By John Mackay, Mackay Research Group
Each year MHEDA conducts the Distributor Statistical Comparisons (DiSC) study. DiSC is a financial benchmarking study of MHEDA members. This study has become an important tool for MHEDA members to be more successful and without your participation this tool would not be available.
Actually there are three DiSC studies, one aimed at each of three major segments of MHEDA members; industrial trucks, storage and handling, and engineered systems. Each of these segments has different business models and, therefore, different benchmarking needs.
Why is it that one of every four storage & handling distributors makes twice as much money as the rest of the industry?
There are concrete benchmarks that highly successful storage & handling distributors manage in their business just a little better, resulting in a lot better return on investment (ROI). Thriving distributors achieved their success by managing what the Storage & Handling DiSC report calls the Critical Profit Variables (CPVs), see Exhibit 1. Those key CPVs are the decisive benchmarks that separate successful companies from other distributors in the industry.
Interestingly, the high-profit firms almost never truly excelled at any one of the CPVs. Instead, they were able to manage the collection of profit drivers just a “little bit” better than the typical company in the industry. This small delta in performance was enough to generate dramatically higher profit.
The MHEDA DiSC study provides some key insights into exactly how the high-profit firms generate better profit numbers. It focuses intently on the key profit drivers — growth, gross margin, expenses, inventory turnover and accounts receivable collections. The report provides a roadmap for any firm wanting to improve its financial performance.
Typical Versus High Profit
The term “Typical Firm” in the report means the firm that is most representative of the industry. This typical firm is the one with financial performance in the exact middle of the results for all participating MHEDA distributors. That is, on any given measure, half of the firms performed better than the typical firm and half performed worse. It is the best measure of industry performance on the profit drivers.
In 2019 the typical storage & handling firm generated sales of $16 million in revenue. On that sales base, it produced a pre-tax profit of $656,000 which equates to a profit margin of 4.1%. Stated somewhat differently, every $1.00 of sales resulted in 4.1¢ of profit.
In contrast to the typical firm, the “High Profit S&H Firm” generated a profit margin of 8.0%. This means that even if the high-profit firm had produced the same sales volume as the typical firm, it would have generated more profit for reinvestment in the company. Higher profit along with higher asset productivity ultimately resulted in higher return on equity to the owners of the business.
Managing the CPVs
In trying to move from typical to high-profit, the key is to understand the Critical Profit Variables with greater precision. To facilitate that understanding, the CPV results for the typical firm and high-profit firm in the industry are summarized in Exhibit 1. While there are other factors that could be examined in evaluating performance, these are the ones that really drive performance.
The Critical Profit Variables for Storage & Handling
|Profit Margin (pre-tax)||4.1%||8.0%|
|Return on Owner Equity||35.3%||86.4%|
|The Critical Profit Variables|
|Sales Per Employee||$565,187||$642,760|
|Average Collection Period||39.8 Days||38.5 Days|
At first glance, some of the differences in the CPVs between typical and high-profit may appear to be so small that they don’t even deserve management attention. In fact, it is these small differences that combine to produce major changes in return on investment. This means that the typical firm doesn’t have to dramatically improve performance on the CPVs, but simply do a little better across the board. There is a multiplier impact when performance is better in a few areas, even if “better” is relatively small.
From a management perspective, it is not even necessary to do a little better everywhere. However, being “good on everything” is not necessary to generate a high level of profitability. What is important is to be good on what counts.
It is important to emphasize once again that the CPVs that are the most important benchmarks to enhancing profit results are sales growth, gross margin, operating expenses (both payroll expenses and non-payroll expenses), and inventory turnover. Each factor needs to be planned carefully to ensure adequate profits.
The high-profit storage & handling firms produce great results virtually every year. They also reflect the fact that there are no industry barriers to success. The key to improved performance is to develop a specific plan for each of the CPVs and combine them in a positive way. If one of four distributors in the industry can earn over 40% Return on Owner Equity, it should be a reasonable goal for the other three of four distributors in the same industry. Ultimately that is why MHEDA conducts the DiSC survey, to establish realistic, attainable profitability goals and determine the critical benchmarks for achieving those goals.