Articles

While we are all enjoying a nice return to high sales volumes we should pause and ensure that we are realizing everything that 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 has a direct affect on customer loyalty. Are you attracting the right talent and retaining everyone that 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 his what you want?

Expense management and control as well as gross margin management and control, is a challenge 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 significant 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 such as we are experiencing at the moment. The amount on order plus the amount on hand need to be watched carefully. If the market were to slow down and all of your orders received how long would it take you 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 parts if we achieve a 25% gross profit and turn the parts inventory 4 times we realize a 100% gross profit return on capital. With turnaround time on stock orders now in most instances one week why are we so weak in turnover? We should be realizing at least 8 times turnover and those that follow my columns know that I am being very gentle on this result. A turnover of 8 times with NO degradation in service should be a walk in the park. We are suffering from under expectations. With a turnover of 8 and a gross profit of 25% the gross profit return on capital employed is a much more robust 200%.

In service if we achieve a 65% gross profit and turn the service work in process 12 times we realize a 780% 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 turn over should be 52 times or one week worth of labor billing in work in process. This returns a robust gross profit on capital employed of 3,380%. 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 the same measures 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. Isn’t it time we “managed” according to the numbers.

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.

This has been a measure that has never been a measure of success in our Industry. Isn’t it about time we showed our true grit and got it done? Remember me? If you don’t want to get this done now...when would it be appropriate to expect it to be done? It is rather painless it is just work. How good are you anyway?