Five Ways to Succeed in 'The New Realilty'By Ron Slee
Article Date: 11-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.
Responding to reader feedback from recent CED ‘Aftermarket’ columns, the author elaborates on his recommendations for aggressive, intentional product support outreach.
The past couple of years have been a very humbling experience for many of us. The economy is in a shambles, the equipment sales are down drastically, parts sales are off as more machines are idled and even labor sales are slipping. Dealerships have cut personnel (in some cases dramatically), and employees have had to take pay cuts and be furloughed, too. It is a scary time.
One thing is very clear to me, though, and I am quite certain of this: Strong sales sure hide a lot of sins and inefficiencies. And another thing is that we will never get those inefficient years back. Remember 2007? For many of you it was your strongest sales year ever, your highest profit ever. Remember that? Did you realize it was based on a house of cards? It was based on debt – we leveraged our assets to astronomical proportions.
I remember when "The Associates" was sold from Ford and the average portfolio of an Associates customer was $7.50 of debt for every dollar of assets. I thought then that the ratio was obscene. Little did I know. I believe you have heard me quote from a book titled, "The Trillion Dollar Meltdown," with the following: "The worldwide Gross Domestic Product in 1980 supported $3.70 of debt for every $1 of GDP, and in 2005 that debt was $30 for each dollar of GDP." That is completely unsupportable. This is the main cause of our current problem.
There are some other unfortunate truths that people seem to be overlooking. This is not the great depression revisited. This "recession" is running pretty much in line with the recent four or five recessions: the length of the negative GDP, the high unemployment rate (even though government changed how it was measured in 1981) and many other economic indicators. Now I am no economist, that is certain, but I think the incessant beat of negative news, starting back during the presidential campaign, has penetrated our psyches and we are badly bruised. Everyone is sitting on their hands, no one is spending. If a machine goes down and the contractor is fortunate enough to have work they simply park the machine and use another one. And if they don’t have a spare machine they will rent one from us or someone else.
So where are we now?
We are hunkered down. We are riding this out. This cycle will correct itself. Well, here I will distance myself from the herd. I don’t think we are going back to the old world. We are not in a traditional cycle. I think we are in a new world, a deleveraging world, an increasing savings rate world. And the sooner we come to grips with this "New World" the better.
In my CED column for the months of June through August, I was pounding the drum of "The New Reality," "The New Business Model," and I received many calls and e-mails and I thank each and every one of you. Remember my old self image as a Product Support Advocate? I was a mule braying in a tin barn, making a lot of noise, but few were listening. The response I have received seems to indicate that more people are listening now.
Alright, this is where complacency is starting to show. The traditional responses to change are coming out: "I am afraid I can’t do that," or "that might work for a little while but it will never last," "that will upset the equilibrium we have worked so hard to achieve," or "you are rocking the boat." This is something we teach in our AED Foundation sponsored classes in Parts and Service Management Unit II – Performance Excellence. We use a theme of "Tactics of Innovation" and show people how to be more successful at implementing change. After all, that is a clear responsibility of business leadership; taking people to places they wouldn’t go by themselves.
Well, here are some of the usual suspects you challenged me on.
For those of you who made this change I have a serious question to ask you: Did your equipment margins go up? Not likely. All you did was reduce the margins you were achieving in parts and service and feel better about the margins in equipment, maybe for a little while, but then again, maybe not. (Sound like a recent government stimulus program?) In my nearly 40 years in this industry, NOT ONCE have I seen margins on machines go down when the internal prices went from a discount on the retail price up to the retail price. NOT ONCE! That is because we are a cost-driven industry, not, as we make ourselves believe, a retail price-driven industry.
- Charge retail prices to internal departments. I have heard from many of you who used to charge retail but reverted to something less than retail "because the equipment market was so tough." What does that prove? That by discounting prices from parts and service we can make the margins of equipment get better?
Look back at the Product Support Opportunities Handbooks from 2002 and 2007. Our market capture rates are extremely low in parts and service, and our customer retention rates are embarrassing. And yet we resist reaching out more to our customers through parts and service. We just cut the staff back and eliminate the product support sales force. Something is wrong here don’t you think? Oh, and please don’t have your equipment salesmen sell parts and service. It rarely works, if ever. A nice thought but that is like having an F1 driver take on a mail route. Does the term "Going Postal" bring to mind any images?
- Increase Market Coverage. You want to do what Ron? No I am not talking about equipment salesmen; I am talking about parts and service salesmen. I am talking about product support sales personnel in the field, I am talking about telephone sales personnel inside the dealership, I am talking about aftersale follow-up calls from management, I am talking about in-store merchandising, and I am talking about Internet selling. I am talking about everything and anything that we can do to "touch" the customer more often and more effectively.
And what about equipment inventory, new and used and, dare I say it, attachments? And don’t forget rental inventory. The used equipment valuations are not going to increase anytime soon. So putting a new machine with low hours out on rent is killing your resale value much more than the income you are realizing from the rental – and what I call conditional sales, your rental purchase options. Oh my.
- Asset Management. From most major suppliers today we have daily stock orders with three- and four-day turnaround on those orders. Why then isn’t our parts inventory turnover in excess of 12 or 24? Now that is a Paradigm Shift Extraordinaire. Many of you have turnovers in the range of three to five, maybe even six. Much better than the 2.5 we used to experience in the not-so-distant past. But with a turnover of three that means we have 120 days of supply on hand when we can replenish the inventory in less than five days. What is the other 115 days of supply intended to do? This is especially disconcerting because many of you use the parts inventory as an asset against which you borrow money. And I won’t even go to the "True Turnover."
But, and this is a big point, the branch manager is not administrative services; that function is sales management. Interest is not an administrative service cost that is assigned to the specific department for their asset supporting lines and working capital. It is accounts payable, accounts receivable, payroll, and perhaps some computer services, but very few. Not much else. Technology can take care of most of the administrative support services. Why have paper files anywhere? Why not send invoices and statements electronically? Why have any land line phones when you can use VoIP for everything? Why not use signature pads and touch screens? There is much to do.
- Maintenance Services. How many of you have gotten into the maintenance business at half your labor rate, done at night, with specially trained maintenance service personnel? I won’t belabor this one too much other than to say that if we control the maintenance we will control the repairs, too. Our main responsibility to our customers is to reduce their owning and operating costs, and you do that by fixing before failure – and you increase that likelihood by maintenance. And, oh, one more thing, oil sampling.
- Administrative Support Services. I have been receiving a lot of pushback on the standard expense ratio for administrative support services. The allowance should not be greater than 10 percent of the parts and service volume.
And yes 10 percent is a good number.
We haven’t finished, but I am way past my limit on space for this article. I felt the need for a "Dennis Miller "Rant." I thank you all for reading this as I do feel a lot better. Perhaps you will too.
We need to get a sense of urgency back in our lives, in our jobs, with our customers, with our processes and procedures. This isn’t like making wine, which will naturally get better over time. This is a time to stand up and get going; to throw off your complacency, to get active and excited about your life and your job. Life is much too short to stay in a malaise for too long. And we have been there for too long already.
As most of your know, I am a Canadian by birth and an American by choice. (That really riles up my Canadian friends and family) and one of the joys of this country is that about every 20 years or so it reinvents itself. It has done so with surprising regularity. The last major reinvention took place in the 1981 to 1985 period when we killed inflation. This time we have to kill leverage. We can and will do that, too. It will be tough but it won’t happen if we are complacent and don’t get off our proverbial backsides and get things done. Are you ready? Can you revive your sense of urgency? I know you can and I am counting on you to do it. Now!
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