Path to profitability

July 1, 2008
Truck-Equipment distributors are more nimble than manufacturers in achieving profitability and are more able to react to changes in the marketplace, according

Truck-Equipment distributors are more nimble than manufacturers in achieving profitability and are more able to react to changes in the marketplace, according to a research expert.

John Mackay, president of the Mackay Research Group and former vice president of the Profit Planning Group, said that distributors can achieve a 34.7% profit boost by raising prices by just 1%, compared to 22.8% by manufacturers. By lowering material costs by just 1%, distributors boost their profit by nearly twice as much as manufacturers — 25.2% to 13.6%.

Manufacturers have the advantage over distributors in just one of the seven areas of improvement — reducing direct labor, where they would achieve a 3.7% boost in profits to 2.4% to distributors.

“The perception about manufacturers is, ‘Boy, those guys make a lot of money’ — but the reality is that they make about the same as distributors do,” Mackay said.

He said the typical distributor had a profit margin of 3.5% in 2006, compared to about 3% for the typical manufacturer. The picture was slightly different for high-profit manufacturers, who had a profit margin of 10%, compared to 8% for high-profit distributors.

“One out of every four in our distributor and manufacturer profit survey is making three times as much money as the rest,” he said. “If one out of four is making that, it should be a good goal for the other three that aren't there yet. If I'm a distributor making 3.5%, should I be able to make 8%? How am I going to get there? For manufacturers and distributors, 70% of the expenses are fixed. I can raise prices, lower the cost of goods, lower operating expenses, and sell more.”

In asset turnover, the typical distributor had $2.90 in sales for every $1 in asset investment, compared to $2.30 for manufacturers. High-profit distributors had $3.60 and manufacturers had $2.60.

“Manufacturers are more capital intensive than distributors,” he said. “It takes more investment in manufacturing operations than distributing, therefore lower asset turnover.”

Return on assets

In return on assets — the return based on everything invested in the business (cash, inventory, accounts receivable, etc) — the typical distributor gets 10.1% while the manufacturer gets 6.8%. The high-profit distributor gets 28.9% to the manufacturer's 25.2%.

In financial leverage, the typical manufacturer gets 1.9% to the distributor's 1.8%. The high-profit manufacturer gets 1.9% to the distributor's 1.5%.

“Manufacturers are more highly leveraged — using more of others' money,” Mackay said. “High-profit companies are less highly leveraged. It doesn't maximize the Return on Investment (ROI), but it does give the owners more control over their destiny. In 2001, 2002, and 2003, these companies weathered the storm more easily in terms of cash flow because they didn't owe anybody, and banks loved them in terms of loaning money in tough times.”

In return on net worth (owners' investment), the typical distributor gets 19.2% while the manufacturer gets 12.2%. The high-profit distributor gets 45.4% to the manufacturer's 43.3%.

Other critical profit variables for 2006:

  • Sales growth: manufacturer 9.6%, distributor 7%.

  • Gross margin: distributor 23%, manufacturer 21.5%.

  • Sales, general, and administrative expenses: distributor 19.3%, manufacturer 17.3%.

  • Profit margin: distributor 3.5%, manufacturer 3.1%.

  • Sales per employee: distributor $259,657, manufacturer $198,224. (“That says manufacturers are more labor intensive than distributors.”)

  • Total payroll: manufacturers 30.4%, distributors 18.9%.

  • Inventory turnover: manufacturers 4.1%, distributors 3.8%.

Collaborations needed

Mackay said that in order to achieve profitable growth, distributors and manufacturers must make their collaborations succeed by being willing to engage, setting up a collaborative environment, learning from their partners, and bringing expertise to the table.

  • Willing to engage

    “They have to be open to share information and expertise. Manufacturers need a sales forecast. Distributors need product strategy information. Even in today's high-tech environment, that means a lot of face-to-face meetings. They have to make decisions jointly and resolve conflicts that arise. Factors that undercut collaboration are withholding information, failing to listen, and failing to consider important facts from the other side.”

  • Building a collaborative environment

    “They have to hire the right people, top to bottom, because it's no longer us versus them; it's us with them. Give incentives to collaborate. People need to be trained on communication, conflict resolution, and project management. Everyone has to be open and willing to share what they know. A process has to be in place to monitor progress, with targets for cost, timing, and quality. Listen to partners. Costs are likely the largest source of tension. There needs to be a formal process to discuss progress and review what worked, what didn't.”

  • Learn from your partner

    “Build in-house skills and information, and use knowledge to absorb new information from outside sources. Encourage employees to take part in training, education programs, and industry forums, and rotate employees throughout the organization. Use industry benchmarks so that you know what other manufacturers are doing. How do competitors get the job done? Encourage feedback, make it easy for customers to complain, learn from mistakes, and eliminate red tape.”

  • Bring expertise to the table

    “Contribute a unique capability or you aren't a good partner. If you don't add anything to the partnership, the partner will be able to call the shots.”

He said customer pressures are changing the marketplace.

“There's global competition — certainly we see more European and Asian competition,” he said. “Technology is accelerating in all facets, from way people interface with products — technology in the cab or whatever. Customers are more demanding.”

He said 20% of customers are price-driven, 10% are the innovators who will always be on edge of technology, 35% are value-oriented, 20% service dependent, and 15% are confused.

He listed these distributor frustrations: ineffective/inconsistent territory management; too many distributors; conflicting channels; sell direct; market strategy/end-user focus; sales goals; service levels; inventory levels; and the “We-make-it-and-you-sell-it” mentality.

Manufacturer frustrations: a lack of commitment to products and promotional programs; if it isn't hot, they don't want it; distributors only focus on the most profitable, fastest-turning products; do not have sales and marketing skills; lack ability to effectively manage inventory; rush orders and small orders.

About the Author

Rick Weber | Associate Editor

Rick Weber has been an associate editor for Trailer/Body Builders since February 2000. A national award-winning sportswriter, he covered the Miami Dolphins for the Fort Myers News-Press following service with publications in California and Australia. He is a graduate of Penn State University.