been accompanied witn equal success.

All business institutions are c .arged with a definite service obligation to soc iety, inis obligation is usually in the form of economic values that constitute a firm's primary service object!ves. In addition, it is necessary to secure tne secondary business objectlves of "economy and effectiveness in the creation of the primary values...

Inless these secondary objectives are secure it is im­ possible, over the long run, to attain the primary ob­ jectives. In department stores the problems of secondary objectives have not received sufficient consideration* 2------nalph Currier Davis, in an unpuulisned set of reading notes prepared for a graduate seminar in The Theory of gusiness Organization and management, lne Gnio State Uni versity, 1914-'?-l ^ H . 31 3

Rising costs, increased competitive pressures, ni-her pay levels, snorter work weeks, and growing rigidity of costs make an organized approach to expense management problems imperative •

Expense Measurement- Managements pave long ago con­ cluded that expenditures for advertising must be measured in terms of the direct return from the cost and effort ex­ pended. For most other expenses this same lesson has not been learned. There has been a failure to realize that any expenditure, while superficially or technically an outgo, is actually an investment or input. As such, it should ce evaluated in terms of the return resulting from the input.

Mechanically, this is the efficiency ratio of output/input.

The real weakness of the sales ratio is its failure as a direct, stable, or accurate measure of output for .most expenditures. "Per cent to sales" is a financial account­ ing device that serves a very important function, but as a tool for the effective control of costs and operations on a day-to-day or month-to-month baaia it is not well adapted. The "per cent this year to last year" concept is subject to the same criticism. While it does Indicate direction or trend, tne assumption that last year's results are a fair absolute criterion of expense perfori.ianee is un­ just! fled.

In effective management of expense it Is necessary to use tools that give maximum precision in tne measurement of 31U the output/input ratio. Ordinarily two types of these tools are required -- cost standards and physical :-roauctlon standards. Greater precision is secured when tnese are ex­ pressed per unit of input. Physical standards (e.g., pro­ duction per man-hour or packages wrapped per hundred rounds of wrapping paper) give the most effective measure of the utilization of the product or service purchasec. Cost standards combine t e yardstick of physical utilization with the price that must be paid for each unit of product or service.

Two Aspects of Expense management- Expense management consists of two elements, reduction and control. While both may d o undertaken simultaneously, reduction effort should precede any earnest attempt to establish permanent control patterns. If control is instituted first it will then be necessary to revise or develop new controls once static expense efficiency has been established,

Expense problems exist within a given framework of policy, environment, competitive conditions, and methods and procedures♦ While any elements of this framework may be cnanged, thus aaving a profound effect on the expense level, the major opportunities for expense reduction appear to depend on a greater efficiency of operations, devised methods and procedures offer a second fertile fieli;. 1 o have a maximum opportunity for success the reduction effort 515 must be planned, organized, and carefully controlled. It should be carried out in conf or/.ance with sound management principles which recognize the community of interest that exists between business, social, and personal objectives.

Participation from all levels of the organization Is imperative. It is particularly important that employees and first level supervisors play an active part. Education and decentralized responsibility are other essential require­ ments for a successful reduction program.

Once costs have been reduced, there is a difficult problem of how to secure control flexibility. Operational tempos are highly variable within and between almost all of the commonly used time units. Effective control of expend­ iture can best be made by attacking expense at Its source.

Particularly in tne case of nonselling expenses, many costs are not controllable In tie department where they are In­ curred. To maintain a flexible control it Is necessary to use variable budgeting tools that will compensate for volume variations In a more or less automatic fashion.

Anile some costs are relatively fixed in the short run, management has an opportunity to reconsider possible ways to reduce this rigidity at some time or another#

Since control can be effective only If maintained at tne cost source. It follows that It must be decentra1Ized.

Expense should be so classified as to maintain control In 316 terms of executive responsibility ana authority rather tnan by classifications tnat cut across authority lines. it must be remembered that expenses are controlled by persons rather than by systems.

Prerequisites of Xhls Approach- basically, what Js requireo is a propram of planned expense engineering.

Measured objectivity snould be the prime cnaracteristic of such a program. Short run benefits must be subordinated, for tne sup ested approach will ordinarily be a slow cumula­ tive process. As a minimum it means tne creation o f a r e ­ search department sufficiently large and adequately trained to promote cost consciousness in all, provide technical assistance where needed, and to undertake expense problenis of a non-localized nature. Productivity concepts should be expanded beyond the present "man-hour" basis in an effort to secure more meaningful criteria for cost and operations evaluation.

APPLICATION Or COhCisPT TO PRACTICE

Applications of some aspects of the suggested approach are to be found in many of the stores studied. With one or

two exceptions, no store nas a program tnat resembles an overall approach to the tnree problems of expense reduction, measurement, and control,

Kxpense Reduction- Within tne peneral expense frame- 517 work, increased operational efficiency presents t .e beet

opportunity for expense reduction. Essentially this improve­ ment must come from a reduction of waste time, energy, motion,

and ina teriai n . Detailed, specific studies of trie wastes in

using these four elements must be undertaken, fortunately many industrial techniques have already been developeo that

simplify this task.

Analysis of work by flow process ciartiim is one of

the mo;:t successful techniques for exposing wastes in opera­

tions, It is well suited to many different situations with

unlike characteristics, .Vide usage in department stores

verifies its value as a oasic research tool for expense

reduction. It Is of particular value In the analysis of

steps or movements involved In process I nr merchandise,

mater’als, or papers, I'he chart is simple In construction

and can be easily employed by a person with minimum train­

ing. Activity analysis is a tern applied to the study of

capacity utilization of an employee, croup of employees,

machines, or a combination of these, Ont of tne main ob­

stacles to the use of activity analysis in e r trrt. nt

stores is the difficulty In securing data. home sort of

d cservino tecnnique must be used that will rut create a

situation so artificial as to vitiate the value of the

study. There has been only a very limited use of activity 518 analysis in department stores, even tnouph it has valuable possibilities Tor the study of sales operations, Experi­ mental camera techniques have been used witn some measure of success. In particular, adaptation of movie cameras to take exposures at the rate of one per second or even less frequently can simplify the observation problem, l-.atio- delay study can also be employeu by supervisors or others to gather useful data concerning activity. Even In stores where Industrial engineerinj- techniques ,ave advanced fartriest, there has been no organized study

of fine motions. While t; ere arc many activities where such studies are surely not justified, there ere otuer

tasks, particularly In nontellin, ut. par tment s, which are of a sufficiently short cycle a,w repetitive nature to warrant time and motion studies. , .icro-;i:otion u..ult sis snoulo tiake a limited out valuable contribution to hipher operational efficiency. One difficulty, of course. Is

that trained personnel are required to carry out tu.ese

studies, When stores nave remedied tne broader and more ouvlous defects, motion analysis may receive more consid­

eration, 'Work Simplification programs have become instituted

in a number of department stores since I9u^* When properly developed and a dm ini s tered, substantial cost savings are

possible. It was estimated in one store that 1^,000 wa* 310 saved in a single ;ear in tne Accounts Payable arm Gruer

Checkin# Sections alone. x he essential chare c te r i : 11 cs of most successful Work Simplification programs are; traininf courses in methods study ana motion economy prin­ ciples, a formal submittal proctuure for pro osais, and generally some reward for acceptable proposals, Success of the programs appears to depenu upon the care wit.1; which they are installed und tne decree to wnicii popular partici­ pation is secured,

host of these reduction and investigation techniques affect primarily the efficiency of labor utilisation. in the light of the tremendous possibilities for savin, s in the use of personnel tnls empnasis is justified. On the other hand, many opportunities do exist lor coat savings by policy revisions, the analysis anti improvei..ent of forms, ana studies in supplies utilization.

One of the ciiaracteris tic s that di s tinpui she s most industrial activity from that of marketing is tne former 1s high degree of mechanization. Although many marketing activities will probably never be mechanlzed, there are operations in department stores where macnines can be economically employed. Interest in tne development of mechanized or electronic equipment for store operations is high. While the areas of application are somewhat limit ed, mechanization offers excellent opportunities for cost 320 reductions. hxamplts of iiL-aa vised installations should caution executives to ^1ve careful consideration to all of the aspects of each problem where tnere may be lecuanl- cal applications*

Measurement Xechniques- Any scientific approacn to measurement requirements for expense management must recog­ nize the three dimensions of quantity, quality, and cost.

All three, present to some degree in every expense manage­ ment situation, directly or indirectly affect the output/ input ratio. If cost efficiency is to come from physical efficiency it is necessary that tnese dimensions be ex­ pressed in physical terms. Probably the most important of the three Is the physical quantity or production standard, usually expressed in terms of man-hours of labor.

Since I 9 /4.3 there has been a growing auoption of quantity production stanaarcis In department stores. The value of these standards, their quality, and the manner in which they are employed has varied considerably. The\ are most commonly used in nonselling areas I’or tasks that are relatively routine. The success of their use Is so appar­ ent that one wonders why more stores have not employed them and why those that do use them nave not expanueu their application. frequently the values are not fully attained because of the use of inappropriate terms and organization units, or a general lack of rigor In the application of the standard* 321

In their most advanced form, physical proauction standards are engineered measures that are developeu alter careful methods, layout, and operation time studies. In this form they exist in only a very small number of the stores studied. It Is more common to develop production standards by subjective evaluation on the part of the super­ visor or by a computation based on past production records.

In either case there Is a difficult problem of establisnlng a standards level that Is defensible from either a manager­ ial or worker viewpoint. When properly developed and em­ ployed, a production standard provides an excellent base for measuring Individual and departmental productivity, rewarding employee performance, controlling the size of a work force, and budgeting payroll expense. historical and subjective standards are usea chiefly to evaluate depart­ mental performance and to budget payroll.

To achieve maximum benefits from the use of production standards In department stores it is necessary to set these measures as scientifically as possible. In the majority of

Installations studied, insufficient attention was given to tne proper selection of standards terms, organizational and operational areas of application, and tne installation, maintenance, and revision of these stanuards. These fail­ ures often resulted from management's reluctance to employ sufficient well trained personnel, and from the apparent inability to overcome widespread prejudice. 322

Standards maintenance is a problem that is often overlooked. The vast ranpe of operation levels toat are usually experienced over a perioa of time are accompanied by different sets of operating conditions. These often affect the attainable production levels to a marked oegree.

There has ueen little effort to employ productivity concepts in selling activities although costs are high anu have been increasinp, in this area. While selling conditions are often unstandardized ana therefore less susceptible of precise measurements, physical production standards might be used to plan work force requirements and to evaluate certain aspects of indiviuual ana departmental productivity.

It is believed that one of the major obstacles to progress in the use of production standards in selling departments is the lack of precise measures for both input and output*

The man-hour basis is not as meaningful in selling as in work w i t h a more predictable and more regular work load pattern* A "transaction" is hardly a homogeneous measure­ ment under a variety of traffic and sales conditions. One possible type of sales production standard that would be more precise than a transaction per man-hour would be one based on a transaction-traffic relationship. Only isolated experimental work has been done along such lines, but the obstacles do not appear to be Insurmountable,

Quality standards are needed In department stores for two very important reasons. first, since department stores 5-5

have a hign level of customer service, it is important tnat

service quality be controlled. in addition, it is usua ny

necessary to establish some sort of control when proauction

standards are used in order to assure that quantity is not

secured at the expense of quality. Statistical control

techniques, developed in industry and based on scientific

sampling, have definite possibilities for application. -y

such control it is possible to reduce errors and incorrect

work with an attendant saving in costs. Service stanuarus,

a special type of quality standard, have been used more or

less sporadically in a number of stores. In the future it

is expected and hoped tnat a greater use will be maue of

quality control in the rnana: ement of expense at, well as

the improvement of service ana operations efficiency.

Standard or predetermined costs are a prerequisite to

an improved allocation of expense to sellin- departments.

At beat, a number of expenses must be allocated in an ar­

bitrary manner. With predetermined costs, it has become

possible to reduce the amount of pro-rated expense to about

15 to 20 per cent of total expense. With predetermined

costs per unit it is also possible to attacK certain ex­

penses at their source. for example, wnen a selling depart­ ment is cnarged a specific amount for each package tnat is

delivered, the department manager is likely to develop wuat

is probably his first intense aesire to reduce tne ratio of

packages delivered to transactions completed. 10 uate tnere has been only an Isolated use of preat te m i n e u cost; In department stores. Tnere is u definite need l'or more prt- aetermined cost ana anit cost aata. ..,08 t phases of market-

iiv nave lagged behind manufacturing in tneir ae velopment ol"

cost accounting.

Expense Control- Probably tne most difficult tas.r in

controlling store expense results from the highly variacle

character of department store operations. Prom perioas that are several years in length aown to periods of only a few minutes there are many different time levels at whlcn fluc-

tuationa of store activity exist. Since these variations

are due chiefly to external causes ceyond managerial con­

trol, Improvement must come from an enhanced ability to

predict and compensate for tuese disturbances to staule

operational patterns.

There are two Important needs for effective adjustment

to tne dynamic fluctuations in operation levels. rirst, it

is Imperative that stores employ budgeting and control, tools

that are well adapted to the task at hand. in most stores

a forecast or fixed budget is used to control store expense,

inis Is a predict! onal device t;r^t nas little real virtue

when It comes to the actual problem of ex, ease control since olanned operational levels are seldom achieved exactly,

inis Is particularly true when tie period of prediction is

relatively short. It Is not too difficult to approximate

sales for a six month perlou, but to make a reasonably 325 accurate prediction Tor a week, for a c& t or Tor shorter

.-erioiis is a more difficult problem.

A variable budget is tne lest tool yet developed for tne proper evaluation and control of costs. it \t Ideally suited to decentralized control by the exception pr1ncipie. its use requires that specific production or volume units be developed, that oareful consideration be given to proper departmentization, and that adequate accounting classifica­ tions be developed. Variable budgets have been used success­ fully in industry for many years, and since World War il have been employed in several of the leading department stores in this country.

As with production standards, applications in non- sellinf, departments are the most obvious. A consideration of the cuaracterlsties of selling operations lends support to the belief tnat tnere are similar applications in selling* budgets can be developed at departmental, divisional, and store-wide levels. While all expenses that vary in a pre­ dictable manner can be controlled witn this tool, the most important single expense is payroll*

Estimates of proper expense-volume relationship for use with variable budgeting are usually developed by some form of correlation computation between tne amount of ex­ pense and a measure of production or volume for past per­ iods. One problem raised by the use of past relationships is that of determining whether to accept past results as a 526 reasonable measure or expense performanee, One way to

improve upon the use of past average results us t ,e criter­ ion Is to develop tie relationship on a cross section of uata for perious of above avera e cost perforn;ance,

A second problem stenrr.inr Irom tne djnanl c nature of department store operations Is that of actually rai ntuininr a flexible balance re tween work force and work loan. A study of operations In sor.,e of the leauing department i tore s in the united States : ugpests tnat insufficient thought and effort naa been directed to work force-work load balancing.

It must be admitted that tncse problems present a difficult challenge because of technical considerations and manager­ ial and employee prejudices.

In selling activities there have been rather Intense efforts to balance work with personnel through the use of contingents and regular part-time employees. Lven in sell­ ing departments, however, little Is known about tne manner in which traffic volume ebbs and flows. In nonselling; activities, there has been a strong tendency for manage­ ments to assume that a relatively high fixed work force Is necessary. While the variety of work and type of skills re­ quired do complicate tne problem, only Isolated Instances are found where any attempt has been made to make a mater­ ial improvement in work force flexibility. i.iore considera­ tion shoulu be given to tne use of workers that may be 527

£j in i f t s d w 11 in 1 n t In c nonsGlUn^ ux*6 & s & no f r on. nonrellin to

selling areas when peak wor* loads necessitate ai-al tl onal help. As with other problems, the failure to fina i,:uch

propressive consideration of these difficulties can be attributed to the lack of basic research into the causes and nature of short run variability, anu the inertia on

the part of management to innovate*

AN APPLICATION OP SCIENTIFIC EXPENSE MANAGEMENT

While many specific techniques and methods have ceen

discussed, no overall example has been given that shows the

intergration of a number of these techniques for a given

activity. An illustration of the results of such a program

in the clerical service department (stenographic and book­

keeping) of the credit division of a department store is

shown in Figure 2^ • The first eight months represent the

period before the program was instituted. The comments

founa on each chart explain clearly the results achieved,

GENERAL CONCLUSIONS

From the study and analysis of department store operat­

ing statistics, and from observations, surveys, and inter­

views, it is apparent that the problem of high and possibly

rising department store expenses is crucial. The increase

in expense ratios, particularly since 1 9 ^ 5 . ^as been accom­

panied by a change in attituae towara expense on the part of FIGURE 2S

Results of a 29 Month Industrial Engine ring Program in the Clerioal Sarrica Department of the Credit 1A vision of a Department otore

4 1 t 3 ♦» I. 1 3 1 1I t4 n a | | * S -a 13 5 a | 3 * ♦* i T \ i 4 ^ i ? i AM ?

4 \ ♦ A f -4 ( +i-l 4 — + - 3 82 2 3 3 3 2 I awl-** MTtMpHi U^fvs* -f^Lme d^seav ^x»pui^«o. 1 s I 4 li I $ 4

< " ' 3I I * 'tx. X - 4 J 4 3 2 3 3 3 8 § 3 S «aj«n j» X vap«i (npoft ajnotf-uv rlCi'.j:lK 2S

rial Engine* ring i^ro^raxi in the Clerloel Credit iivision of a Leper tmexit otore

4 j 4 -a I I f I 4 4 4 * ♦» «) f* *i s t f-4 4 < i* i

- X-

3 a ^K*tiUl^J»0

4 a 4 * 1 I ■> i* i 4 a> 5 s 4 5 ! -1 i x 4 •3 3 i S * 3 5? ! ••JW TO JO 1 p**xo* ejmoq—ue 329 store executives. In many cases, expense manat ei.itnt prob­ lems are now their primary concern. In spite of all this intert st, there is a paucity of Information concerned specifically with department store expense management prob­ lems, concepts, and practices.

While tnere have been substantial increases In certain expenses Impossible or difficult of control, such as taxes, or rental costs, some of the largest growths have been In wnat are normally called controllable costs. The achieving of a better expense performance is cast In two forms. It ch store operates within a given framework of physical environ­ ment, policy, competitive climate, and customer caaracterls- tics. Changes in this framewqrk offer many cost reduction possibilities, but defy generalized treatment. There is a definite need for thoruugn case analyses that will throw some light on these factors and the effects that are se­ cured by a change of framework.

A second avenue to lower department store costs con­ cerns the problems of expense management within tne expense framework. This is the major concern of this thesis. One of the most prominent characteristics of pretent-uay depart­ ment store expense management Is the lack of a well defined approach. It is believed that any permanent Improvement of expense conditions must be founded upon a point of view that gives due consideration to social, personal, and company objectives. Its first requirement Is that manage- 330 ment maintain a research viewpoint toward costs anu jptre- tional efficiency. iy the maintenance of maximum operational efficiency commensurate with given enviroiinental cunuitions, it will be pos ■ ible to Improve the static expense picture, by scientifically applied controls ana control techniques it will be possible to improve the dynamic aspects of expense ianapernent• xf expense is to be pr perly managed, it is imperative tnat precise, scientifically determined mearuris

Le applied to botn costs and operations. In all tiiree of these aspects, most efforts in department stores are tiaruly beyond the pioneer stage.

An overall expense management program is urgently required in most of the stores studied. Such a program must necessar1 iy be long run, cumulative in its application, and shoulu be designed to give uue ;uate consioeration ootn to technical and personnel factors. xt is particularly import­ ant that younger executives be inuoctrinatea with tne re­ search viewpoint, possibly by requiring then, to spend a period as a regular member of tne research department. There is a tremendous need for researcn in all tnree of the major expense proolems--measurement, reduction, and control. xost measurement techniques and terms have been borrowed from other segments of economic society. ihese

*ave proved workable in many routine nonselling activities tut have been less successfully applied in activities that ?3l b.i*e unique to retail institutions. ..i6ny cost, physical production, ana quality yardsticks now in ust offer o, por-

tunities for refinement and improvement• A reappraisal of

input and output concepts anu tne manner ana cause of varia­

tions between tne tit is needed. an particular, input ana out­ put measures in sellinp activities need to be reconsidered and more scientifically de term! ned.

A great stride forward in expense reduction can be

.u&ue by devtlopinp more exact and more meanin. 1'ul criteria

of proper static expense level. bii s must come, it is re­

lieved, through tne refinement of present invest! stive

techniques, development of new investigative approacaes, and

tae accumulation of data needed to evaluate expense level efficiency. Specifically, it is Important to aevelop

criteria of reasonaule output per input level, minimum scill

levels for performing a iven X'unction, ana adequate .uality

characteristics for performance and condition*

The basic proolen: in improving expense con irol is the

ju lane in, o; work force ana cost to ui-dily variable work

e editions. what are tne work loau patterns at different

time levels for different organi zo t i ona 1 units? w'hat is

tne range in these patterns? how well can work force and

costs De oala need to tnese patterns? Tneee problems run

tnrough Doth the selling and nonsellint phases of depart­

ment store operations* 332

Although the development of scientific expense i-.an- a en.ent practice in department stores is nurdly leyono toe pioneer stare, it is apparent from the material ( rt; trf t.u

In previous chapters, that the concepts and approaches

^upper ted are basically sound. eventually, deuartu.tnt store manare; lents must accept tne challenge and undertake ri :.earch in sufficient quantity am. luality if toe., are to c.ntriLute t ,elr share toward lower dit.tr' tut'on c.sts. i L t jay can be hastened by probing fur ther alonp tne avenues j i' at tael: tnat -.a ve been del’neater .ih’t, 335

BIBLIOGRAPHY

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Kosms, Andrew R., The A.b.C. *s of Motion Economy. (Newark, N. J., Institute o£ Motion Analysis and human Relations, 19U3). 133 PP. Lang, Theodore, editor. Cost Accountants1 Handbook. (^ew York, The Ronald Press Company, 19i+4J. 1 4 3 0 pp.

Lefflngwell, W. H ., and Robinson, E.M., Textbook of Office uoanagement. (New York, tucGraw-Hill rook Company, IHTTT^ 950)7 S25' PP. Lowry, Stewart M., Maynard, Harold fi., and Stegemerten, G. J., Time and Motion Study. (New York, McGraw-nlll Book Company, Inc., 1932), 1*65 PP.

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Rautenstrauch, Walter, and Villers, Raymond, The Economics Of Industrial Management. (New York, Punk Wagnalls (Jompan7T^959) 7T 3 T" p p 7 ” Rlegel, John W., Management. Labor. and Technological Change. (Ann Arbor, Tne University of Michigan Press, 1 3 5 2 7 7 1 7 4 PP. Robinson, 0* P., and Brisco, N. B., Store Organization and Operatlon. (New York, Prentice-hall, IncT, 1949) W pp. Ross, H. John, Technique of Systems and Procedures. (New York, Office Research Instltute~ Tne ., 1 94^0» 53^ pp.

United States Department of Labor, Job Descriptions for the Retail Trade. Volumes I and III~ Owashin^ ton, li. S. Government Printing Office, 1958), 2^5 PP* *od ^02 respectively*

Proceedings and Papers

American i4anagement Association, Case Experiences in Office Cost Reduction. Office ManagementSeries No. 12 b, (Hew York, American Management Association, 194°)» 4 ° PP*

. Incentives and Standards in O f f ! c e Production. 5??loe Management Series No. 121, TNew York, ftmerican Management Association, 1 94 7 ) * 2 ° PP*

______, Labor-Management Cooperation for Increased Prodiucir^Lty. Production feerles No. 175. (New York, American Management Association, 1947)* 4 6 pp*

. Production Costs and breakeven Points. Pro­ duction Series No. 1?7* (New York, American Management Association, 1 9 4 7 ) , 47 PP*

. New Controls for Pixed ana Variable Costs. Pro­ duction Series No. 176* (New York, American Management Association, 1 9 4 6 ), 39 PP. 535

American Management Association, Practical Uses of Break-Even and Budget Controls. Production Series ho. lob, (New York, American nagement Associati on, I9I+9 J, j>0

Controllers* Congress, Yearbook. 27th Controllers * Congress Convention. (New York. National Retail Dry Goods Aasocia- ilon. 155.7 ^. 161* pp.

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Management Division, Proceedings of the Wrapping and Packing Clinic. (New York, NetionaT Retail Dry Goods Association, 191+1). 1+1 PP.

Store Management Group, Warehousing and Delivery Practices and Procedures. (New YorlTJ National Retail Dry Goods Association, 191+9) • 1+1+ P P •

Gearing Operations for More Sales and Less Expense. (New York. National txetall brv Goods Association. l9l+9), 93 PP. . Store Manager * a Operating Guide. (New York, National Retail Dry C+oods Association, 1 9 5 ° ) # 11+2 pp.

______, The 191+9 Expense Problem. (New York, national detail Dry Goods Association, l9l+9Jf 25 pp,

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Store Management and Personnel Groups, Controlling Personnel and Operating Expense. (New York, National Retail Dry Goods Association, l9l+d), 2i+7 PP.

______, Management and Personnel Forum--191+7. (^ew York, National Retail Dr*y Goods Association^ 1^1+7)* 227 PP*

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Court, A. T., "Measuring Labor's Productivity," Automobile and Aviation Industries. March 1, 191+P* P* 17. 356

Gardner, Fred V,, "Controlling breakeven Points," factory management and maintenance. July, 19i+9, p. 9 0 . harvard University, Graduate Scuool of business. Operating Results of Department and Specialty Stores. Various bulle­ tins r r o n T T .^29 t o l^lj.9 Inclusive, (boston, harvard univer­ sity, Graduate School of Business),

Lowe, Robert A,, "Application of Performance Standards to maintenance Workers and Their Extension to Other Indirect Labor Groups." N.A.C»A. Bulletin, Section One. June. ld^O. P. 1 2 3 7 .

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Uaynard, H. B., Stegemerten, G. J., and Schwab, J. L., "methods-Time measurement," factory .management and main­ tenance. February, 1 9 /4 p. 9 b.

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Simpsen, Marion H,, "A Monthly bonus for Foremen based on Cost Savings Against a Flexible budget," N.A.C,A. Bulletin. Section One, April, 1 9 5 ° # P* 9 2 7 •

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"What Belongs in a Methods Study Program?", Factory Manage - ment and Maintenance. September, 19^0* P* APPENDIX A TABLE /6

Total fiaployees, Total Payroll, and Average Payroll Par Employee, for Department Stores In Salooted Cities In Five Population Siaa Groups, United States, 1939

Total Arerage T o t a l Payroll (in Payroll Par City E m p l o y e e s thousands) Eeployee

Population - 50.QUO to 100.OCX)

Glendale, Cal. 658 ♦665 $1 , 0 1 1 Waterbury, Conn. 371* 373 997 St. Petersburg, Fla. 303 315 l,0ii0 Macon, Ga. 1*20 366 871 Evanston, 111. 1,062 972 898 Davenport, Iowa 939 831 885 Topeka, Kans. 613 531* 871 Lawrence, Kans. 266 2l*J* 917 Kalamasoo, Mich. 567 617 1,051 Springfield, Mo. 1*83 370 766 Niagra Falls, N. Y. 625 555 868 Sohenectady, N. Y. 816 812 995 Binghampton, N. Y. 999 805 806 Asheville, N. C. 1*1*5 nou 908 Winston-Salem, N. C. 365 298 77 n Harrisburg, Pa. 759 756 996 McKeesport, Pa. 299 322 1,077 Pawtucket, R. I. 326 237 727 Columbia, S. C. 367 257 782 Roanoke, Va. 50li U6 0 913 Charleston, W. Va. 601 792 989 tiwtington, W. Va. 632 U87 771

Mean $ 906

Population luO.OQO to 250,o00

Long Beaoh, Cal. 1,61*1* $1 , 6 3 8 $ 996 Hartford, Conn. 2,879 3,1*85 1,210 Wilmington, Del. 6 9 0 681* 991 Miami, Fla. 1,783 1,908 1,070 Peoria, 111. 1,611 1 , 6 3 9 1,017

(continued) TABU K(eoBtlnud)

Total" Avaragn T o t a l F a y ro ll (1* Payroll For ClfiL »tiSZ5SS. L Popolatlan^ 100^000 to 250.000

Oary, lad. l,Gl*8 $ 9 2 9 $ 686 Sooth Band, lad. 915 1,001 1 , 0 9 k Fort Mayaa, Had. 1,281 1 , 3 8 9 1 ,081* Dos Moiaaa, loom 2,161* 2 , 2 2 7 1 , 0 2 9 Cubrldct, Ifooo. 625 6 6 5 1,061* Foil U t o t , M o m . k O k 3 8 1 91*3 Nov Ditfcrd, M o m . 5 6 1 535 9 5 k Springflald, M m i . 1 , 6 6 6 1 , 6 7 5 1 , 0 0 5 Eliaabath, M. J. l*Ok 5 3 0 1 , 3 1 2 Tran ton, II. J. 1,226 1 , 1 9 k 97 2 Utico, V. T. 660 51*6 830 Conton, 0. 722 688 953 Seranton, Fo. l,2l*l 1 , 1 3 7 916 Chattanooga, Tonn. 685 775 876 Salt Laka City, Utah 2,1*10 2,oia 81*7 Norfolk, To. 1,179 1 , 0 0 5 652 Rlofcaond, To. 2,773 3*011 1,086 Toeoaa, iuta. 1,102 1,180 1 , 0 7 1

61,001

Population 250,000 to 500,000

M « | h — | __ 2,106 ♦ 1 , 7 7 1 ♦ 6 k l Oakland, Cal. 5,121* 5,1*53 1,06k Danrar, Cal. k , 9 6 6 5 ,5 3 5 1 , 1 1 0 Atlanta, Oa. 5 , 1 7 7 5,1*93 1 , 0 6 1 Tnrilanapolia, Ind. 5 , 3 6 9 5,81*5 1 , 0 8 9 Lottlwllla, ly. 2 , 0 5 k 2, 1 2 k 1 , 0 3 k Maw QTlaana, In . 3, 5 1 2 3 , 5 2 6 1 , 0 0 k 7 , 0 2 5 7 , 9 1 0 1,126 St. Paul, Minn. 5 , 8 5 9 5 , 9 0 9 1 , 0 0 9 Kanaaa City, Mo. 6,030 6 , 1 8 1 1 , 0 2 5 Naaark, V. J. 8,71*2 1 1 , 9 3 k 1 , 3 6 5 Rochnator, I. T. 3 , 9 9 k 3 , 8 5 0 9 6 k Cinnl naati, 0. k , 9 7 6 5 , 7 8 0 1 , 1 6 2 Colaaha% 0. 2 , 9 8 k 3 , 3 6 1 1 , 1 2 6 TAHIJt t6(eontiim ed)

f c i a l Average T otal Payroll (la Payroll Far C ltT Baplojaea ttaoaaaada) fia>lojoo Poealatiaj 759^000.,to #0,000

Toledo, 0* 3 9y»8 3,552 1,030 Portland, Ore. 5,315 6,389 1,203 Prorldenoe, B. I* 3,292 3,597 1,093 Maephla, Toon* k,192 k,085 97k Dallae, Tax* U ,k ll 5,591 1,266 Bouatoa, Twu 2,138 1,781 833 San Antoalo, Tax. 1,51*3 l,3 k 7 873 Seattle, lu h . 5,238 6,U81 1,237 Mean 81,068

Fomlatlon 500.000 to 1.000.000 San Praaolaoo, Cal. 7,206 88,663 81,230 Baltlaere, Ud. 10,713 11,673 1,090 Boetoa, Maaa. 15,332 18,892 1,232 St. Loala Mo. 8,9 8 0 10,119 1,127 Buffalo, I. 7. 6,182 6,198 1,003 Cleveland, 0. 12,067 I k ,282 1,18k Plttebergh, Pa. 12,770 I6,5kl 1,295 XLXnakae, Via. 8,73k 7,373 1,095 WaaMagton, 8. C. 9,362 11,518 1,230 Maaa 81,165

Ponolatlaa 1.000.000

Total Optratinc taptnct to Salto Katloa of Stltctad Oapartaant Staroo Beportlj* to tat Harvard Ortdaata School of Batlaaaa, Glatolflod by Salto Volaat and City Slat, United Statoa, 1*0, 19k3, W > , « d 1 M

i — r f f T i r i I H o i Xtar fai— Volta* Lttt t6an 12 to 25 to 50 to 100 to 250 to to 1,000 or (how 15 2f 100 250 500 1.000 ■ort 19W Ltoo than 1 150 31*65 32.3* $ 150 to 300 32.it 31.6 3lu tf 300 to 500 33.6 32.9 500 to 750 3 iu l 33.95 750 to 1,000 36.2 3tu3 1,000 to 2,000 31U 3k«6 35.05 2,000 to it, 000 32.0 3UtoO 35.95 35.85 it,000 to 10,000 33.1 3U«9 37.3 10,000 to 20,000 35.2 35.6 38.75 20,000 or ■art 36.it 1 * 3 $ 1,000 to $ 2,000 29.35 27.615 2,000 to it, 000 28.0 28.25 It, 000 to 10,000 26.7 29.0* 31.55 10,000 to 20,000 27.2 31.1 20,000 to 30,000 27.5 30.0 30,000 or ■art 30.85 1 * 6 $ 1,000 to $ 2,000 27.7* 25.15 29.05 2,000 to it,000 27.1t5 25.5 25.35 it,000 to 10,000 2lt.9 27.8 29.25 30.95 10,000 to 20,000 26.8 26.3 30.2 20,000 to 16,000 27.9 29.lt ■are 16,000 or ( »ta>64 nti a H 1 28.15 TIR11 /? (oontiraftd)

terrvii'rr a * ...... laar Salaa Tolnna U m than 15 to 25 to 50 to 100 to 2 5 0 to ' 50b’ 'to' 1,666 or Qfoqd 1 5 - 2 5 5 0 100 250 500_ 1.000 “W ...... $ 1,000 to $ 2,000 32.15 3 0 . W 32.55 2.000 to 5,000 3 0 * 6 30.9 30.75 5.000 to 10,000 29.0 3 1.8 33.65 1 0 . 0 0 0 to 2 0 , 0 0 0 30.3 32.3 3U.65 2 0 . 0 0 0 to 5 0 , 0 0 0 3 2 . U 33.5 35.25 50.000 or nora 32.5

Snm it ftwritlni Baaulta of Popart—nt and Spaolalty 3toraa« aalaetod y»*ra, nurnrd rad.— rsity, Boraan of~fcnlnaaa fa— arch, Bollatinj Ho. 113> p. 26; 120, p. 23; 126, p. 29; and 132, p. 56. T A B U 7 S

Payroll Expense to Sales Ratio* of S*l*ctod Departaant Store* Reporting to tb* aarrard Oradaat* School of Basin***, Classified by Sal** Volne* and City Si**, United State*, 1940, 1943, 1946, and 1949 (Salas ***** in tbonsands) ______r t r m r r r r r r------T T T ______L Tear less than 15 to 25 to 50 to l6o to 250 to ^00 to 1,000 or ______Store Sis* 35 25 50 100 250 500 1,000 nor* 1 r Lae* than $ 150 16,90* 16.00* $ 150 to 300 16.80 16.65 18.60* 300 to 500 17.70 17.30 500 to 750 17.50 17.60* 750 to 14000 17.70 16.90 1.000 to 2,000 19.00 17.70 16.80* 2.000 to 4,000 16.40 16.90 17.10* 16.40* 4.000 to 10,000 16.50 17.00 17.95 10.000 to 20,000 18.00 18.30 17.95* 20.000 or nor* 17.70 1943 $ 1,000 to $ 2,000 15.60* 15.60* 2.000 to 4,000 14.60 14.40* 4.000 to 10,000 14.60 14.55* 15.55* 10.000 to 20,000 14.90 15*70 20.000 to 30,000 15.00 16.40 30.000 or nor* 16.50* 1946 $ 1,000 to $ 2,000 14.90* 15.50* 2.000 to 4,000 16.20 15.20 14.60* 4.000 to 10,000 14.50 15.60 16.00* 16.10* 10.000 to 20,000 15.60 15.50 16.20 20.000 to 45,000 15.90 17.00 Ii5t000 er .or. (contln»d) *** T a £ H 1$ (continued)

(Sales and population in thousands) rsTrrrrroi ------Tear Less than 15 to 25 to 50 to 100 to £5o to 506 to 1,000 or Store Site l£ 25 50 100 250 500 1.000 eore T 3 B F $ 1,000 to $ 2,000 17. lOJt 17.00St 17.90% 2,000 to 5,000 17.00 17.70 16.5058 5,000 to 10,000 16.10 17.50 18.00? 10,000 to 20,000 16.70 17.10 17.90? 20,000 to 5o,ooo 17.70 19.10 lfi.5058 50,000 or ■ore 18.20

Sourcei derating Results of Depart— nt and Specialty Stares, selected years, Harvard University, Bureau of Business Research, Bulletins No. 113, P* 28; 120, p. 23j 126, p. 29; and 132, p. 56. TABLE t9

Real Estate Cost to Sales Katies of Selected Department Stores Reporting to the Harvard Graduate School of Business, Classified by Sales Volume and City Sise, United States, 19l0, 1913, 1916, and 19I9

(Sales and population in thousands) P OPU 1 A T i ON Tear Less than 15 to ?5 to 5cTto 100 to 2?0 to 500 to 1,000 or Store Size______15 25 50 100 250 500 1,000 aore T 9 E 0 Less than $ 150 3.70* 1.00* $ 150 to 300 3.55 1.00 3.75* 300 to 500 3.25 3.15 500 to 750 3.60 1.10* 750 to 1,000 1.20 1.15 1.000 to 2,000 3.10 3.70 1.20* 2.000 to 1,000 1.00 1.00 1.20* 1.30* 1.000 to 10,000 1.30 3.95 1.10 10.000 to 20,000 3.70 3.90 5.30* 20.000 or more 5.05 1913 $ 1,000 to $ 2,000 2 .80* 2.70* 2.000 to 1,000 2.70* 3.10* 1.000 to 10,000 2.60* 3.30* 1.00* 10.000 to 20,000 2.60 3.60 20.000 to 30,000 2.30 2.80 30.000 or aore 3 .60* 1916 $ 1,000 to $ 2,000 1.65* 3.10* 2.000 to 1,000 1.75 1.90 2.60* 1.000 to 10,000 2.20 2.65 2.90* 3.20* 10.000 to 20,000 1.90 2.35 2.50 20.000 to 15,000 2.10 1.70 15.000 or more i.95* continuec; TAELE if (continued)

(Sales and population In thousands) POPULATION Tear Less than “B i o 25 to 50 to 100 to 250 to ”5oo to 1,000 or Store SIm 100 250 500 1,000 aore _ 15 25 ?>

$ 1,000 to $ 2,000 2.70$ 2.60$ 3.20$ 2,000 to 5,000 2.10 2.20 3.20$ 5,000 to 10,000 2.10 3.20 3.10$ 10.000 to 20,000 2.70 2.90 3.20$ 20.000 to 50,000 3.20 2.20 3.60$ 50.000 or aore 2.25

Source: Operating Results of Department and Specialty Stares, selected years, Harvard University, Bureau of Business Research, Bulletins No. 113, p. 26; 120, p. 23; 126, p. 29; and 132, p. 56. TABLE SLo

Advertising Expense to Seles Ratios of Selected Department Stores Reporting to the Harvard Graduate School of Business, Classified by Sales Volume and City Si*e, United States, 191*0, 19U3, 19l*6, and 19t*9

______(Sales and population in thousands) ______POPULATION ______Tear Less than 15 to 25 to 50 io 16o to 256 to 560 to 1,006 or Store Sise 15 25 50 100 250 500 1,000 more T 5 E 0 Less than $ 150 1.90$ 2.10* ♦ 150 to 300 2.00 2.20 3.20* 300 to 500 2.70 2.75 500 to 750 3.60 1*.10* 750 to 1,000 1*.?0 li.15 1,300 to 2,000 3.10 3.70 1*.20* 2.000 to 1*,000 2.70 3.20 li.OQ* 5.10* 11.000 to 10,000 2.85 3.65 U.15 10.000 to 20,000 2.95 3.1*5 1*.60* 20.000 or more 3.50 191*3 $ 1,000 to $ 2,000 2.10* 1.90* 2.000 to i*,000 2.10 2.70* i*,000 to 10,000 1.90 2.50* 2.90* 10,OX to 20,000 2.1*0 2.90 20,OX to 30,000 1.90 2.20 30.000 or more 2,70* 191*6 I 1,000 to $ 2,OX 2.05* 1.95* 2.60* 2,003 to 1*,000 1,95 2.X 2.00* I*,000 to 10,X0 2,20 2.35 2.70* 3.20* 10,XO to 20,OX 2.10 2.50 3.10 20,OX to 1*5,000 2.13 2.20 1*5 ,000 or more 2 ,13* (continued) TABLE J

(Sales and population in thousands) P 0 P U L A T I 0 N Tear Lass than l5 to 2$ to 50 to 100 to 2$0 to 500 to 1,000 cr Store Size 15 25 50 100 250 500 1,000 aore 191*9 $ 1,000 to $ 2,000 2.50* 2.1*0* 3.00* 2,000 to 5,000 2.60 2.60 3.00* 5,000 to 10,000 2.1*0 2.60 3.1*0* 10,000 to 20,000 2.50 2.90 3.70* 20,000 to 5o,ooo 2.U5 2.U5 2.90* 50,000 or ■ore 2.50

Source t Operating Results of Department and Specialty Stores, selected yeara, Harvard University, Bureau of Business Research, Bulletins No. 113, p. 26 j 120, p. 23j 126, p. 29} and 132, p. 56. TJLELE 3U

Delivery Expense to Seles Ratios of Selected Department Stores Reporting to the Harvard Graduate School of Business, Classified by Sales Volume and City Site, United States, 191*0 and 191*9

(Sales and population in thousandsJ

POPUU T I 0 N

Year If to 25 to 50 to 100 to 250 to ~5oo to 1,000 or Storei Size 25 50 100 250 500 1,000 more

19lb $ 2,000 to I 1*,000 .90$ 1.20* 1.1*0? 1.70? ii,000 tc 10,000 1.1C 1.15 2.00 10,000 to 20,000 1.5o 1.65 2.30? 2u,o00 or more 2.50 191*9 t 1,000 to $ 2,000 .35? .55% .65% 2,000 to 5,000 .65 .90 .8556 5,000 to 10,0 j 0 .90 .85 1.15? 10,000 to 20,000 1.20 1.25 1.70? 20,(XX) to 50,000 1.10 1.6C 1.65? 50,000 or more 1.95

Source: Operating Results of Department and Specialty Stores, 191*0 and 191*9, Harvard University, Bureau of Business Research, Bulletins No, 113, p. 26 and 13?, p* 56. TABLE 3 3

Net Gain to Seles Ratios of Selected Department Stores Reporting to the Harvard Graduate School of Business, Classified by Sales Volume and City Site, United States, 19lxO, 191x3, 191x6, and 191x9

______(Sales and population in thousands)______P ° p U L A T ION Tear Less than T T t o I T t o T o “ * 100 to ISETto 5oo to 1,000 or Store Size 15 -J 2 ___ 50 100 250 5oo 1,000 ■ore w H o Less than $ 150 1.50* 1.18* $; 150 to 300 2.60 lx.00 2.90* 300 to 500 3.50 3.70 5oo to 750 lx.70 6.50* 750 to 1,000 lx.00 3.6o 1,000 to 2,000 5.1C U.90 3.70* 2,000 to li,000 7.00 5.70 3.90* 3.30* lx,000 to 10,000 7.00 5.70 3.60 10,000 to 20,000 6.00 6.50 1.50* 20,000 or more lx.90 I 191x31 t 1,000 to 1 2,000 13.10* 12.10* 2,000 to lx,000 13.5C 11.50* It, 000 to 10,000 llx.50 12.00* 10.70* 10,000 to 20,000 Ui.50 10.00 20,000 to 30,000 13.60 12.1i0 30,000 or more 9 .00* 191x6 $ 1,000 to $ 2,000 9.70* 12.00* 6.90‘ 2,000 to lx,000 11.00 11.70 11.20* ix,Q0Q to 1C, 000 11.70 11.00 6. bo* 7.30* 10.000 to 20,000 11.30 9.70 7.70 20.000 to 1x5,000 9.30 9.30 lx5|000 or aore 9.70* (continued) TJLBIi; 2.(continued)

(Sales and population in thousands) POPULATION Tear Less than 15 to T T t o " "5o~to ■ lOO' to 25o to 56o to 1,000 or Store 31 se 2? 5o 100 250 500 1,000 more 19L9 $ 1,000 to $ 2,000 5.50* 6,00* 3.80* 2.000 to 5,000 6.60 6.60 6.00* 5.000 to 10,000 1'hO 5.70 3.10* 10.000 to 20,000 7.10 5.1:0 2 .60* 20.000 to 50,000 5.L0 5.20 3.70* 50,000 or aore 5.10

Source: Operating Reg alt a of Department and Specialty Stores, selected years, Harvard University, Bureau of business Research, Bulletins No, 113, p. 28j 120, p. 23; 126, p. 29; and 132, p. 56, TABLE 2 . 3 Derivation of Index of Cyclic*! Fluctuations in Operating Costs of ^isiness Concerns, Using Business Gross Product as the Base, United States, 1929 * 191*9

(in Millions of dollars) Buaineaa Inccae of Un­ Iccoa* Eatiaatcd Per Cent Cyclical Oroaa incorporated Corporate pica Profit Operating Coata Operating Coata Index Tear Product Enterprisea* Profits* . Icol. 2+3J (col. 1-6} (col. 5/1) (1929=100) l9i$ 1 96,166 JU . 9 2 7 *10,058 »3,98? * 70,159 11.52 100.00 1930 81,877 10,963 6,626 17,389 66,688 78.76 105.69 1931 67,586 8,216 1,635 9,869 57,737 85.1*3 116.66 1932 50,869 6,921 -1,961 2,960 67,909 91.18 126.38 1933 68,361 5,207 -1,979 3,228 65,113 93.32 125.23 1936 56,656 6,603 1,038 7,661 66,815 86.U7 116.06 1935 63,250 9,858 2,638 12,696 50,556 79.93 107.26 1936 76,265 12,166 6,862 17,006 57,239 77.09 103.65 1937 79,837 12,269 6,066 18,293 61,566 77.09 103.65 1938 73,626 10,768 6,065 16,813 58,815 79.88 107.19 1939 80,231 11,282 5,569 16,851 63,380 79.00 106.01 I960 69,876 12,660 8,963 21,603 68,271 75.96 101.93 1961 113,067 16,506 16,386 30,888 82,159 72.68 97.53 1962 162,206 23,061 19,669 62,710 99,696 69.97 93.89 1963 166,256 26,731 26,061 50,772 113,666 69.09 92.71 1966 176,260 28,997 23,753 52,750 123,690 70.07 96.03 1965 176,362 31,267 18,925 50,172 126,170 71.22 95.57 1966 186,666 35,375 17,817 53,192 131,676 71.20 95.56 1967 209,860 35,365 26,008 59,373 150,667 71.71 96.23 1968 233,976 39,791 30,982 70,773 163,203 69.75 93.60 1969 226,099 3 6 J 7 3 29,071 63.666 166,655 72.19 96.87 * plus inventory valuation adjustnent.

Source: Adapted from R. B. Miner, Trends and Variations in Marketing Coats, Unpublished Doctoral Dissertation. The Ohio State University, p. ^26, and various issues of the Survey of Current Business, 191*7-1950. TA£I£

Computed Dollar Outlays for Major Natural Expanses in Selected Volume Group of Department Stores, United States, Seven Selected Years from 1929 to 191*9

(1929 sales = 100 per cent)

PATROL L Real Other Year Administrative Buying Selling Other Estate Advertising Expense

1929 3.35 3.65 b.15 1.65 1*.30 3.15 8.25 1932 2.1*0 2.66 5.78 1.26 1.19 2.92 6.75 1937 2.91 3.11 7.72 1.61* 3.75 3.19 9.18 191*1 3*59 1**10 9.35 1.68 i*.56 3.62 11.1*1 191*1* 1**69 5.66 12.62 2.56 1.61 3.76 13.58 191*6 6.76 8.1*2 16.71* 3.91 5.59 6.10 16.50 191*9 7.72 9.59 21.80 1**61 7.?? 7.85 22.66

Source: Operating Results of Department and Specialty Stores, selected years, Harvard University, Bureau of Business Research. TABLE <2L3T

Cyclically Adjusted Selected Natural and Subfunctional Expense Ratios Falling Under the Selling and Delivery Function, Selected Volume Croups of Department Stores, United States, 1929-191*1

"Other" Year Taxes Salesclerk Selling Selling Delivery Payroll Payroll Supplies

1929 .30 6.00 1.10 .65 1.25 1930 .28 5.77 l.ll* .69 1.23 1931 .28 5.33 1.09 .61 l.ll* 1932 .29 1*.91 1.27 .58 1.19 1933 .27 5.07 1.32 .55 1.20 1931* .27 5.1*7 1.3U .65 1.3U 1935 .1*1 5.97 1.1*0 .72 1.1*9 1936 .61 5.35 1.35 .68 1.55 1937 .96 6.01* 1.35 .76 1.59 1938 1.12 5.88 1.1*5 .76 1.63 1939 1.07 5.91* 1.32 .71* 1.56 19UG 1.07 6.23 1.37 .80 1.52 19U1 1.11* 6.30 1.38 .80 1.1*9 191*2 1.15 6.35 1.36 .78 1.33 191*3 1.19 5.99 1.62 .65 .36 191*1* l.ll* 5.85 1.1*1* .61 .71* 191*5 .89 5.31 1.52 .61 .78 191*6 .31 6.23 1.52 .68 1.10 19U7 .83 6.55 1.66 .31 1.30 191*8 .33 6.78 1.71 .86 1.31* ... W .. .88 6.71 1.70 .66 1.1*6

Source* Operating Results of Department and Specialty Store a, 1929 to 19hi, Harvard University, Bureau Business Research, Various Bulletins; and computations. A P P E N D I X B Foldoute on ptgts 357ad <1 35® not ooqplottlj nicroflined u one elde le clued onto the pege. Fllned u received fron The Ohio Stete Uni- ▼erelty. UNIVBK3ITT M1CROFI1M3 CONFIDENTIAL QUESTIONNAIRE Department Store Expense Study Prof. In. Emory College of Bus. Admin. U. of Florida BUDGETING Gainesville, Florida

1. Does your store budget expense? Tes;No (If NO-skip to question 7)

2. For what time period is the budget made?

3* If you were to give a one sentence answer to *WHT DOES TOUR STORE BU EXPENSE?", what would you say?______

L. iho initiates the expense budgeting process?______

5. Through what steps does it go before it is in final form?

6. lhat factors determine the amount to be budgeted for each of the following? (a) Payroll expense (lV executive (non-selling)

(2) executive (selling)

(3) employee (non-selling)______

(M employee (selling) 6. Itiat factors determine the amount to be budgeted for each of the following? (a) Payroll expense (1) executive (non-selling)______

(2) executive (selling)

(3) employee (non-selling)

( M eagiloyee (selling)

(b) Advertising & Promotion______

(e) Supplies

(d) Services purchased

(e) Travel 4 Comunication

CONTROL OF EXPENSE

7« Wio is responsible for the proper control of expense?

8. How does your fire control the following expenses? (a) Payroll (1) executive (non-selling)______

(2) executive (sales)

(3) employee (non-selling)______

en$ loyee (sales>

(h) Advertising 4 Promotion

(c) Supplies______

(d) Servicea purchased

(e) Travel 4 Cocwunication______UJwrxue.-riiAi. 1 ivufr.AJvr siu tt i^ror > m m a m nicory AJLpjui3tE> :WvN/ti>^Iji&tfX oUfvVhV fc college oi business Admin.. UniTeraity of Florida Gainesville, Florida

1. Since 1945 hare you revised espouse olasslfications la an attaopt to iaprove expense oontrol? yea; no (ii YhS) Whet, in general, sere the revisions? II Exhibit

2n Are youi expanse classifications adequate for good expense control? ree; no, in; couiu n-hey he iaproved?

3, Do you control expense by "pork center" In nonselling nativities? yes: nOo (IF YES) (a) Hoe long have you controlled by the work center idea?______(b) Hoe many work centers do you have? ______(IF MO) (a) What is the smallest organizational unit in nonselling aotivltlee by which you control? ______

4* What exeoutlve(a) ls(are) responsible for oxp-jrse control in the aoaoelling activities?______(a) How long h&3 this a) L ‘ T : U i:yV______

(IF THEHE HAS BBBI A CHAJCR SIHCh 1945) Ta-1) Who had It foraorlv? ______„. _. . (a-2) What wee the purpose of the change? ______*CtlTltl*i? ______2 ------^ (a) How long ha* thia azecutiTG^a) hr<5 Ihla rcaponaibility?

(1/ THEat HAS BSSM A CHAH1S SINCfc. 1945) Ta-l) Who had it Toraarly? (a-£) What aea th* purpoa* of the ehonga?^______

0, What ta aha aaallaat o ziguil zatlonal unit by ahich you oontrol Belling axpu**?

(a) Son lone hay* yon ba n controlling by thia unit? ( U TOrfj HAS BfcSH A (BASSE 3XMCE 1945) Ta-l) What anltna* f o m a r l y aaed? ______(a-*) Why th* ohahgt?

d» What *x*eutlva(a) la(are) raaponslbla for expense oontrol in falling aotlTltioa?

(a) Hon long ha* this *x*cutlTo{o) h*d thia responsibility?

HAS BSAH £ C3AHCS SINCE 1945) 1 M T e > o had it fomarly?^ (a-£) Why th* ohanga? _ _ _ _ _

PUEASE USE THIS SPACE f OH ANT PUKHLti COuP^ Do you uae prods tarnlaad or standard coats as a baas for charging exponas to the aalllag dapartnent*7 t m : _ n o ; (if YJ&) (a) Bow long baas you used than? ______(b) that toots art charged la this manner9

(e) O a t hot been tbs result of using standard Posts?

0* Bass any sxpsasss bean pot under oontrol sines 1945 that tors not flo marly controlled? res: no (IF IB ) (a) that are they?

(b) B o o ars they now oontrollsd? ______

•• Baa thsrs bast an laorsassd awareness of the l^portanos of tins in tbs oontrol of expanse? res: no- (IF IBS) (a) B a t actions bare beent&kci or changes mads because of this lnoroassd i?

10o H o a oloselyc In terns of is c- c' th> following expenses controlled or rcvU^c- Float ties sons ailing peyroll______; ^xsoutlro sales payroll______, Ju^loyeS eoneelltag payroll______; -xmployoe sales payroll ______

Mvirtlalnf ; islharj ______?, Supplies 'fr&Tsl^______Ootnlaatlon j

U » Baa the eloasosea of eontrolf in terms of time, been chafed for any of 10* Hoe olooeip, ta Urm of ttmt U each of tbo foUoelag n p u w i controlled or rerieiedV ta m ttiv m tiU to i payroll j Axeeutira atloo payroll ______^ a y e a m w lllog payroll , ; aaployoe «elee payroll ; AlfirUitii } Doll Tory i a w l loo, 1 TroTtX.______, 0— in tto i i U» Boa tbe <1—aMa of oontrol, la tina of tine, teu ebaogad for any of tko abaca ozpaaoo olaoolftoatloaa? ct>; no <11 X W ) ~ ■QCBt VHSR7

u* (g nf y b m b o i i n ) Ibet e7fbOt4 if any, boa tbe change In the tint period of ooatrol bad on* U) tbe eapenae?______

(b) «a tbe budget period?

PLEASE USE THIS SPACE FOR ANY FURTHER Cttfl£.VTS« *’ V y vU MX W AUwi 0 Wi Ja V> t ^ ± t * HQ0

(i f rts) IN WHICH GT THESE? SHAT FACTOR ERTKHULHKS THK VARIATION?

noosalllag p a y r o l l ______

___ selling payroll '______xii II Exhibit

auppllee ______

advertising ______

r,

(b) How long have you uaad tbo r?« .His budget' 14. (ir no na*iTu.K KJixax u caso) ( a T Horn la tbe flexibility la the c-.,ntrul cf expense aonlevedV

(b) Now long bee this rsttod bcrs u.stfT „ ____ (o) (:7 QSC0 Cfctff Slit* * H 3 bo» wee it fcrnerly ccno? ^ ^ ^ v.- r a

15o Have any changes '.a other (IF I£3) (aT”than were tbey nade? (b) What was done? ___ ISo Hara any changes '-n cnuoi - _.u.. (If T £ 3 ) (aTlhen were they dlz

16c 2a thara a trend la your store to £«■ free the controlling of exponas la torss of •par oaat to sales* and "per ocnt t.Un y?rjr to lest year”? yaa: __ nt ( 2 TK ) (a) Hoa raoant la thia trend?______

17o (If YES TO QUESTION #16) Toward ahat bases ara you new oovin: in; (a) nonselllng expense?______

(b) selling expense? ______

(o) Ara thara any aotlTltles where tfcase are not pow uaad but where you are planning. to uao than? ______„

18o (If YOU USE STAMttLiDS OF PHYSICAL i Hava any of your standards boon set by a parson trr.insd In standards setting? yas; __ no (If us) (a) In what activities?..... _ .... ^

M 2132. — *k° tuio*J-2y aete the standards? ______,

PUA32 USE M S SPACE P03 ANY rJuIH^k QC'.l J . . - APPENDIX ;>foO

Executive Opinions Concerning the best Methods of Attacking the Problem of Expense henuctiun and Productivity Improvement i-y continuing in the direction of production standards and work simplification, etc.

Constant analysis of need and control of individual output. Constant study of new resources and material costs. py making supervisors and workers "expense conscious" and improved instruction In applying techniques listed In item #11 [work simplification, methods study, e_t cetera. ]

Py constant review by top management.

A thorough study by each divisional head of expense require­ ments and a committment by him as to his efforts to keep expense in line with his budget. There is no adequate yardstick for dollar control now with rising cost of wages, taxes, etc. The important consideration is maintenance of adequate volume of business to justify the cost structure•

Constant, constant, constant, constant study.

Necessity for the job and how to do It most econnrri eally.

Sell your problem of reduction and productivity to each supervisor. Take one department or section at a time, study it for improvement, change equip: ent If necessary. Shere some of the savings with the employees and don't let up. by constantly asking What, When, Where, i^w, and Why,

Iy making the whole store expense conscious.

Dig, Dig, Dig, and never stop digging. by education of the executives In the Intelligent spending of money and display of their leadersnit ac ility.

y constant search for easier and better ways of doing work, establishing standards on that work and selling supervisors and their employees on these standards as a representation of a fair day's work. * 6 1 by enlisting the cooperation and support of individual supervisors and adequately training them. in various tech­ niques which will lead to better expense control.

:y questioning and justifying the existence of * very person on the payroll and every item of expense.

Constant vigilance and responsibility at all levels of man­ agement. Continued searching for new methoas to cut ex­ penses - G-ood preplanning and accountability for results.

Thru use of accurate data discover weaknesses, weed out marginal producers, establish worthwhile incentives, en­ courage new ideas, watch payroll dally, and above all se­ lect, train, and keep only good people, particularly > ood supervisors. Delegate and define definite resgo sibllity and commensurate authority. better training of supervision and closer supervision by immediate supervisor.

Services and supplies--tight limited authority to commit money--close inspection of billings. Payroll--weekly fore­ cast revision and top study of such forecasts at expense meetings* by analysis of past records and study of the indi vidual operations to simplify the methods and procedures of work, work layout, control of flow of work* by continuous study and application of latest methods used by others to accomplish expense reduction and productivity improvement *

1. by a survey to determine the areas in which t'^ jrohlem is more serious (for the store). 2. ty the development of a planned program of expense and productivity control (which may not always be a reduction of the expense aeeount-- for frequently you must spend or Invest money to save money). 3. by delegating the responsibility to toe operating execu­ tive who makes the decisions which effect the level of expenses. ij.. Through nroper follow-up by management.

^tablishment of standards, work simplification, budgeting, performance reports, incentive pay*

Constant surveilance of present expenses. tndy of Im­ proved techniques and equipment. Periodical review of methods. Asking "why". *n the process of establishing expense goals, cognizance is taken of various standards which are available, such as those released by the uarvard Scnool of business Aun/i ni strati on, the Controllers' Congress of N.K.b.G.A. and those results given to us from other stores with whom we exchange informa­ tion, When the goals that have been established are given to the operators and department managers, they are expected to find ways and means of getting their expense to these levels and they have the members of tne budget Office and the Methods Division available to assist in workin>- out ways to reduce expense,

y making line supervision conscious of and responsible for exoense reduction.

Take each individual section and study its problems with the people who work in that department. Set goals and standards which are within reason,

Greater flexibility in payroll more methods Improvements, learn work is the key to this problem, help all line super­ visors feel they are a part of this team. Let them know whet your expense and profit problems are. Ask for sugges­ tions and help them by giving examples of what can be done.

Store-wide approach, where all executives are made expense conscious, and then measure their results.

The problem of expense reduction and iroductivity is a con­ tinual one, and we think that the top executives of a business such as ours can do much in this direction by occasionally reviewing performance in the various non-selling divisions.

Ey assigning specialists to attack specific problems through time study, work simplification, etc, within a definite long- range program; by keeping detailed productivity records to quickly indicate weak spots.

Knowledge of unit costs, standards, methods, detailed analysis, engineering, etc.

With proper information and studies of work. by a minute and detailed study of each phase of the company to determine whether or not the activity aids in producing profitable sales or protects the assets of the company when taking into account certain calculated risks. 5 0.-5

Must be attacned by all supervisory personnel as well as top management*

-y a careful analysis of every expense item as it a.pears on the expense report and challenging the item as to whether it is necessary at all, and if so, is it being done in the simplest way possible. It seems that Writh proper ^"Der- vision department managers are b^st qualified to attack the expense problem.

Constant supervision and Improvement of methods, techniques and management#

No one way.

Accountability of those who control departmental expenses. Regular review of results. Constant r©-evaluation of mar­ ginal services. Regular exchange of Percentage results for comparable functions by associated buying groups and ex­ change of ideas and systems by these same stores. Detailed study of one function at a time in clinics held by these buying groups, by Improvement of method of setting standards; by improved budgeting and Improved budgetary control.

By attacking.

By constant review of all functions, work simplification, methods studies, expense consciousness and mechanical applications when practicable.

By a group assigned to constantly work and study it and by constantly using pressure right down ttie line.

Challenge all functions not essential to day to day operation. On day to day operations, challenge on basis of historical s tandards. 3 6 4

AUTOBIOGRAPHY

I, Charles William Emory, was born in Irwin, Ohio,

November 27, 1921, I received my secondary school educa­ tion in the public schools of the city of Springfield,

Ohio* My undergraduate training was obtained at Witten­ berg College, Pennsylvania State College, and The Ohio

State University* Prom the latter I received the degree

Bachelor of Science In Business Administration in 194&*

I received the degree Master of Business Administration from The Ohio State University In 1947* During 1 9 4 6 - 1 9 4 7

I acted In the capacity of student assistant to Dr.

Theodore N. Beckman* During 1947“3-948* I w a s a teaching Assistant in the Department of Business Organlzatlon,

College of Commerce and Administration, The Ohio State

University, while completing the residence requirements for the degree Doctor of Philosophy* Since 1 9 4 8 1 have been an Instructor and Assistant Professor of Marketing at the University of Florida, during which time I have been completing the remaining requirements for the degree

Doctor of Philosophy.