Eliminate the Expendable
Kellick & Associates had a pro dealer client recently who wanted to sell his business. But that company “was beyond our ability to sell,” says Kellick-Grubbs, because its operations had become too unwieldy. The dealer generated $4 million from a lumberyard and hardware store that are only six miles apart, and had an outsized workforce of 44 employees. Kellick-Grubbs’s point is that pro dealers trap themselves by clinging to what she calls “untouchables,” such as loyal employees or a product category or service whose productivity have waned. These allegiances can drag down a company, and their negative impact becomes more evident when business conditions flag.
She and other consultants say survival requires dealers to sever these attachments by scrutinizing their companies for deadwood to clear. Such probing usually tells dealers they may need to go through another round of staff cuts. Lee generally recommends that people-related costs not exceed 45% of a dealer’s gross profits or 60% of its total expenses. “When they start getting into the 70% range, dealers aren’t making money,” he notes.
Larry Adams, president of the Southern Building Material Association, Charlotte, N.C., has noticed that some of his group’s dealers gauge employees’ productivity using multiple ratios: sales, gross margins, products, even sales per truck or forklift.
Salespeople are coming under special scrutiny, experts say, because this is the first downturn for some sellers and the first time they’ve had to generate orders from customers rather than simply write them up. Do it Best’s Ondricek and others say dealers need to re-evaluate constantly who among their sellers is up to the challenge, let go of those who aren’t, and provide those who are with better training and tools geared toward creating new business.
Consultants concede that what they are asking dealers to do is cut bone, not fat, which is tough for companies that have already downsized once during this slump. But dealers shouldn’t confuse operational excellence with strategy, warns Michael Hartnett, president of Atlanta-based Strategic Associates. Consultants agree there’s always room for improvement in most dealers’ inventory management.
“It’s a perfect time to ask yourself, ‘If I knew then what I know now, would I be carrying this product line?’ ” says Harris. “If the answer is no, drop it.”
In 2004 and 2005, when its housing market was still strong, Star Lumber did break out profit-and-loss statements on five customer classes and nine product categories to assess the profitability of each. As a result, it exited the hollow metal door and hardware business that, in the previous few years, it had expanded through acquisitions. “We decided it would never be a core competency,” recalls Davis.
Maximize Customers
The general consensus among consultants and other industry watchers is that pro dealers miss business with customers they already sell to because they aren’t carrying the right combination of products, the products are priced wrong, or dealers aren’t pursuing those sales aggressively enough. Surviving a downturn “can’t be just about expense control,” says Joel Gelb, vice president of business development for the buying group Lumbermen’s Merchandising Corp. He notes that the group’s members typically aren’t in all of the product or customer segments they could be.
Ondricek of Do it Best recommends that dealers conduct post mortems on each project sale to see what products they didn’t supply. This can help them plot strategies to increase market share.
There are several ways for dealers to determine what products customers want but aren’t purchasing and why. Harris says when dealers conduct roundtables with their best customers, “they consistently hear [the customers] aren’t getting enough attention.”
Chris Rader, president of the Lafayette, La.-based consulting firm Rader Solutions and a ProSales Online columnist, advises dealers to go to builders’ jobsites more frequently. “You’d be amazed at the products they aren’t purchasing [directly] from manufacturers,” says Rader, the implication being that the customers are buying products from competitors.
Getting closer to customers might help dealers untangle two knotty problems: margin erosion and delinquent accounts receivables that are “stretching dealers to the nth degree,” says Kellick-Grubbs.
Given how difficult it has been of late to make money on basic commodities, Rader says dealers need to get builders more interested in buying less-price-sensitive items, such as steel connectors. Several consultants also say that dealers need to re-educate customers about the relationship between prices and costs and do more “value selling,” in Harris’ words, to boost margins.
Those approaches, though, are likely to fall on deaf ears with customers who think low price first in all negotiations. Seely notes that Michigan contractors now regularly hop among five or six suppliers for price quotes. He also says that accounts receivable days for dealers in Detroit and Minneapolis are double the national 45-day average. “Dealers have got to stop being their builders’ banks,” says Seely. He advises dealers to work up lists of their top 100 customers, rank them by net margin, sales per product category, and “how much they are carrying” these customers.
On the plus side, this breakdown will tell dealers what they aren’t selling to these customers and could present new opportunities. On the minus side, it will tell them which customers aren’t worth doing business with and need to be “fired,” says Seely.
