Issue link: http://read.dmtmag.com/i/134956
Profit Improvement Report The Race to Provide Services Nobody Really Wants What customers care about most – and what dealers should excel at – is inventory availability. By Dr. Albert D. Bates Distributors in virtually every line of trade have worked hard to increase their service profile through the years. As one obvious example, the time between receipt of a customer's order and delivery has shrunk dramatically. The list of other, equally significant, service enhancements is lengthy. Today, distributors continue to look for additional ways to enhance "service" in order to lock in their customers. The problem is that all of these new and better services increase payroll costs with no guarantee of actually locking in the revenue. If they don't, distributors will suffer from payroll expense creep. This report examines the nature of the service revenue/service cost issue. It will do so from two important perspectives: n The Revenue/Payroll Relationship – An analysis of how sales and payroll growth interact to drive profit in the firm n A Profitable Service Profile – Some specific suggestions for ensuring that service enhancements actually lead to profit improvement The Revenue/Payroll Relationship Throughout the distribution industry, including AED members, payroll is the overwhelming expense factor. This can be seen clearly in Exhibit 1, which Exhibit 1 The Impact of 3% Payroll Expense Creep For the Typical AED Member Income Statement--$ Net Sales Cost of Goods Sold Gross Margin Payroll and Fringe Benefits All Other Expenses Total Expenses Profit Before Taxes Current Results $35,000,000 27,475,000 7,525,000 4,000,000 2,895,000 6,895,000 $630,000 5% Sales Growth $36,750,000 28,848,750 7,901,250 4,120,000 2,895,000 7,015,000 $886,250 No Sales Growth 35,000,000 27,475,000 7,525,000 4,120,000 2,895,000 7,015,000 $510,000 Income Statement--% Net Sales Cost of Goods Sold Gross Margin Payroll and Fringe Benefits All Other Expenses Total Expenses Profit Before Taxes 100.0 78.5 21.5 11.4 8.3 19.7 1.8 100.0 78.5 21.5 11.2 7.9 19.1 2.4 100.0 78.5 21.5 11.8 8.3 20.0 1.5 40.7 -19.0 Change in Profit--% presents the current performance of the typical AED member based upon the latest CODB Report of financial performance. As can be seen in the first column of numbers, the typical firm generates $35 million in sales, operates on a gross margin of 21.5 percent of sales and produces a bottom line profit of 1.8 percent of sales or $630,000. Of most significance, payroll is 11.4 percent of sales or 58 percent of the total expense load for the firm. In some instances distributors may feel they are forced to enhance their service profile in the face of new offering by competitors. In other instances, firms are seeking to establish their own competitive advantage. In either case, the key profitability issue is how much of a sales increase can be generated, if any, in relationship to the payroll cost associated with providing the additional service. The last two columns of numbers in Exhibit 1 present the potential good and bad results associated with an increase in payroll expense. In both columns it is assumed that the increase in costs is associated with an additional service. Further, in both columns payroll costs are assumed to increase by exactly 3 percent. The middle column of numbers represents a situation where the increased payroll costs are offset by a 5 percent increase in sales. In short, the firm has developed a service-enhancement profile. Total profit increases by (continued on page 34) 32 | www.cedmag.com | Construction Equipment Distribution | June 2013 32_Profit_Feature_KP.indd 32 5/31/13 2:51 PM