Return On Capital EmployedWritten By: Ron Slee
Article Date: 06-01-2005
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
What profit is all about.
While we are enjoying a return to high sales volumes, we should pause and ensure we are realizing everything we should be achieving. Customer satisfaction is a constant challenge, and the rate at which we retain customers is a serious job. Are you tracking your customer retention on a monthly basis? Remember that increasing retention has a most significant impact on operating profit.
Employee satisfaction and loyalty have a direct effect on customer loyalty. Are you attracting the right talent and retaining everyone you want to keep? Are you constantly improving the skills of the employees through regular training? Are you involving your employees in six sigma projects, continuous improvement? If the employees are turning up for work with no opportunity to improve themselves, they might find an opportunity elsewhere. Is this what you want?
Expense management and control, as well as gross margin management and control, are challenges during a strong market. The temptation to be softer on prices is real; however, now is not the time to be weak-kneed. Commodity prices are at significantly high levels, and material and products are in short supply. This is not the time to be reducing prices.
Asset management is a serious management issue particularly in a time of shortages. The amount on order plus the amount on hand need to be watched carefully. If the market were to slow and you received all of your orders, how long would it take to get your inventory levels back in line?
This brings me to the point for this month: Return on Capital Employed and how to manage this important metric.
I want to focus on the "Gross Profit Return On Capital Employed." This is where asset management and price management meet.
In the parts department, if we achieve a 25 percent gross profit and turn the parts inventory four times, we realize a 100 percent gross profit return on capital. With turnaround time on stock orders usually one week, why are we so weak in turnover?
We should be realizing at least an eight-time turnover. A turnover of eight times with no degradation in service should be a walk in the park. We are suffering from under expectations. With a turnover of eight and a gross profit of 25 percent, the gross profit return on capital employed is a much more robust 200 percent.
In the service department, if we achieve a 65 percent gross profit and turn the service work in process 12 times, we realize a 780 percent gross profit return on capital employed. With the focus of service management on the business, a turnover of 26 times a year should be normal. The turnover should be 52 times or one week's worth of labor billing in work in process. This returns a robust gross profit on capital employed of 3,380 percent. Quite a result, wouldn't you say?
Neither of these statements on parts or service is out of line. They are both not only achievable but reasonable to expect from the management of these departments. When we compare these results to the results realized for equipment sales or rentals, we see the necessity to maximize the results in parts and service. This isn't a matter of nice to have; it is a matter of necessity.
We have a serious responsibility in parts and service management. We need to serve customers and satisfy their needs. We need to serve our employees and develop them, if we want to retain them. And we have a clear responsibility to develop and enhance the profitability of the dealership by providing the customer with the highest value part and service at the lowest possible cost. Without maximizing the gross profit return on capital employed, we are underachieving on a key metric.
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