The Business Model is Dead - Long Live the Business Model - Aftermarket
Construction Equipment Distribution magazine is published by the 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. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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The Business Model is Dead - Long Live the Business Model

By Ron Slee

Article Date: 06-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.

The tactics we employ must change with the times.

Earlier this year we discussed technology and training, and now we have to move to our tactics. First, I need to set the stage regarding distributor resistance to the new and improved business model. John Maynard Keynes, the father of most economic thought said, “The difficulty lies not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

The models we use in our industry have been in vogue since the early 1980s. They are based on product life cycles that no longer exist, with margins that have long since disappeared, and productivity levels that are more 1900s than 2000s. We are living through a collision of market forces that we have not yet experienced and for which our history ill prepares us.

We have become comfortable with equipment sales between 60 and 80 percent of the total sales of the dealership. That level is our history; it is not our future. Equipment sales are down dramatically at nearly every supplier in our industry in North America. Product support sales used to be between 20 and 40 percent of the total sales. That number has grown dramatically, but not through any efforts on our part – it is because equipment sales have fallen so precipitously. This means we must retool our thinking and our businesses. We must drive the business through parts and service, and sadly we are not prepared for this challenge.

We need to “retool” our people, our processes and our systems. This is an extremely difficult undertaking, and we must overhaul this “engine” while it is running.

  • We can no longer rely on wage multiples in the mid threes; we must apply variable multiples and use a two for maintenance services. 
  • We can no long apply markups to low-value parts on the premise that “it doesn’t matter.” It does matter, and that is why we have lost the hardware business to a box van with a driver that covers our customers and replenishes their shops. 
  • We can no longer accept the activity-weighted inventory control theory that has a higher level of inventory for slow moving parts than fast moving parts. 
  • We can no longer accept that a supplier will find the part for us; we must find it for ourselves no matter where we find it.
  • We can no longer invoice service work when it is convenient; we must do it the day the job is completed.We can no longer leave our customers without parts and service sales coverage. The customers are too valuable and too important to lose without even attempting to keep them with us.
These are the reasons we need to create a new business model. This one will be much more complicated to develop; we have too many businesses that have been driven to satisfy the model’s metrics without understanding what the objectives are behind the goals. We have been driven to the numbers and hurt the business. We have become short-term operators.

We have been driven to follow this model blindly. When business goes down, “get rid of parts and service salesmen” is a refrain I have heard so many times over the past 25 years that I am now numb to it. Don’t worry about it, I am told; sales won’t go down. After all, it is the shingle that sells, not the salesman. What a naive view that is for serious minds to hold. Today, more than ever, every supplier is fighting for every piece of business. If you are not in the fight, you lose – it is that simple. To be in the fight means we must re-examine our pricing policies, our staffing levels, our market coverage models, our inventory rules, and our systems and facilities. We must develop a new business model. It is a big job, and it is overdue.

We are going to make mistakes in this retooling effort to be sure. We must make certain, however, that the mistakes we make are acts of commission, not omission, on behalf of our customers. If we look after our customers properly I am certain they will look after us as well. Are you ready to put your customer first? The decision you make will be with you for a long, long time.

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Article Categories:  Management  »  Product Support