Prior to and during the 1960s, the local building material dealer had limited competition, customers didn’t know much about products, stores could raise prices easily, and pretax profit typically topped 10%. Clearly, much has changed in LBM.
Today, the typical builder is far better informed about the products we sell and the prices we can charge. There’s always some other dealer competitor willing to meet the customer’s demands. We’re in a world in which profit margins for most dealers are just 2% to 5%, and builders are placing multiple orders a day for delivery to the same jobsite.
All these factors make the logistics of delivery a crucial driver of profits today. If they aren’t managed well, your bottom line will suffer. Here’s how to make that shift.
Follow the New Benchmarks
The bottom-line profit driver has migrated from, “Can we charge more for studs?” to, “How can we control cost to improve our operating profit?” Reducing overtime is almost always the first emotional response, but often it’s better to ask why that overtime is occurring. How much of it is due to yard and warehouse and delivery inefficiencies?
After more than 15 years facilitating industry roundtables, I’ve developed a list of key performance indicators (KPIs) to measure the efficiencies of a dealer’s yard and warehouse and delivery processes. Dealers achieving these KPIs typically produce a 6% to 8% operating profit line. They are:
• Delivered sales (not total sales) per delivery truck: $1,750,000 • Delivered gross profit dollars per delivery truck: $425,000
• Delivery cost as a percentage of delivered sales: 2%
• Delivery cost as a percentage of delivered gross profit dollars: 7%
•Total sales per forklift : $2,600,000
• Total gross profit per forklift: $650,000
• Average turn time (time on the yard between deliveries): 20 minutes
Delivery vehicles include delivery vehicles only. We’re talking about primary vehicles, not trailers or towable lifts. Not included are pickups, even if used for delivery, or any other company vehicles. Delivery cost includes delivery vehicles plus any towable or truck-attached lifts that are used primarily for delivery.
Expenses to be included are fuel, oil, maintenance, depreciation, lease payments (if applicable), repairs, and other similar expenses. If the dealer has a maintenance shop, include a prorated portion of total shop expenses. Not included are vehicle insurance, drivers’ wages, and costs involving any nondelivery vehicles.
Maintain Your Fleet
Builders tell me the most important thing their lumber dealers can do for them is: “Deliver my materials to my jobsite when you promise to do it.” It follows, then, that if you want to meet your builders’ expectations, it’s essential you have a fleet of trucks and lifts that don’t break down regularly.
Delivery trucks and forklifts aren’t like wine; they don’t get better with age. All professional trucking companies—and you are a trucking firm—have fleet maintenance and replacement schedules. When I ask dealers about their schedule, I often hear, “We run them until the wheels fall off.”
To avoid a crisis, test an oil sample from your engines and transmissions at least every other oil change. And set a replacement schedule. A $50 solution to engine problems, in most cases, is having your fluids analyzed—a service your oil suppliers will provide if you ask them.
I also recommend you budget to replace 20% of your fleet each year. For lifts, budget to replace 10% annually. If you have 10 delivery trucks, plan to replace two a year. This eliminates the risk of an unplanned cash outlay for three or four trucks in one year or, worse, expensive short-term leases. If we’re in a recession, replacements can be postponed.
Reduce the Chance of Errors
The further into the delivery chain a mistake is discovered, the more the error will cost. I use a general rule of 10X: A mistake caught after the material is bundled, but not loaded, will cost $1 to correct. If the inaccuracy is discovered after loading, the cost is $10. If it’s found after the delivery, the cost is $100. And if the oversight is discovered after the material is installed, the cost is $1,000.
In the latter case, the cost implications actually are worse than $1,000 because you pay for that error out of your earnings. Assuming you have a pretax profit of 5%, a preventable $1,000 error requires a sale of $20,000 just to pay for the preventable problem. And that doesn’t include the “soft” cost of late deliveries, overtime, or upset and possibly lost customers.
Anyone correctly using a warehouse management system with barcode readers and bin locations won’t have this problem. Alternatively, you can have a second count and verification of product as soon as the order is pulled. Many larger dealers have a yard manager responsible for this task.
There’s yet a third option: Have any knowledgeable person, other than the person pulling the order, function as a quality control (QC) officer. If you have two pullers, they should check on each other. An audit trail is necessary, so I recommend attaching to the bundle a tag with two lines for signatures: one by the puller and one by the QC officer. This simple action can improve accuracy by 90%.
Honor the Golden Hour
If you don’t get things right the first hour, the day will likely go downhill from there. To ensure your deliveries are out the door as promised during the first hour (and the rest of the day), do this:
• “A” and “B” items can never be out of stock. • The address for every delivery must be accurate.
• Delivery times are promised by only one person and can’t be overridden without approval by the highest level of local management.
• All orders must be checked for accuracy.
• For first-outs, two choices: 1) All orders must be pulled the day before, and all other deliveries are pulled and staged before the assigned truck returns. 2) Loaders must come in at least a half hour before the drivers on the morning of shipment, to prepare the delivery.
• No add-ons—zero. Last-minute add-ons are the No. 1 reason why the first hour fails to be golden.
The mindset in our industry is shifting from, “We got the order, so the heavy lifting has been done” to, “We got the order, so now the heavy lifting begins.” Builders think you’re in the freight-delivery business. Get it right.