It was my honor this year to put together the Cost of Doing Business Survey on behalf of seven regional LBM associations representing 24 states. (The National Lumber and Building Material Dealers Association also did a cost of doing business survey this year. Click here to see its results.) My comments and analysis below are from the 88 dealer surveys that I compiled.
Pretax Profit Margin
Dealers reported an average pretax profit margin of 2.3%, down sharply from the 6.06% margin posted in last year's NLBMDA Cost of Doing Business Report. I see two main reasons for this: the housing slump and the decrease in the price of lumber products.
What do do. Compare this year's financials with last year's. Start on the expenses. Place a 2007 financial statement with year-to-date numbers through this month last year next to a 2008 financial statement with year-to-date numbers through this month this year and look at expenses as a percentage of sales. Then look where you can cut expenses. If your sales have decreased, don't be the last holdout to cut expenses. This should also be a part of your budgeting for 2009. If you look at January through November numbers at the beginning of December, you can get a jump-start on your 2009 budget. I don't believe in waiting until you have 12 months before creating a budget when 11 months are a good indicator.
Gross Margin on Materials
This category fell a whopping 3.08 points, from 29.15% in 2006 to 26.07% in 2007.
What to do. One of your goals should be to increase your overall margins by 2 points or more. How? Look internally at your pricing structure and the people that make it happen. If your people are short on time or you don't have a pricing manager, consider investing in an outside consultant to help you. I recommend contacting any of my colleagues, Mike Butts, Jim Enter, Bill Lee, or Ruth Kellick-Grubbs. Or feel free to contact me and I will help you. Read my previous column on transparent pricing.
Bill Lee has written a book called, My Gross Margin. I recommend that you read the book for tactics about moving margins. He has some great examples about pricing special orders and negotiations.
Inventory Turnover
This number decreased to 7.15 times in 2007 from 8.17 in the 2006 NLBMDA report. We need to have at least eight turns in a typical lumber business and more than 10 in one that is primarily a sticks yard. But a better number to look at is GMROI (gross margin return on inventory). This number is your turns multiplied by the gross margin percentage. To increase the number you have to have a higher gross margin percentage or more turns. The average GMROI in 2006 was 336.02 as compared with 251.82 in 2007; again another decrease.
What do do. You can achieve one additional turn by ordering your products more frequently or buying through a distributor or wholesaler, as opposed to going direct. Using purchase advice reports on your computer system is a no-brainer. Remember to keep a clean yard and practice good data hygiene, or getting your vendors involved on the buying end and get your customers involved on the selling end. If you can do a better job of forecasting your customer needs, you can make better purchasing decisions.
If you are running a millwork operation, truss plant, or similar manufacturing operation, I strongly recommend that you read The Goal by Eliyahu Goldratt. He will help you better turn your inventory and become more efficient through process improvement.
Sales per Employee
Sales per employee dropped to $337,981 from $396,651and gross profit per employee shrank to $86,793 from $115,663. On the other hand, the average salary dropped to $51,544 from $57, 473. That's a bright spot: As a percentage of sales, payroll costs dropped to 15.2% from 17.37%.
What to do, part 1. As always, you have to get more productivity out of your people. How do you do it? Start with employee reviews. Here is a link to one that we use internally at our company and also it is used by many of my dealers. And click here for a description of the employee review process. Next, before you hire somebody, perform a background check. I have found that the each Federated Association can recommend a background checking company that may be familiar with your local laws or state laws.
What do to, part 2. Be aggressive in your hiring and stop paying by the hour, unless you also pay for performance. This is simple in that you figure out how much an employee should make on an hourly basis. Then multiply this number by about .75. Compute what they should accomplish (i.e., job responsibility) which must be measurable. If they hit the target, the other 25% should be then dispersed. If not, then there should be no additional pay. The key is to create a system such that the more productive the employee, the more profit for the employee and the company, making sure the company always wins. While this explanation is simple, it can be applied to all areas of the business. I would rather employ the best people in the marketplace, knowing that I have fewer employees, being more productive. It just makes good business sense.
Did You Do Worse?
I suspect that many of you reading this column work at companies with even worse numbers than what's been reported above.
What to do. Compare your numbers to the survey. (If you do not have a copy of the survey and are in one of the states that took part, contact your local federated association or me and I will send you a copy. The survey costs $300 if you are a member of a participating federated association, $500 otherwise.). If your numbers fall short, get help and do it now. One quick way to start is my column on "10 Things To Do To Boost Your Bottom Line." Consider joining a roundtable and learn from industry peers. Federated associations are a great resource to find a roundtable.
Use your time wisely. Invest in your employees, customers, and vendors. Reduce your expenses and increases your sales and margins. "If it was easy, everybody would be doing it," people say. This is simple. Yeah, Right!
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The regional cost of doing business report was sponsored by: the Mountain States Lumber and Building Material Dealers' Association (representing Arizona, Colorado, Idaho, New Mexico, Utah, and Wyoming), the Illinois Lumber and Materials Dealers Association, the Michigan Lumber & Building Materials Association, the Northwestern Lumber Association (representing Iowa, Nebraska, Minnesota, North Dakota, and South Dakota), the Southern Building Materials Association (representing South Carolina, North Carolina, Tennessee, and Virginia), the Lumbermen's Association of Texas (representing Louisiana and Texas), and the Western Building Materials Association (representing Alaska, Idaho, Montana, Oregon, and Washington).
