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Opening New Branches

Customers are frequently interested in the support and nearby resources available from their “local” branch. Indeed, we have won and lost orders due to our proximity to the customer, leading us to consider new branches in developing territories. Conversely, the ever-increasing pressure on margin would lead us to abandon that very expensive thought and make investments in better technology/coordination tools to support these territories. What factors should be considered in opening or closing branches? How significant is physical proximity of the branch to the purchasing decision of the customer?
                                                                                
– Joe Dean, President & CEO
                                                                                             Pengate Handling Systems Inc. (York, PA)

Duncan Murphy: Within any group of dealers, you will find passionate supporters for both options. We have five locations, as dictated by geography. There is at least an hour of drive time between locations, and each has a market potential with its surrounding area to support a facility. If occupancy costs are high, then the opportunity must be high. Small branches will work. Two million dollars in revenue can carry its G & A load and still make five percent. Several mom-and-pops now do so in your area without the resources that a home office can bring. Customers are interested in great service. A local presence can add reassurance, but you must still exceed expectations. Technology does not replace the personal touch but can trim staff in a branch, which is your real expense. Rent is cheap, but staffing a branch is expensive and each person must drive revenue. For a branch to succeed, it must provide all the goods and services your other locations do. Otherwise, let them operate out of their vehicle, with the Internet and a post office box.

Dave Griffith: For forklifts, bigger branches with remote support of technicians are the way to go. This leverages the scarce talent and resources and allows you to be more responsive in a given situation. Given call centers, GPS, laptops, wireless and the proper use of the Web, a local look and feel is very achievable. You also get some real scale with bigger branches. This assumes remote road techs and all the infrastructure that needs to be in place is there.

Richard Donnelly: We are an industrial truck dealer, and we think it is important to be close to the customer. The four major profit areas are new and used sales, rentals, parts and service. Profit margins are very slim in new equipment; there-fore, you need to make your profit in the other areas. A local branch managed properly will drive efficiency and profits in those areas. When we consider opening a new branch, we review several major areas, including customer demographics, market economic outlook, machine population, machine and product support sales opportunity, branch structure, facility cost, tooling and vehicle cost. After reviewing this information, we develop a three- to five-year strategic business plan and income statement for the proposed branch. If we determine the branch will give us a competitive advantage and a return on investment, we will build. Through the years, we have built several facilities and learned from our mistakes.

Rex Mecham: The fundamental role of distributors is to be near the customer and taking care of needs. As our products become more and more a commodity in the eyes of customers, our ability to service them quickly and professionally is our major differentiating factor. So it is important that we respond more quickly than a caring neighbor. Over the years, I have closed and opened several branches. The only way to make the decision is to evaluate profit potential. If there is enough potential profit to support the expense of a branch with five to seven percent left over, then we need to be there. If we can’t make it work in an existing branch and there is not a visible way to improve it, we close it. It is always more enjoyable to open than close, but profitability dictates the decision.

Dave Reder: We have had good success with branch locations. The key is to have techs report there for parts support, paperwork and uniforms. The cost justification comes from reduced travel and non-billable expense, fuel savings, wear on vehicles and increased business because of the shorter response time. We find people want to do business with people in local communities. We do invest in technology like phone systems, so we do not have to duplicate overhead like receptionists or parts phone sales. These all ring into our main location.

Stan Sewell: I agree with you that a pure brick-and-mortar strategy in our industry can severely impact your return on investment. In the ’80s and ’90s, we opened several satellite branches. Today we have merged most of these facilities back into a branch that is 45 to 120 miles down the road. Generally, if we cannot generate $2.5 million to $3 million in parts, service and rental revenues in a given geographic area, we don’t need to invest in a building. Road service teams with GPS, parts drop points, direct ship programs and dispatch technology can effectively serve customers without the burden of increasing your balance sheet fixed assets. Remote larger customers can be served with on-site service teams operating under a customized maintenance contract. We believe we can support a customer with the right service contract regardless of the proximity of a physical building.

Jerry Weidmann: The majority of our services are provided to our customers at their locations, with facilities supporting the execution of these services. Field service, tire pressing, parts, rentals, equipment demonstrations and sales are all performed at the customer site.

We have two large regional facilities and four service centers located throughout our market. We have shop technicians, service parts support, rental equipment, delivery vehicles and sales representatives at each of the six facilities. To justify a new service center, the market should be able to justify a minimum of three shop technicians (including a working foreman) and 25 rental trucks. Generally the market should be more than one-and-a-half hours away from the nearest service center. For smaller markets, we will hire local technicians and support them with parts drop points and daily deliveries. We will price our cartage to meet the competition for the local market.

By sizing facilities to markets and pricing services to competition, and establishing service support locally, you can provide superior customer service in all sizes of markets whether or not you have a physical facility in the market. Customers are concerned about the service they receive and the timing with which they receive it. If you can demonstrate the efficiency of your service support strategy to meet or exceed your customer’s expectations, the customer will not care about your facility location.

Material Handling Equipment Distributors Association

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