Your business is fuelled by dollars, not percentages.
Many jobbers today are struggling with the changing climate of the aftermarket industry.
Margins are falling due to an ultra-competitive marketplace. And, with margins declining, it follows that gross profit dollars are declining.
Today more than ever, it is necessary to focus on the gross profit dollars made from sales, and not just markup percentages based on cost.
As a simple example, if a store bought something last year at a cost of $30 and marked up the item by 50%, it generated $15 in gross profit. If that same item now costs $20 and management is holding on to the same old rules, the item, with a 50% markup, now generates $10 gross profit. It is gross profit dollars that are required to run the business and generate net profit income, not markup percentages. As your company moves forward and grows, it makes much more sense in today’s business environment to always put profit before revenue.
One advantage of this strategy is that it allows the jobber and distributor to build in a cushion so they do not have to turn away a good employee. It is amazing how some jobbers and distributors perceive employees as nothing but a cost to their store. I have heard many times, “We can’t afford that good employee.” The fact is that competent employees make money for your business, so how can management perceive them as a cost? They are a great investment that provides a great return.
In addition, focusing on profit saves you from having to waste countless hours worrying about cash flow, so you can focus on other business problems. Consider taking profit to the core of the company: departmentalize the entire store structure to make each department run like a little business and justify its existence within the business.
Once your store has its internal house in order, focused on profit, it is time to apply the same principles to your customer base.
Consider that 30% to 40% of your total revenues are generated by shops that are not profitable. Take a look at the store’s past-due receivables, and the accounts that cannot pay in full by the 10th of the following month. These shops focus on the cost price of parts only, and go from jobber to jobber trying to get a better cost. They do not measure or understand shop productivity.
These shops have never been shown the mathematical consequences of their actions. If they did, they would change their ways–because math does not lie. No matter how good a shop owner they think they are, they cannot make two plus two add up to six.
As a jobber or distributor, the question you must consider for each customer is, “Can they be made profitable?” If and when they are, their shop business will be able to move forward; and as a parts supplier, your business moves forward with them. Note, however, that the opposite of that statement is also true: a poorly-operated customer will drag your business down.
Jobbers and distributors must examine the type of relationship they have with each customer. Relationships must be mutual, as a one-sided relationship is doomed. Consider that when you are going to invest time with a shop owner, the store must see a return for it. The jobber’s return is parts volume at the correct dollar margin to deliver the services that the jobber must bring to the shop’s table.
To accomplish this objective, the jobber needs to first determine which customers are going to be targeted. The jobber must then develop a strategy to approach the chosen shop owner, with the ultimate objective of discussing shop profitability based on shop productivity, not the cost of parts.
Consider the following:
1. Does the shop owner truly know the difference between markup and gross profit? Can he explain the math behind each?
2. Is the shop owner well-versed on global realities when it comes to commodity prices? Does the owner clearly understand the consequences to his business of only focusing on commodities?
3. Does the shop owner understand that he is in the knowledge business and it is labour hours billed within his shop that are most important? That is his business. Does he know he should be achieving 2.0 to 2.5 hours billed per maintenance repair order or invoice? Does he know what he is averaging now?
Each jobber must take ownership of the process by which profitability is planned and improved. You must become, in effect, a counsellor to your client.
The real growth position and the relative profitability of a jobber store today are tied directly to the cumulative data that it gathers and maintains on its customers.
So, do you know enough about each shop to help those that you desire to do business with? Your business relationships are best managed through the knowledge and insight that you have with each business. Consider that the jobber business will go up in direct proportion to the quality of the relationship you have with your customer base. Building the quality of the relationship is a continuous process.
A good way for you to determine where you stand in terms of customer relationships is to talk to your team. Ask them the following questions: Do we know the names of the shops that compose half of our store’s net profitability? Do we know their current and future needs? Can we clearly predict what they will expect from us next year? Do we truly understand our top 20% shop clients’ businesses, how they function, and how they measure their business? Do we understand their business strategies, and the strategies of their competitors?
When a jobber starts to focus on its customers’ business in this way, the shop’s profitability and the jobber’s profitability come into much sharper focus.
Many jobbers say that shops are not loyal today. Well, do you understand the definition of loyalty? Loyalty is just the lack of a better alternative. When you are on top of your business issues and your client’s business issues, your competitors provide no alternative.
Has your jobber store lost the focus on its business without really understanding the consequences of its actions? Have you become top-line driven, or are you bottom-line focused?
When you and the shops you serve are focused on the bottom line, and build a solid customer relationship by delivering real value, you create a recipe for a strong, profitable business. This virtually guarantees that each business will be around years from now.
When looking at a strategy to move your business forward, consider a review of your store’s method of going to market. Many shop owners are right out of the loop when it comes to understanding how the “New World of Profitability” is going to work within their business and your business.
Perhaps it is time to get on with the task of educating your store’s customer base about these issues. If discussing profitability is not something that you are comfortable with, then perhaps it is time you asked yourself if you really understand the consequences of that attitude.
Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 and by E-Mail: firstname.lastname@example.org or email@example.com.
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