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December 2017
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Time again for a “Reality Check”
John Walker
John Walker

Over the years we have written numerous articles dealing with reality within the equipment industry. At the start of a new year we decided to “dust-off” an article we wrote several years ago with the quote - “Things that do not change will remain the same!”  

Reality as described by Webster is: “The quality or state of being actual or true” . . .  Webster

Reality: Strong equipment sales will eventually return. Whether it will be in six months, 12 months, 18 months or in two or three years is anybody’s guess. As I have written on numerous occasions, I am a complete optimist, with the possible exception of the farm equipment industry. That equipment industry alone has had five exceptional sales years. If you check back 50 years, the industry cycles pretty close to every five years.

Reality: Some dealers will survive, others will not. Reality: Manufacturers will continue to seek new ways to increase their market share and their dealers’ market share.  Reality: Equipment dealers should concern themselves with profitability. Reality: When equipment dealers fail to provide a service in the chain of distribution, they will either be replaced, dropped by the manufacturer or we will witness a dealer-less society. Reality: Change is inevitable! Be optimistic, do what you have to do to survive!

Reality: Big is not always better for everyone! Dealers need to ask themselves how big their operation should be and how many branches they can afford and need to cover their territory. Reality: Growth by acquisition is not always profitable growth. It is not always easy to grow sales by buying someone’s business. Look to survival by profitably covering a territory and getting all the business possible out of your current territory.

There are several realities for the equipment dealer that we would like to point out. 1) Manufacturers need the equipment dealer to make equipment ready to sell. 2) Manufacturers need the equipment dealer to provide warranty and to make necessary changes and modifications in the equipment following the sale. 3) Manufacturers also need the dealer to provide service on an ongoing basis after the sale. This is, and always has been, a key factor in the customer’s decision to purchase from one dealer versus another. Reality: In the long run equipment manufacturers cannot survive in the market without a financially strong dealer organization!

Equipment is not only becoming more expensive to purchase it is also becoming more complicated to service. Simple repairs are no longer the norm and technicians today need far more education and training than required in the past. Reality: Hiring, training, compensating technicians and maintaining a competent staff of service technicians must become a top priority for equipment dealers in the next five to ten years.

While equipment prices are increasing dramatically, dealer margins on that same equipment are stagnant. Successful dealers have recognized this problem and have begun to focus upon those areas of their dealership that too many dealers have neglected. Reality is that high profit opportunities exist within the dealer’s aftermarket!

Successful equipment dealers also realize that their greatest margin opportunities lay within their shop (60% to 65% gross profit) and that they have a service that, if truly marketed, can provide the dealership some tremendously profitable opportunities. Reality: Dealers must recognize that all their customers have a choice as to where they can buy their parts and service. Customers in a “free market” can go wherever they want to purchase their needs and requirements. Reality: Dealers must market their aftermarket with the same dedication they put forth in marketing complete goods!

Several years ago we were working with an equipment dealer whose service gross profit exceeded the industry guidelines. He had an excellent billing efficiency and a high technician’s productivity. His service contribution to total sales was a shade over 23%. Reality: He will be a survivor!

Despite his overall success in service, he knew he required more technicians, but was having difficulty acquiring these technicians. He was receptive to anything that would provide his dealership another four or five technicians.

Reality: Technicians are difficult to find. Even in what some call a “downturn” economy. There is certainly no surplus of qualified technicians and those who are qualified are monetarily satisfied and unwilling to make a change. Those who are currently available are many times unqualified. See our articles: Hire-A-Vet! April 2012, Material Handling Wholesaler.

Reality: If we are going to hire, train, compensate and maintain a core of qualified, hardworking, performance orientated technicians, with a strong work ethic, the equipment dealers and service managers are going to have to remove their blinders and begin to think outside the box.

Think about this: For years equipment dealers have paid sales personnel “big bucks”, plus incentives, car or car allowances for selling equipment that returns an average gross profit of 5% to 8%. Perhaps the same dealer pays a typical technician $20.00 to $25.00 an hour, when that same technician produces a gross profit of 60% to 65%!

Reality: The dealer’s service department is not only a profit center, it is an opportunity center. Too many dealers seem to believe that many technicians are unreasonable in their pay requests. Equipment dealers had better recognize the fact that technicians’ wages are going to increase dramatically in the coming years. It is a typical “supply vs. demand” scenario. Check out technicians hourly wages in ND, SD, Western Texas and Eastern Pennsylvania, that will shock you back to reality!

How would you as an equipment dealer or as a service manager answer this question? What if you seriously needed a “top-notch” technician, a technician qualified to work on the type of equipment your dealership sells and one that could handle any job you gave the technician to accomplish? What if an applicant came along who fit every single requirement you were looking for? What if a check of this applicant’s references indicated the technician was even better and more qualified than he/she said they were? What if the technician truly wanted to come to work at your dealership? What if the applicant stated that a salary requirement of $35.00 an hour would be necessary to make a change in employment? Could or would you hire this applicant?

In answer to this question we too often hear “no.” It is no because: 1) “No one in our shop is paid that amount of money and, 2) If we did hire that applicant, everyone would expect a similar increase in hourly wages.” Reality: Equipment dealers are being held hostage by some of their employees.

Reality: Most of you will see technicians’ wages approaching this level in two to three years! Some of you are already experiencing this level of hourly wage rates. Therefore, equipment dealers and service managers are going to be hard pressed to focus upon solutions to solve this particular problem. What if an incentive pay plan based upon performance was developed for your shop? A program based upon profitable performance would allow your service department to compensate at a level of $30.00 or $40.00 an hour for the services of your qualified technicians. What if your service department developed pay for performance programs based upon productivity of technicians using flat rate billing?

Reality: Many dealers and service managers are too quick to comment that flat rate won’t work in their dealerships. Most dealers and service managers don’t recognize that in many areas flat rates are already being used: planned maintenance program, lease with maintenance programs, customer quotes and, of course manufacturer warranty programs and set up or make ready programs. Unfortunately, many of these same dealers are not using these flat rates as a measure of performance or as an incentive compensation program for technicians. If they were they would have the beginning of an answer for paying a technician $30.00 an hour.

Reality: Most equipment dealerships fail to establish realistic labor rates. Your shop is generally labor intensive and contributes to some of the largest expense dollars within the dealership. Every year your expenses increase and your technician’s wages should go up. Unfortunately, over the years your shop labor rates have not kept pace with your shop and payroll expenses. Reality: If you are not reviewing your labor rates at least twice a year and making the necessary changes, then you are falling behind.

If technicians’ hourly rates are going up and if we agree that they will continue to go up based upon the shortage of qualified technicians, then a continued review of your shop labor rate is certainly necessary.

Pegging your hourly labor rate to what your local competition is charging is foolish. Set your labor rate to develop a profit for your dealership. If your competitors want to go broke, let them! You are a survivor and you are going to market the value added service your dealership provides! You’ve got to sell your services for what they are worth and at a profit to the dealership! Reality: Most equipment dealers don’t have the “guts” to raise their labor rates. Reality: Using ridiculous internal rates dramatically draws down your absorption rate as well as your aftermarket profitability.

As an example, we were working with a dealer in the northeast whose labor rate is $116.95 an hour. This dealer told his customers that his labor rate was the highest in the metropolitan area, but that in return his customers got the best value for their dollar when they had their service work performed at his dealership. This was value-added salesmanship! He had “top-notch” technicians whom he paid well and technicians who worked on a pay for performance plan that permitted them to earn, in many instances above the $30.00 an hour wage.

May we suggest that in the coming years, dealer principals and service managers and parts managers face up to reality? No other area within an equipment dealership offers the profitable opportunities that are provided by your aftermarket . . . for success focus upon those opportunities!

Serious Reality: Many manufacturers are “establishing” fixed labor rates and fixed parts pricing for what the manufacturer calls National Accounts. If this practice continues to grow it could have a detrimental effect upon what we have said above.

John R. Walker is president of Aftermarket Services Consulting Co. Inc. E-mail to contact John.