A hard standard for decades, this personnel ratio strikes the balance between dealer profitability and customer service.

Over the years, one thing has become painfully obvious: We don’t have enough parts people to do the job in the way it needs to be done.

For some three decades, the salesper-employee standard has allowed management to provide a balance between customer service and profitability. If you have a higher salesper-employee value it is possible that the level of customer service is at risk while you are maximizing profit. Similarly, if the sales-per-employee value is low then profit is at risk despite high levels of customer service. As with most things, we seek balance.

The standard, based on an AED study (circa 1982), is at or around $600,000/employee/year. Many dealers have changed this to $50,000/ month, which doesn’t mean the same thing at all. To minimize the impact of seasons, weather and many other variables, I would urge you to apply the use of a “rolling 12-month” standard, if you don’t already.

Let’s revisit the standard methodology. We developed this standard based on three variables in the Parts Department: average payroll costs per Parts employee, the gross margin achieved, and the expense-to-sales ratio of the Parts Department. The average value of the parts sold was a wildcard and not included.

When the standard was determined, the average payroll costs of a Parts Department employee were $42,000 per year. Obviously that number has changed today. The gross profit is an important consideration as well. The higher the gross profit, the higher the sales number. The sales number is the denominator for the expense-to-sales ratio. For example, if annual payroll expenses are $100,000 for the department and we had sales of $1 million for the year, then we would have a personnel expense-to-sales ratio of 10 percent. ($100,000/$1,000,000) In actuality, when the AED study was performed 30 years ago, the expenseto-sales ratio was determined to be 7 percent. So, if your payroll cost was $42,000 and your payroll expense-tosales ratio was 7 percent, you arrived at the $600,000/employee/year standard.

But to implement this standard you need a range of acceptable performance – use 80 percent as the floor and 120 percent as the ceiling. With a standard of $600,000/employee, the minimum level of acceptable performance is $480,000/employee (80 percent of $600,000) and the maximum level of acceptable performance is $720,000 (120 percent of $600,000).

Generally speaking, when sales per employee is at or below the minimum level of acceptable performance ($480,000) for three consecutive months (using the rolling 12 months), then it is time to reduce staff. If you are at or above the maximum level of acceptable performance ($720,000) for three consecutive months it is time to add an employee.

So, that’s the standard. Now let’s apply some current thought to this.

The personnel expense-to-sales ratio runs between 5 and 9 percent at the dealerships I have been involved with over the years – it tends to be lower for mining and forestry dealers, whose average price per piece sold is significantly higher than the norm. The higher expense-to-sales number (9 percent) is for those businesses with a lower price per piece sold than the norm. You have to calculate your average-piece-sold price to refine the sale-per-employee standard. Ask your majority supplier what their sales value per piece sold is and then apply this to your business. If their number is $40/piece sold then you need to apply a factor to your value. If you are at $50/piece sold then apply a 1.20 markup to the sales/employee standard that they give you. If they say you should be around $600,000/ employee then, in fact, you should be at $720,000/employee.

If your payroll costs are $60,000/ employee with 7 percent expense-tosales ratio, then the standard salesper-employee would be $857,142.80, which I would round to $860,000. The range of acceptable performance then would be from a low of $688,000 (call it $690,000) and a high of $1,032,000 (round to $1,030,000). Then apply the piece sales value factor to the result.

No hard standard can be applied universally, but you can follow this pretty closely. What you will likely find is that you should add more people. Will you respond to this challenge and, as a result, improve your customer satisfaction? Customer retention is the ultimate measure of your customer service levels. The time is now.

by Ron Slee
July, 2013
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.