This is part 8 of Shifting Profit Drivers, a periodic series of essays.
You may have seen headlines like the one in a recent Business Insider Article declaring that truck drivers’ salaries have experienced an unprecedented jump this year and yet those increases aren’t enough to end a shortage of drivers. What's worse, driver pay might have to rise another 40% to 50% before the crisis ends.
This is a particular problem for LBM. That’s because, with few exceptions, we are locked into a “free delivery” business model. And we make this free delivery offer without consideration for the number of trips made to a jobsite, the size of the order, or the gross profit dollars generated by the customer. The current driver shortage hurts us, not our customers.
An operations manager’s roundtable that’s part of the American Association of Roundtables conducted a study to determine the average number of trips made to a new construction residential jobsite. The result: In a perfect world it would require six to nine deliverie, depending on product groups supplied. During this six-month study, we also tracked jobs from start to completion. The average number of trips to jobsites was 16, including deliveries and reverse deliveries (aka returns). In the bottom quartile, the number was over 26 deliveries.
To recover or offset the increase in delivery costs, you have three options: 1. Raise your prices for commodities.
2. See your profit margin shrink by 75 to 100 basis points.
3. Improve delivery productivity.
Good luck with the first option. As for the second option, with most dealers earning around 5% before taxes, a hit on earnings of three-quarters to one percentage point reduces the bottom line 15% to 20%.
Pursuing option three will be challenging, but in the end will be the most rewarding. Based on fleet productivity numbers from recent roundtables, the average dealer and can increase delivery volume by 50% without adding additional drivers.
To start, ask your lumber buyer for the freight cost of the last load of lumber received, and you will get an answer to the penny. Now ask your dispatcher the freight cost of the last delivery made to a builder; that person’s look will tell you all you need to know.
However, this information is available and is being used by a group of dealers to measure productivity. An analysis conducted just last week by a large contractor-oriented dealer of delivery costs offered amazing insights into the productivity issue at the customer level: the lowest cost of delivery was 1.63%, and the highest cost of delivery was 7.51%--not for one job, but for an entire year.
For both customers, a salesperson was paid a percentage of the pre-delivery gross profit dollars. This sales cost was considered in the dealer’s study, but not included in these numbers.
If you are not prepared to measure productivity at this level, a great place to start is to check out these key performance indicators as well as track the number of trips made to a jobsite. You may find you can increase delivery volume without increasing the number of drivers allowing you to pay more as well as send savings to your bottom line.
To quote Ken Iverson, past Chairman of Nucor Steel, “hire five employees, work them like 10 and pay them like eight”. Under Ken’s leadership, Nucor was never without highly motivated workers. A key to their success, Nucor had excellent systems and measured everything. This allowed their employees to be the most productive, highest paid in the industry as well as Nucor to have the highest profits in the steel industry.
Previously in this series:
1. Want Higher Profits? Start Thinking More About Logistics.
2. How Efficient Is Your Operation? Find Out With These Benchmarks.
3. Lots of Dealers Drive Trucks Until They Collapse. That's Wrong.
4. Errors Cost You 10 Times More Than Doing Things Right. Here's How to Reduce Errors
5. Most Dealers Can't Tell You How Much It Costs to Serve a Particular Customer. They've Been Sucked Into a Black Hole
6. This One Hour Each Day Can Make All the Difference in Your Operations
7. On This Island, LBM Delivery Errors Don't Happen