This is Part 1 of "Shifting Profit Drivers," a periodic collection of essays
Over the lifetime of our industry as it has matured, our profit drivers have tended to shift. Prior to and during the 1960s, the local dealer had limited competition and product was king. Customers had limited knowledge of our products, and few alternate options were available to them. Product features and benefits were the key points in taking an order.
Because builders options were limited in those days, lumber dealers priced their products at whatever the market would bear. If profits declined, the dealer's solution was to raise prices. Profit before tax was typically above 10%. Controlling expenses was not emphasized or seen as part of the solution to profitability.
The 1970s and 1980s brought an age of multiple locations for dealers who previously had operated from only one spot. With these multiple dealers in competition, the still-uninformed builders were pursued based on more product options and price. Even with the persuasive skills of the outside salesforces of these dealers, gross margins dropped. Profit before tax decreased to 4% to 5% for the majority of dealers. Still, no relationship between profitability and expenses was stressed.
Beginning in the 1990s and continuing through today, the typical builder--as always, our customer--is more educated and better informed. They know how the competitive building industry functions, and are demanding about the product itself, the timeliness of its delivery, and the pricing.
Dealers operate in an environment where the builder may place multiple orders during a day for delivery to the same jobsite. And in today’s competitive market, there is always a dealer willing to meet the customer’s demands. Thus, logistics of delivery becomes crucial to profits, and if not managed well, will negatively affect the bottom line of profitability.
Today, profit has dropped to 2% to 5% for the majority of dealers due, in part, for our failure to manage delivery costs.
I will write a series of articles addressing the need and advantage of developing a mentality of logistics thinking. Managing this shift is critical to profitability.
Next up: Delivery Productivity Ratios