The president and CEO of a large Southeast LBM operation has been quoted as saying that his installed sales program adds 11% to the bottom line each and every month. Other clients of mine feel the same way. As a side note, 80% of my business this past year has been working one on one with LBM dealers nationwide, assisting with installed sales initiatives. Either by starting a new program or searching for ways to move a program to a higher level, all these dealers are casting an eye toward improving the bottom line.
A survey, released in May, by the Northwestern Lumber Association said of installed sales: "For the second year in a row, [we] found that lumberyards reporting sales increases are more likely to offer installed sales programs than those who report decreases. ? In 2008, one-third (32%) of the dealers offering installed sales reported revenue increases from 2007 compared with only one-fourth (26%) of dealers not offering installed sales." The survey also said the average reported contribution of installed sales to these dealers' 2007 revenues was 12%.
So, the deal is how to add 10% to the bottom line. For those of you who use my suggestions, let me ask: Have you taken the time to break out your installed business from the day-to-day operations of your retail operation? If not, you'll never fully realize the financial potential of your installed services program. If, like some dealers I've worked with, you elect to leave everything in one pile, the installed portion of your business will become muddied and lost inside the overall business.
One dealer I have worked with over the years would tell me: "We're busy as we can be, and I think we're making money." But when I would ask to review his financials, he couldn't produce anything. He tracked nothing. Being busy isn't always being productive, and certainly isn't always profitable.
Let's look at a clear set of financials from an LBM operation. I'll show you what I would like to see if I visited your business, and what I believe you need to review on a monthly basis. This particular LBM dealer breaks out the installed business on a separate profit and loss statement, then at the end of the month consolidates the two and reviews the entire store's productivity and profitability. It takes a bit of work initially to set everything up but, as you've seen me write before, if you can't measure it, you can't manage it.
Installed Sales (This was not year-end, but two-thirds of the way through a fiscal year)
Net sales: $1,125,350
Gross margin: $229,571 or 20.4% (a bit low, in my estimation)
Total payroll expense: $61,000 or 5%
Controllable or variable expenses: $113,660 or 10.1%
Net profit: $105,782 or 9.4%
Reclassified labor: $341,000 or 70% (70% of total labor and fringe charged back to the appropriate jobs as cost of goods sold)
Even though the gross margin dollar is on the low side, the installed sales manager looks after every dollar spent, works hard to insure that all labor is accounted for and, as much as possible, reclassified into cost of goods sold to keep the controllable expense line item low, thus making sure that net profit is high.
Think about this: With your typical LBM operation, how many of you can return 9.4% net profit on your business? In good times, yes, but when the market is down and times are tough, installed services can and do make a significant difference. And that's what this is all about: making a significant difference not only in your business, but in your customer's business as well.
When I am called to work with an installed operation, I like to review financials, but I don't need to see years of detailed statements on income and profit and loss. What I want to see is what I call critical profit variables. These are the same measurements I use with my roundtable groups. In fact, I will compare your numbers to my best in class from those roundtables and see where you stand. This is nothing more than a basic form of benchmarking your performance, but it is also a place to start.
From these measurements, I can get an overall picture of the health of your program. Then, if something stands out, we'll look a bit deeper into that area and determine what may be causing it. The key to this entire exercise is that you must break out your financials every month for the installed operation.
Let me give you an example: One of my clients was doing a pretty good job with installed insulation and siding. It had in-house crews, a good manager, and a sales force that supported the installed initiative. But the net profit was dismal every month. Net sales were fine, gross margin was low, and the controllable expense items were OK with the exception of the below-the-line payroll expense. This is that part of total payroll dollars that is not charged back to cost of goods sold. This line item was very high every month.
In digging deeper into the operation, we discovered that once on the job, the installers were not efficient enough. Some of the problems included driving too far to each job, taking too long to set up once there, no supervision for breaks, drive time back to the store to clock out, and returning to the job the next day to finish what should have been completed the day before. The rationale was that the manager didn't want to pay any overtime, so he had the crews clock out at the end of an eight-hour day whether or not they had finished the job. This put them constantly behind in scheduling, increased individual job cost, ruined efficiency, and drastically hiked the labor-cost line item.
The company was selling enough jobs, but the crews weren't getting them done. The management was looking for ways to stop the bleeding by controlling overtime, but that made the problem worse. Not only were expenses increasing, but customer service was falling through the basement.
We turned the program around over time, but it took some gut-wrenching decisions and a realization that the company had to absorb some costs in overtime to get these jobs done. It also had to let go of some crew because they couldn't do the job up to standard.
This company is still installing siding and insulation and has added windows, doors, and housewrap. However, it went through some tough times. We could fix the problem only because the company had good numbers to analyze and a willing management team to work with.
Let's look at those critical profit variables that I measure. Net sales: It is what it is. Gross profit: I want to see both dollar amount and percentage. Below-the-line expenses, starting with labor cost: This is that portion of total payroll expense, including benefits and taxes, that is not recovered into cost of goods sold. Now we move to your total controllable or variable expense cost. From here we arrive at our net profit, both dollar and percentage.
The final number I want to see is what I call reclassified labor cost, or that portion of your total payroll cost, including taxes and benefits, that is reclassified or recovered into your cost of goods sold. Obviously, if you use subcontractors exclusively, this will be extremely low as you are only recovering a portion of your administrative cost. But if you have an employee install team, you should strive to recover a significant portion of this cost.
Be sure you're estimating your employee labor cost accurately. Don't laugh, I've seen dealers who were paying their installers $12 per hour, billing them out at $15, and wondering why they were losing money on this proposition.
Now back to that 10%–how do you get there? Offer products and services that your customers really want and need, accurately measure every item in the process, and control the overall operation. One friend of mine calls this "collect and control:" Collect the information, and control the outcome.
In many of my columns, I have outlined methods by which you can enter the new construction installed business, capitalize on the remodel and retrofit segment of the market, and even install for design/build remodeling contractors themselves. All of these methods are proven, and they all have one thing in common: They won't work unless you do.
In every case, you, the LBM dealer, working with your installed sales manager must commit time and resources to pursue whichever segment of the market you have chosen, and relentlessly chase that business until you own it.
Installed sales isn't something you jump into because a customer asked you to. This is a long-term business commitment that requires all the forethought and planning that any other business venture deserves.
What my most successful clients have in common are a dedicated installed sales manager, a realistic budget that they know and understand, full financial accountability and reporting, and the support of the entire team to see this business succeed. That's how they add 10% or more to the bottom line. And there's the catch: You have to work at it to get it.