Paul DePodesta and Scott Simpson have little in common besides Ivy League educations, and neither has ever run an LBM operation. But both are among a small group that could lead you to rethink how you measure your LBM operation’s performance.
DePodesta held the ProSales 100 Conference audience spellbound earlier this year when he spoke about the key role he played in “Moneyball,” in which new ways to measure and forecast players’ performance enabled the Oakland Athletics baseball team to succeed far beyond what its modest budget would suggest. Now he’s striving to do the same in pro football with the Cleveland Browns.
Meanwhile, Simpson is using his years of experience in credit-card management to look with fresh eyes at LBM companies. Too often, those eyes are wide with surprise.
Both men belong to a movement that questions how and why we measure things the way we do and seeks to either create new metrics or embrace measuring devices that haven’t been utilized much. For example, DePodesta asked the ProSales 100 group why baseball execs should regard one of the sport’s oldest metrics, earned run average, as a key indicator of pitching talent when a good part of what goes into the stat depends on how well teammates field a batted ball. Questions like that have led to baseball statistical gurus’ development of several new metrics to go alongside ERA, like “Defense Independent ERA,” “Power/Finesse Ratio,” and this writer’s favorite, “Cheap Wins.”
Simpson (shown below) has made similar, LBM-related inquiries as part of his role as CEO of BlueTarp, a Portland, Maine-based firm that helps dealers with their receivables and credit. One target is early pay discounts, in which a dealer typically reduces the amount that a customer owes if they pay the bill by the 10th of the following month.
“Early pay discounts are overused and ineffectual,” Simpson told dealers in Minneapolis earlier this year. “If I have 10 customers, a certain percentage—usually six or seven—will pay promptly. The other three or four won’t do it [regularly, if ever].” In essence, you’re missing out on money you could collect in the vain hope of receiving cash from other people who never intend to take the bait. So why do it?
At other times, the metric itself might remain worthy, but the benchmark to judge it needs updating. Consultant Ruth Kellick-Grubbs says that’s the case with payroll as a percentage of total sales. The old rule of thumb was that payroll plus benefits and income taxes shouldn’t top 15%. But that applies more to retail yards, she says. For contractor-heavy facilities, you should aim for payroll below 12% or even 10% of sales.
Kellick-Grubbs also is a fan of tracking average delivery ticket value and average dollars spent per trip and per truck. Doing well on these metrics puts a premium on efficiency, she says. You also can break down the numbers by salesperson or by customer; either way, “if you’re doing 25 tickets for a job, that’s a problem.” She says it can be surprising for a dealer to see just how job-intensive a customer might be.
In this same vein, Jim Moody of the Construction Suppliers Association recommends dealers measure total truck expense: gas plus oil plus repairs plus leasing costs or depreciation, all divided by the value of delivered sales. Shoot for truck expenses below 1.8% of delivered sales. Want to cut it? Keep a closer eye on how many trips are made to pick up returns. If you have customers who always over-order, factor that into your pricing, Moody suggests.
He and Kellick-Grubbs both recommend tracking gross dollar profit per employee, partly to keep you from succumbing to staff’s siren call to hire more people as business picks up. “If you look at sales and gross profit as certain ratios [that need to be surpassed], you can say when it’s time to hire,” Moody says. “But if you don’t clear that bar, you can say, ‘Historically we haven’t reached that level yet.’”
History plays a role in the metrics we use, and emotion figures into how (or whether) we read them. That could happen if you take some consultants’ advice and start measuring your operations’ performance in terms of return on invested capital. It’s a great way to determine whether you’d be better off investing the money you’re putting into an LBM operation elsewhere.
But here’s the catch: Suppose you own your LBM company’s property and charge rent to a separate entity in which your children operate the business. You’ve kept rent low because you want to help the kids. The operating company may show a healthy profit, and if that’s the only bottom line you ever looked at, you might feel good. But the capital you’ve invested in the land might be getting paltry results, particularly if the property value has swelled over the years.
What should you do, then? Your head might tell you that selling the land and investing the money elsewhere makes sense. But your heart could lament that you’re abandoning the family heritage and ruining your children’s prospects. Numbers don’t lie, but they can inflict eye-opening pain.