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Bend and Stretch: Our Eighth Annual Cost Management Survey

The best companies remain focused on cost cutting, whatever the business cycle.
Lori Calabro, CFO Magazine
February 1, 2002

To say that corporate America has its eyes on costs these days is a bit of an understatement. Hardly a day goes by without some announcement of a layoff, stalled capital investment, or acquisition put on hold. In January alone, Ford Motor Co. announced the closing of five plants in North America; AT&T Corp. slashed an additional 5,000 jobs; and The Walt Disney Co. shed a number of its Disney Stores.

What companies are doing is cost cutting by "brute force," says Jon Scheumann, a director with business-process consulting firm Gunn Partners. For most companies, he explains, "it's a struggle to adjust SG&A [selling, general, and administrative] costs in concert with fluctuations in their business cycles." Confronted with an economic downturn, companies take out costs as quickly as possible, which often translates into workforce reductions. Conversely, in the midst of an economic boom, costs often escalate wildly in the quest for growth.

"It's the bane of many CFOs," says Scheumann. "How to break that cycle."

To get a handle on which companies are best at doing just that, CFO teamed with Gunn Partners for the eighth annual Cost Management Survey (formerly the SG&A Survey). The survey ranks the largest companies (revenues of at least $750 million per year from 1997 through 2000) publicly traded in the United States, according to their cost management index. The CMI is calculated by adding a company's cost of goods sold to its SG&A expenses and dividing the sum by operating revenue.

Using figures from 2000, the survey found that Corporate America again made improvements in cost control — albeit marginally. The median company improved its costs-to-revenue ratio by 41 basis points from 1997 to 2000, compared with a 64 basis point improvement in last year's survey. It's the improvements at individual companies, however, that offer clues as to which have been best able to weather the current economic climate.

Last year's leanest operator, Apache Corp., for example, again topped the list in the Energy—Oil & Gas sector, with a CMI of 14.5 percent, compared with 77.0 percent for the industry. While 2000 was a boom year for that industry, Apache maintained its focus on costs, says Roger Plank, CFO of the Houston-based oil-and-gas exploration and production company. Riding business cycles, he explains, "is a way of life" at Apache. "And while I'm not saying we're going to guess every cyclical turn right, we aren't afraid to zig when others are zagging." As an example, he points to the fact that Apache has sat on the acquisition sidelines for the past 11 months, because "everyone else is paying too much."

The airline industry has been no less volatile in recent months. And the numerous layoffs post­-September 11, says Scheumann, "are a direct reflection of how inflexible the airlines are." Bucking the trend, of course, is Dallas-based Southwest Airlines, which remains one of the only airlines not to have laid off employees since the terrorist attacks. In 2000, the low-cost leader spent 40.8 cents on SG&A expenses for every dollar of operating revenue generated, 560 basis points lower than the industry, and had a CMI of 76.6 percent, compared with the industry median of 91.7 percent. "We do run a tight ship," says CFO Gary Kelly. "But there are always opportunities to improve." And many of those opportunities come from employees, who have been challenged to save $5 a day for the past four years.

For Cox Communications Inc., the Atlanta-based cable operator, success depends on "developing new products and applications for future deployment" even though the industry is "somewhat recession resistant," says CFO Jimmy Hayes. While such developments require a continued investment in SG&A, he says, it must be done with "a balanced perspective." In 2000, that perspective meant spending only 36.3 cents on SG&A for every dollar of operating revenue it generated, and recording a CMI of 60.7 — 1,730 basis points better than its industry.

Of course, the CMI is not a perfect indicator of the future, as Ford's first-place finish in the auto industry certainly illustrates. And considering how earnings have dropped at many companies, Scheumann says the index is destined to go up next year — although not as much as one might expect. "Historically, SG&A rises as the business cycle is on the upswing and declines are on the downside, but on a lag basis. So in 2001, revenues will be down, but SG&A won't be down in proportion." The true reflection of the current cost-cutting binge, therefore, won't be seen until the 2002 numbers. "It all goes back to the flexibility question," he says.

Lori Calabro is a deputy editor of CFO.

Methodology: A Focus on Flexible Cost Cutting

CFO magazine teamed with Gunn Partners, an Exult company, on this year's annual Cost Management Survey. The survey sample is based on publicly traded companies, including international companies, that reported at least $750 million in revenue annually for the years 1997 through 2000. More than 1,000 companies were grouped into 40 major industry groups. Company data was sourced in a standardized format from Media General Financial Services Inc., in Richmond, Virginia.


Data was analyzed for consistency and comparability across companies and industries. Metrics were calculated to assess cost efficiency and performance. This year, like last, the perspective was broadened to look at both COGS and SG&A (before depreciation and amortization). For financial firms, noninterest expense was used.

Candidates were ranked by their cost management index (CMI), which equals COGS plus SG&A, divided by operating revenue. The accompanying table shows the North American-based CMI leaders in each industry.

Cycle Riders: Leading Cost Containers in 40 Industries, 1997-2000


All values are % of operating revenue

1Cost management index = (COGS + SG&A) / operating revenue for 2000

2Average cost management index for 1997­-2000

3Compound annual growth in operating profit before depreciation


Analysis performed by Gunn Partners, an Exult company
Data provided by Media General Financial Services Inc.

Company2000 COGS2000 SG&A2000 CMI1'97-'00 CMI Avg.2'97-'00 Earnings Growth3
ADVERTISING & MEDIA
Cox Communications

24.4

36.3

60.7

61.7

31

Walt Disney

70.4

0.4

70.8

65.3

-6

Gannett

49.1

15.6

64.8

66.5

11

Comcast Special Stock

54.7

15.2

69.9

70.2

19

Belo

35.8

33.5

69.3

70.5

9

Industry median

46.2

31

78

79.7

10

AEROSPACE & DEFENSE
Goodrich

67.1

13.9

81

83

18

Northrop Grumman

66.5

14.1

80.6

84.6

4

General Dynamics

78.7

6.2

85

85.7

43

Alliant Techsystems

76.1

8.2

84.4

86.2

6

Lockheed Martin

89.8

0

89.8

88.7

-8

Industry Median

77.4

7.8

86.3

87.5

12.3

AIRLINES
Southwest Airlines

35.8

40.8

76.6

78.4

22

AMR

39

47.8

86.9

84.6

-7

America West

45.2

47.2

92.4

85.4

-15

Alaska Air Group

37.3

54.7

92

86.2

-10

Continental Airlines

41.1

48

89

87.4

4

Industry median

42.5

46.4

91.7

88.9

-6

AUTO & AUTO PARTS MANUFACTURERS
Ford Motor

73.2

7

80.2

78.9

0

Harley-Davidson

61.3

17.7

79

80.1

23

Desc SA DE CV ADR

69.4

15.9

85.3

82.4

-2

Borg Warner

75.7

9.2

84.9

85.4

15

Federal-Mogul

72.3

14

86.3

85.7

63

Industry median

72.6

15.4

88

88.2

9

BANKING
Golden West Financial**

32.4

32.9

11

Fifth Third Bancorp**

45.1

46.4

28

Bank of New York**

50.4

46.7

8

Comerica**

47.8

49.5

8

Charter One Financial**

46.6

53

27

Industry median**

59.6

60.9

15

BEVERAGES
Brown-Forman

33.4

35.4

68.7

68.4

7

Coca-Cola

33.6

44.6

78.2

73.6

-7

Anheuser-Busch

55.4

17.7

73.1

74.1

6

Coca-Cola Femsa SA DE CV

44.4

32

76.4

79.8

25

PepsiCo

34.8

44.7

79.5

80.6

1

Industry median

46.1

33.2

80.3

81.2

7

BUILDING MATERIALS
Rayonier

66.4

2.5

69

75.2

14

Vulcan Materials

68.3

8.7

77

75.5

12

Lafarge North America

69.9

9.7

79.6

77.2

11

USG

75.2

8.2

83.4

79.8

3

Armstrong Holdings

68.4

18.2

86.5

82

-6

Industry median

71.2

13.7

86.8

86.8

12

CHEMICALS
Sigma-Aldrich

45.3

28.8

74.1

73.9

-2

Praxair

61

14.8

75.8

74.2

0

Air Products & Chemicals

59.4

15.3

74.8

74.6

6

Int'l Flavors & Fragrances

52.1

25.4

77.5

75.5

-5

Albemarle

62.4

14.1

76.5

76.4

4

Industry Median

66.5

15.3

84.1

82.3

4

COMPUTER NETWORKING & STORAGE
Cisco Systems

32.6

38.5

71.1

68.6

44

EMC

35.9

32.5

68.4

70.8

52

Enterasys Networks

50.4

40.1

90.5

84.5

-32

3Com

50.3

41

91.3

85.7

-19

Storage Technology

52.9

38.8

91.7

86.4

-25

Industry median

50.4

38.5

90.5

85.7

-19

COMPUTER SOFTWARE & SERVICES
Microsoft

9.8

38.9

48.7

46.9

27

Computer Assoc Int'l

0

45.6

45.6

49.1

17

First Data

51.1

15.2

66.3

68.1

9

Adobe Systems

4

59.8

63.9

68.4

16

Oracle

25.2

40.5

65.7

72.1

30

Industry median

41.7

33.5

78.6

75.2

10

COMPUTER SYSTEMS & PERIPHERALS
IBM

57.7

23.5

81.2

81.2

6

Sun Microsystems

43.1

36.8

79.8

81.6

32

Lexmark Int'l

64.6

21

85.6

85.1

17

Hewlett-Packard

68.7

20.6

89.2

87.9

-4

Dell Computer

78.7

10.9

89.7

89.2

51

Industry median

68.2

21

90.9

89.2

3

CONGLOMERATES
General Electric

34.1

36.7

70.7

72.2

21

Minnesota Mining & Mfg

46.4

30.3

76.7

76.5

3

Fortune Brands

50.2

27.8

77.9

76.6

9

PPG Industries

61.8

19.1

80.9

79.1

-1

Tyco Int'l

56.3

18.2

74.4

79.7

96

Industry median

67.8

17.7

85.3

85.8

0

CONSTRUCTION & HOUSING
Clayton Homes

49.3

31.3

80.6

80.9

18

Toll Brothers

75.3

9.4

84.7

85.5

25

Lennar

87.6

1.1

88.7

88

53

NVR

78.9

8

87

90.5

79

MDC Holdings

84.9

2.3

87.2

90.7

60

Industry median

82.2

8.6

91.7

92.2

23

CONSUMER DURABLES
Pitney Bowes

29

37.1

66.1

66.8

0

Emerson Electric

60.1

19.2

79.3

79.5

9

Eastman Kodak

51

26.9

77.8

79.9

8

Lancaster Colony

66.5

15.7

82.2

81.7

5

Newell Rubbermaid

70.1

13

83.1

82.4

19

Industry median

67

20.7

87.4

86.3

6

CONSUMER PRODUCTS
Gillette

30.7

41.2

71.8

72.6

-2

Clorox

50.2

25.8

76

76.5

18

Colgate-Palmolive

42

35.3

77.2

79.2

8

Procter & Gamble

48.4

31.2

79.6

79.4

5

Ecolab

38.8

40.5

79.2

79.7

14

Industry median

40.4

40.9

82.1

82.8

8

DIVERSIFIED FINANCIAL SERVICES
Fannie Mae**

16

16.9

17

Freddie Mac**

19.8

21.8

30

USA Education**

44.1

36.6

3

Household Int'l**

41.1

44.5

37

Finova Group**

132.1

65

-158

Industry median**

72.1

69.3

20

DRUGS & BIOTECHNOLOGY
Amgen

5.7

48.5

54.2

53.7

15

Eli Lilly

14.9

48.3

63.2

63.6

10

Schering-Plough

16.3

49.1

65.4

67.2

16

Bristol-Myers Squibb

22

41

63

67.3

10

Pfizer

13.7

53.7

67.4

68.8

36

Industry median

21.5

48.5

71.3

71.6

15

ELECTRONICS & SEMICONDUCTORS
Intel

27.9

26.6

54.5

54.1

8

Analog Devices

37.2

26.9

64.2

71.7

40

Atmel

43.7

23

66.7

73.2

44

LSI Logic

45.2

25.1

70.2

73.3

31

Applied Materials

45.4

21.6

67.1

73.6

47

Industry median

49.3

23

76.6

80.5

27

ENERGY — OIL & GAS
Apache

11.2

3.3

14.5

32.2

38

Burlington Resources

29.9

5.2

35.1

42.8

22

Talisman Energy

20.8

2

22.7

44

71

Nexen

32.9

4.4

37.3

48.8

22

Noble Affiliates

55.6

3.4

59

59.4

5

Industry median

64.5

5.6

77

79.3

22

ENERGY — OIL & GAS — REFINING & MARKETING
Suncor Energy

25.4

27.1

52.5

56.7

28

Imperial Oil

76.6

0

76.6

72.4

14

Ultramar Diamond Shmrck

75.6

1.9

77.5

73.7

22

USX­Marathon Group

75.2

1.8

77.1

73.9

20

Unocal

75.4

1.4

76.9

77

6

Industry median

75.6

1.9

77.5

80.1

20

FOOD & FOOD PRODUCTS
William Wrigley Jr.

39.4

36.3

75.7

76.6

6

Sensient Technologies

59.2

18.9

78.2

79.8

7

Hershey Foods

54.4

26.7

81.1

81.7

1

McCormick

59.2

27.3

86.5

87.3

10

Interstate Bakeries

47.5

44.5

92

90.7

-1

Industry median

71.3

18.9

91.7

91.5

6

HEALTH SERVICES
HealthSouth

67.1

5.9

73

71.7

5

HCA

34.3

47.4

81.7

83.8

3

Manor Care

84.7

4.4

89.1

84.3

20

Tenet Healthcare

36.1

47

83

84.5

31

Universal Health Services

23

63.2

86.2

86.1

15

Industry median

79

13.3

94.2

93.9

8

INSURANCE
Ace**

83.7

69.6

23

Jefferson-Pilot**

74.9

74.2

11

Unitrin**

84.8

76.2

0

Torchmark**

75.5

76.5

1

Conseco**

84.3

77.3

-13

Industry median**

88.8

89.7

1

LEISURE, ENTERTAINMENT & RESTAURANTS
Carnival

54.5

12.9

67.4

66.4

14

McDonald's

40.9

30

70.9

69.4

6

MGM Mirage

47.6

27.9

75.5

72.4

45

Hilton Hotels

68.3

2

70.2

73.7

2

Royal Caribbean Cruises

57.7

14.4

72.1

74.1

21

Industry median

57.7

15

79.9

80

12

MANUFACTURING
Pall

39.7

37.2

76.9

78.9

8

Illinois Tool Works

62

18.2

80.2

79.1

21

Ucar Int'l

66.6

12.5

79.1

81.2

-443

Masco

65.2

16.9

82.1

81.8

23

Harsco

68.3

14

82.3

82

6

Industry median

70.3

16.9

87.2

86.8

0

MEDICAL DEVICES & RESEARCH
Medtronic

21.5

41.2

62.7

62.4

28

Guidant

20.2

45.6

65.8

68.7

35

Saint Jude Medical

25.3

47

72.4

74.6

15

Baxter Int'l

50.2

25.6

75.7

76.4

6

Becton, Dickinson

43.1

33.1

76.2

76.7

9

Industry median

32.3

41.2

75.7

77.6

15

METALS & MINING
Barrick Gold

44.4

2.6

47.1

50.2

10

Freeport McMoran C&G

54.6

3.8

58.4

54.9

-4

Placer Dome

52.5

6.6

59.1

64.5

25

Newmont Mining

58.4

7.6

66

72.9

-7

Potash CP Saskatchewan

70

5

75

73.4

-6

Industry median

77.8

5.2

83.4

83.2

3

PACKAGING & CONTAINERS
Vitro Sociedad Anonima

63.8

17

80.7

77.6

-2

Tupperware

28.5

53.9

82.4

82.7

-2

Owens Illinois

68.6

24.5

93.1

83.8

-26

Bemis

74.3

9.4

83.7

84.1

9

Crown Cork & Seal

82.1

4.3

86.4

85.2

-9

Industry median

78.2

7.4

86.6

85.4

3

PAPER & PAPER PRODUCTS
Bowater

68.7

5.3

74

77.4

29

Westvaco

68.6

7.7

76.3

78.8

14

Kimberly Clark

54.6

22.5

77.1

79.5

12

Sonoco Products

72.2

10

82.2

82.3

-1

Longview Fibre

73.4

7.9

81.3

82.3

7

Industry median

74

9.9

83.7

85.1

13

RETAIL
Intimate Brands

56.5

23.6

80.1

80.7

17

Gap

54.5

26.2

80.6

81.8

34

Tiffany

38.8

40.8

79.6

83.5

32

May Department Stores

64.2

19.4

83.6

84.1

7

AutoZone

55.2

30.5

85.7

85.6

17

Industry median

69.8

23

93.1

92.9

14

RETAIL — GROCERY STORES
Safeway

68.1

22.2

90.2

91.1

22

Whole Foods Market

62.4

28.7

91

91.2

23

Albertson's

70

23.1

93.1

92

31

Casey's General Stores

80.3

13.4

93.6

93

14

Weis Markets

71.2

22.5

93.6

93.3

1

Industry median

70.7

22.8

94.1

93.9

7

RETAIL — SPECIALTY
Pier 1 Imports

58.4

28.4

86.7

86.8

14

Home Depot

69.1

19.8

88.9

90.1

34

Lowe's

72.5

18

90.5

91

25

Barnes & Noble

71.2

18.9

90.1

91.4

24

Borders Group

68.9

22.7

91.6

91.7

20

Industry median

71.4

22.4

92.4

92.7

13

RUBBER & PLASTICS
Cooper Tire & Rubber

79.7

6.5

86.2

84.1

17

Bandag

57.3

28.5

85.8

84.6

-2

Carlisle

75.8

10.9

86.7

86.8

12

Goodyear Tire & Rubber

76.3

15.5

91.9

89.5

-11

A. Schulman

81.7

9.5

91.2

90.1

-4

Industry median

76.3

10.9

86.7

86.8

-2

SHIPPING & RAILROADS
Canadian Nat'l Railway

23

43.5

66.5

65.5

15

Burlington Nth Santa Fe

37.7

29.6

67.4

67.2

5

Norfolk Southern

42.8

38.6

81.3

70.9

-11

Union Pacific

24.3

50.1

74.4

78.3

12

Sea Containers

66.3

12.3

78.6

78.4

5

Industry median

68.8

14.8

89

87.2

7

TELECOMMUNICATIONS EQUIPMENT
Tellabs

42.7

24.3

67

65.3

40

Rogers Commun.

73.8

0

73.8

71.2

2

Corning

49.6

21.8

71.5

74.3

24

ADC Telecommunications

47.7

32

79.6

79.2

41

Andrew

62.7

20

82.8

80.2

-5

Industry median

61.9

22.2

82.8

80.9

10

TELECOMMUNICATIONS SERVICES
Telefonos De Mexico SA L

28.2

16.5

44.7

42.8

10

BellSouth

52.5

0

52.5

54.3

10

Verizon

61

0

61

59

31

SBC Communications

60.3

0

60.3

61.5

37

Alltel

62.1

0

62.1

62.5

30

Industry median

47.2

20.1

62.2

63

12

TEXTILE & APPAREL
Jones Apparel Group

57.3

25.8

83.1

84.8

52

VF

63.8

24.3

88.1

85.8

-4

Nike

57.6

29

86.6

86.5

-8

Liz Claiborne

57.8

29.3

87.1

86.8

8

Kellwood

78.2

15

93.1

92.6

-2

Industry median

58.4

29.3

91.7

91.4

2

TOBACCO
UST

16.5

30

46.5

45.4

2

Philip Morris

34.9

23.5

58.3

58.1

3

Universal

80.9

10.4

91.3

92.2

1

Dimon

84.3

7.2

91.5

92.4

-17

Standard Commercial

85.6

7.6

93.2

93.8

-4

Industry median

68.1

16.9

85.3

85.3

2

UTILITIES
American Water Works

43.9

0

43.9

43.7

12

DPL

49.5

0

49.5

50.8

13

Great Plains Energy

60.1

0

60.1

51.4

-2

Progress Energy

58.2

0

58.2

52.5

5

Pinnacle West

67.5

0

67.5

54.2

5

Industry median

70.3

0

72.6

65.7

8

WHOLESALERS
Airgas

52.9

34.5

87.5

86.1

2

W.W. Grainger

66

25.1

91.1

89.8

-2

Genuine Parts

67.8

23.4

91.2

90.5

6

Ikon Office Solutions

56.2

32.8

89

91

13

Danka Business Systems

18.7

70.1

88.9

91.1

6

Industry median

84.2

10.4

95

94.9

12


All values are % of operating revenue

1Cost management index = (COGS + SG&A) / operating revenue for 2000

2Average cost management index for 1997­-2000

3Compound annual growth in operating profit before depreciation


Analysis performed by Gunn Partners, an Exult company
Data provided by Media General Financial Services Inc.




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