The Business Model
Founder and Managing Member Ron Slee walks us through a close look at the Business Model.
Let’s Revisit our Business Model
With the famous “supply chain” issues that we have been experiencing for the past few years and the serious difficulty in finding, attracting, hiring and retaining talented people I believe that we need to seriously re-evaluate the business model which has been basically unchanged since the early 1980s. Product Support has to become more prominent in the dealer businesses, marketing territory coverage issues need to be addressed and purchasing, transportation logistics and customer service have to become not only contactless, through the internet, but also exemplary in the eyes of the customer. The other aspect of the parts and service business that needs to addressed is the market capture rates. In the past fifty years the parts and service market shares have been reduced by half, fifty percent. This not a good thing. It is a reflection that we are not covering our marketplace very well. In fact, we probably do not initiate contact, with a phone call or personal visit, with even twenty-five percent of the customers that purchase parts and service from us. This is another aspect of our business model that needs review.
This model was created in the early nineteen-eighties. This, while interest rates were running in the mid to high teens. This, after we had reduced our head counts to be able to pay our interest expenses. We have been able to withstand numerous financial cycles in those forty years. Yet we continue to operate within the same business model.
So, let’s look at this a bit.
- What is our Market Penetration and how do we address that?
- What is our Parts Inventory Turnover, our WIP Turnover? How well do we manage our assets?
- What is our Productivity Level as measured by sales per employee?
- What should the standard be for sales/Employee?
- What is our cost recovery of standard charges? Supplies, Emergency Service Charges, Vehicle Expenses, Restocking and Handling Charges?
- What is our Pricing Policy?
- What is the Gross Margin realized for Parts or Service?
- What is the Net Operating Income for Parts or Service?
- What is your customer retention rate? (How many customers defect from you?)
This is not going to be easy.
The fundamental ratio of success in the equipment dealer business model was done before rental became as important as it is today. It is called Absorption. Under that model the expectation was that best practices required parts and service to be 50% of the total sales revenue for the dealership. Minimum performance as 40%. This was split to be 25% for the parts business and 15% for the service business. If you exclude the rental business for the revenue, cost of sales and expenses, including interest expense. You can use this methodology to see how you stack up.
The Rental Business today has sufficient volume with most dealers to warrant becoming a standalone option within the dealership. Either a separate company or separate division. The purpose of the rental business is primarily two-fold; generating customer satisfaction and profitability while at the same time creating well maintained good value used equipment.
The traditional dealership is equipment sales, new and used, parts and service. This portion of the dealership should deliver a minimum of 100% absorption. The definition of absorption is as follows; – The Net Income of Parts and Service divided by all the expenses for Sales and Administration as well as the inventory interest expense results in a number > 1.00.
This definition of absorption has been in use since at least the 1960’s. It is a common belief that it was created by William Blackie when he was the Chairman of Caterpillar Tractor. Early in my career I met Mr. Blackie. It is a very special memory for me. He was one of a kind. I offered to work for him as a trainee for $100.00/month. He suggested there wasn’t much he could teach me but more importantly he thought $100.00/month was a bit steep. He was kidding of course. Bill gave me terrific advice. It is something that I have never forgotten. He said that although absorption was a critical business management tool, it wasn’t all about the net income of parts and service. It was also about constraining the expenses in the sales and administration departments and putting some control on the level of equipment inventory that bore interest charges. This is a critical fact that most people choose to overlook. Parts and Service Net Income can not cover profligate expenses in Sales and Administration. Nor can it cover excess machine and attachment inventory levels.
Looking at the Parts and Service businesses we have some measures that need to be reviewed and standards determined for each according to your line up of brands and your geography. The following is a short, and incomplete list.
- Parts, by category, Customer, Service, Warranty, Internal, Expense
- Service, by category, Customer Shop, Customer Field, Internal Shop, Internal Field, Warranty, Expense.
- Parts; salaries, wages, overtime benefits, commissions, etc.
- Service; salaries, wages, overtime benefits, commissions, etc.
- Parts; Vehicles, Service Charges, Systems, Forms and Materials, Training, etc.
- Service: Vehicles, Shop Supplies, Small Tools, Licenses, Training, etc.
- Parts; Rent, (mortgages) Heat, Light, Insurance and Taxes
- Service; Rent, (mortgages) Heat, Light, Insurance and Taxes
- Parts; In Store Selling, Warehouse, Office, Leadership
- Service; Office, Technicians, Leadership
- Parts; Inventory, Vehicles
- Service; WIP, Tooling, Vehicles
- Parts; >25%
- Service; > 25%
In the coming weeks I will break down this model in more detail and leave up to you to determine how you want to proceed. Our executives and owners today are for the most part between fifty-five and seventy-five years of age. At that age they are very risk averse. They seem to be operating on autopilot. This is a time for action. This is a time to make significant or some would say even radical change. Einstein said that continuing to do what you have always done expecting different results is insanity. I think we all can relate to what I am saying. We have yet to exploit our systems and technology. As Alex Schuessler calls it “Paper to Glass.” We have used technology to make things faster but we have simply replaced a form filled in by pen with a screen template, that looks like the form, that we fill in using a keyboard.
It is long overdue. It is time to replace the business model. The Millennials and Gen X and Gen Z are demanding it. And they are proving it with their job change statistics. Each month for the past four months over 3% of the workforce has changed jobs. That is the highest level recorded in many decades. This is a reflection of the fact that they are not going to accept the status quo. They want and need to do better. I think they are right. Care to join me with them and change our business model for the better?
The Time is Now.