We must move on the new market truths or face extinction.

We dealt with the realities of our businesses last month with a review of the old model and where we find ourselves today. Let’s go to the next step and talk about some of the things that we need to do to re-establish a working business.

This brings us to the difference between ignorance and stupidity. Ignorance is not knowing what to do while stupidity is knowing what to do but not doing it. Let’s update our Table from the July issue with some adjusted numbers (see below).

SALES MIX Old Dealer Current Dealer Adjusted Dealer
Sales Mix Sales Mix Sales Mix
Equipment $36,000,000 72.00% $18,000,000 56.25% $18,000,000 56.25%
Parts $9,000,000 18% $9,000,000 28.13% $9,000,000 28.13%
Service $5,000,000 10% $5,000,000 15.63% $5,000,000 15.63%
Total $50,000,000 $32,000,000 $32,000,000
GROSS PROFIT Old Dealer Current Dealer Adjusted Dealer
Equipment $4,320,000 12.00% $2,160,000 12.00% $2,160,000 12.00%
Parts $2,970,000 33.00% $2,970,000 33.00% $2,970,000 33.00%
Service $3,250,000 65.00% $3,250,000 65.00% $3,250,000 65.00%
Total $10,540,000 21.08% $8,380,000 26.19% $8,380,000 26.19%
EXPENSES Old Dealer Current Dealer Adjusted Dealer
Expense % Expense % Expense %
New Equipment $1,800,000 5.00% $1,800,000 10.00% $900,000 5.00%
Parts $900.000 10.00% $900.000 10.00% $900.000 10.00%
Service $1,750,000 35.00% $1,750,000 35.00% $1,750,000 35.00%
Administration $5,000,000 35.71% $5,000,000 35.71% $1,400,000 10.00%
Total $9,450,000 18.90% $9,450,000 29.53% $4,950,000 15.47%
NET PROFIT PRETAX Old Dealer Current Dealer Adjusted Dealer
Net PreTax % Net PreTax % Net PreTax %
New Equipment $2,520,000 7.00% $360,000 2.00% $1,260,000 7.00%
Parts $2,070,000 23.00% $2,070,000 23.00% $2,070,000 23.00%
Service $1,500,000 30.00% $1,500,000 30.00% $1,500,000 30.00%
Administration -$5,000,000 -10.00% -$5,000,000 -15.63% -$1,400,000 -4.38%
Total $1,090,000 2.18% -$1,070,000 -3.34% -$3,430,000 10.72%

That looks better doesn’t it? But you might be thinking that I haven’t touched the expenses in parts and service. Well, why do we need to if sales in parts and service are holding steady and you were at the right staffing levels before? Too often we cut in parts and service without any real departmental reason. It is just easier to do it; for instance cutting parts and service salesmen – not a wise move but a common one. Don’t think your customers don’t notice that you left them in the lurch. Don’t think there isn’t any correlation to your market capture rates and market coverage. Don’t count on the “shingle” selling for you.

Instead, I am focused on the sales department and administration. In the sales department, go back to whatever the expense-to-sales ratio was before this market change. I am assuming you were reasonably happy with the performance of the department at the old levels of sales, margins and expenses. If you weren’t, then obviously there is more work to do; but if you were, then go back to that expense-to-sales ratio. In the Table, it was initially at 5 percent of sales, and we have just adjusted to make it 5 percent again.

The trouble comes when we look at administration, and I will hear the complaints loud and clear. We can’t do our jobs with that small a number. I start back at the beginning. Parts and service needs to develop enough net income to cover all the expenses of the sales department, administration and interest costs. That is the traditional definition of absorption. That is the Bill Blackie (former CAT CEO) definition and the one that I have followed for the past 40 years. It works.

But there is an interesting trap in this absorption thinking. It is not just about parts and service net income is it? It is also about constraining expenses in the sales department, in administration and also the levels of inventory and interest costs. It is only proper and sensible.

And there’s one other thing: You must charge the sales and rental departments the same price as a customer on all work done for them and all parts used by them. No more subsidies. I know it is more work for you at year-end, but that is why we use computer systems. You overstate the gross profit in sales and rentals and understate it in parts and service when you don’t charge the same price internally as you would to a customer. (Remember what I said about ignorance and stupidity?) This also holds true for any rebuild inventory or exchange programs that you operate; all parts and labor at retail pricing.

This is a tough time for our industry, and it isn’t going to get any easier over the next several years. This is not the time for faint hearts or timid moves – it is the time for daring and good business decisions. I know you know what to do, and I know you know that I know you do. So what are you waiting for? Get with the program. Your customers, your employees and your suppliers are all waiting.

by Ron Slee
August, 2009
CED Magazine

About CED Magazine

Construction Equipment Distribution is published by Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada.

With CED, content is king. No fluff, no advertorials – CED just gives AED members what they want to read: business information, industry and association news, plus fresh, original and useful feature articles that they share with their management teams. Our subjects range from rental, product support, sales strategy and customer service to technology, construction markets and legislation – and much more.