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Sales Mix: The Key To Profit Improvement

Your product support reputation often precedes the sales rep into a prospective account.

Sales Mix is key to overall profitability of your forklift business. High performance forklift distributor executives make certain that they are getting at least 40% of their overall sales from parts and service. Unless this sales mix is obtained, 100% absorption rate from gross profits generated by forklift parts and service will be very difficult to achieve. (Absorption rate is the percent of distributor fixed expenses covered by gross profit from service and parts.)

For many years, some manufacturers have told us to focus only on equipment sales, then benefit from parts and service revenues that follow. In my opinion, the astute forklift distributor must do just the opposite: Focus first on service revenues in today’s market.

New machinery profit after direct expenses does not generate enough cash or revenue to fund the business. The most profitable segment of your business is service labor sales. By focusing on service revenues first, you can build a critical mass of highly satisfied customers that will provide the profitability and cash flow necessary for market share investments in new machinery sales.

Every one dollar of increase in labor sales also pulls through at least a half dollar of high margin parts business. Don’t forget, these labor sales increases can come from labor productivity gains as well as external customer repair orders.

Potential Financial Impact by Revenue Center
Revenue Center % Dealer Sales   Gross Margin %    
New Machinery 34 x 7 = 238
Used Machinery 7   27   189
Rentals 12   40   480
Parts 24   32   768
Service 20   62   1,240
Other 3   5   15

We have all heard the big excuses why this can’t be done: “Our service is not competitive. It takes too long to develop this business. There are not enough service prospects. We’re not sure our service department could do it. We don’t know how to sell it. Our compensation plan discourages this business development activity.”

Financial Impact
Here is another view of the same issue: financial impact. If we take a typical high-performance MHEDA forklift distributor’s percent of sales volume from each revenue center, multiply it by the gross margin percent for that department, we can determine the comparative financial impact of each revenue center.

Service can have nearly six times the financial impact on your business as new machinery sales, if you are selling the proper mix. Service is your most powerful contributor to overall gross profit from a richer sales mix. However, in your business, is service getting a proportional percentage of your top management attention? Are you working on building the service and parts volume as a percentage of your total sales?

Departmental Profit ChartWhat are successful distributor executives doing in today’s market? By improving the productivity and efficiency of your service department, you will also dispatch your product support capabilities to gain competitive advantage in your market area. Key issues include making sure the following performance benchmark criteria are being met:

  • 90% off-shelf parts fill rate to the service department on primary lines,
  • 75% service recovery rate of total labor hours sold to total labor hours paid,
  • 3.3 customer labor rate multiple of average technician wages and benefits,
  • 18%-20% of total dealer dollar sales mix in service labor sales,
  • 110%-120% absorption rate from service, parts, and rentals gross profit.

Absorption rate is also critical to sizing your administrative expense to fit your current business profit level. What are some low-cost, high-benefit alternatives to help improve absorption rate? How can you contain expenses while you work on improving your sales mix?

  • Substitute database telemarketing lead generation for high-cost, low performance machinery sales visibility;
  • Substitute high-cost, low productivity sales reps with lower cost product support sales personnel, focusing on selling planned maintenance contracts, short and long-term rentals and incremental service and parts sales;
  • Optimize asset performance: higher turns and margins on retail used equipment, better turns on parts inventory with lower obsolescence, fewer days in receivables by telephone customer satisfaction calls from service department, reduce days work in process through better procedures;
  • Build the Customer Support Sales Representative (CSSR) program through intensive planned maintenance contract sales and incremental parts and service sales. Ultimately, you should have one CSSR for every new and used truck sales rep in major metropolitan areas. In more remote areas, you can have one high-talent CSSR represent your entire business as a universal sales rep.
Is service getting a proportional percentage of your top management attention?

Sales Mix Profit Calculator
What is your profit potential from sales mix improvement? Use the steps below to help define your profit potential.

  1. Enter sales data from last year. Calculate your sales mix from last year. Continuing down column one, enter your Gross Profit Dollars and Gross Margin Percent for each area of your business.
  2. Take the same total dollar distributor sales from last year and enter the amount in the best sales mix example column.
  3. Allocate the 100% sales figure back through the five revenue centers using the sales mix percentages shown, i.e., new machinery, 45%.
  4. Calculate and enter the gross profit dollars for each revenue center based on the gross margins indicated.
  5. Total up projected gross profit dollars. Then deduct 23% of sales for operating expenses (typical). Enter your new operating profit projection. How does it compare to your last year?

Of course, I am not saying you should reduce new machinery sales to achieve 45% of your sales mix. I am suggesting that you increase service and parts business so that these revenue centers become at least 19% and 21% of your sales respectively.

Best Sales Mix
  Last Year % Example %
New Machinery Sales $ _________ _____ _________ 45%
Used Machinery Sales $ _________ _____ _________ 5%
Rental Billing $ _________ _____ _________ 10%
Parts Sales $ _________ _____ _________ 21%
Service Sales $ _________ _____ _________ 19%
Total Distributor Sales $ _________ 100% _________ 100%
New Equipment GP $ _________ _____ _________ 12% GM
Used Equipment GP $ _________ _____ _________ 27% GM
Rental Billing GP $ _________ _____ _________ 40% GM
Parts GP $ _________ _____ _________ 32% GM
Service GP $ _________ _____ _________ 63% GM
Total Gross Profit $ _________ _____ _________ ____ GM
Operating Expenses $ _________ _____ _________ 23%
Operating Profit $ _________ _____ _________ _____

Where to Start
The most effective parts and service sales programs are derived from machine inspection procedures, especially planned maintenance contracts. Your parts business, together with service, rentals and retail used machinery, comprise the four high-margin horsemen that drive greater overall dealer profitability. Make sure your parts operation is under control. Ensure your parts manager has the quiet, dedicated time essential to study and manage his/her stock status reports. Remember, there is nothing you can do to better strengthen full-margin parts sales than to aggressively sell planned maintenance contracts.

Your Product Support Program must become part of the overall package of values that you provide customers. Today, product support has become the primary determinant of value and competitive advantage in the market. Quality product support (parts and service) is a very powerful competitive weapon.

Top-performing forklift salespeople know how to present the features and benefits of this important dealer capability in their sales presentations. You must be working on continuous improvements toward the high-performance standards established by high-profit distributors. It has been said many times that sales sells the first truck, parts and service the second, third and fourth. We now believe that your product support reputation often precedes the sales rep into a prospective account. If you have an excellent product support reputation, it is easier to sell the first unit and easier to sell it at a higher margin.

Customers reward distributors who provide excellent product support. These rewards include higher margins, increased market share and referrals. Conversely, if you have a mediocre parts and/or service operations, customers will punish you with tremendous pressure on price, continuous battles for market share and, instead of referrals, disappointed customers will tell everyone they know how unhappy they are with your operation.

What are your key profit improvement strategies for 2003-4? Are you focusing on those few critical activities that will have significant impact on your business? Do you know what they are? Remember, your sales mix contributes most to your success. If you are still flogging new forklift sales as the priority way to build the business, you are focusing your efforts on the least profitable part of your operations. Evaluate the profit potential of each revenue center. Is each revenue center contributing its fair share to your bottom line?

Material Handling Equipment Distributors Associtation

Walter McDonald Meet the Author
Walter J. McDonald is president of The McDonald Group, Inc. located in Sister Bay, Wisconsin.

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