Situation: Milt Average, owner of Middleroad Tire, grew increasingly disappointed in the performance of his company. His five-store dealership had produced profits in the 2% to 4% range five years in row. But the most recent year showed a profit below 2%, creating real concern. Milt was determined to go from “fair” to much better results.
Sales had been sluggish with the exception of one year where sales increased by 9% due to some incentives and greater sales effort by store managers and service writers. In that year, the stores saw more new and returning customers. The following year, margins improved but sales fell back and fixed expenses increased. Milt sensed that he needed to get everything going in a positive direction, so he made plans to redefine “normal” for his company.
Potential impact study
Milt and an outside advisor drew up a five-step improvement plan. The first step was to quickly determine the positive impact on operating profits if the firm’s best historical performance levels could all occur in the same period. The abbreviated impact study is shown in the chart.
Highlighting the firm’s best year for sales growth, contribution margin and fixed expenses, Milt noted that the three keys all fell in different years. The best fixed expense control occurred in 2014, whereas the best sales growth happened in 2015. The greatest margin on materials, labor and other variable costs fell in 2016.Milt and his advisor then projected the positive impact on Middleroad’s net income if the company could attain its past top performance in each factor all during the same year. The reasonable impact of a renewed focus on best performance could propel Middleroad’s net income from $295,000 in 2017 to $1,574,000 in 2018, almost a five-fold improvement!
The high potential for improvement focused the firm’s management on those critical goals. Breaking down the impact analysis to the individual account categories of variable costs and fixed expenses helped point to specific areas where the team might negotiate significant improvements.
Benchmarks
Milt and his store managers now had an ambitious, but workable, goal for the new year. Their focus on best performance indicators took the team even deeper into comparing their current and planned operations to a series of industry statistics and benchmarks.
Using previously published tire dealer indicators and ratios often used by accountants and banks, the team compared Middleroad Tire to other firms of similar size in both the tire industry and in other general categories. Some of the key performance indicators they used were:
- sales per employee and profit per employee;
- gross margin as a percentage of sales;
- fixed expense as a percentage of sales;
- operating profit percentage;
- total personnel cost as a percentage of sales;
- inventory turns per year;
- accounts receivable — days sales outstanding;
- percent return on total assets utilized, and percent return on owner’s equity;
- debt-to-equity ratios;
- current ratio and acid test ratio; and
- cash flow and current liquidity.
Reviewing the company against benchmarks for 2017 (projected) and 2018 (forecasted) gave Milt and his team confidence and a keen desire to move ahead with additional steps to create a much more profitable firm going forward.Balance of functions and resources
Milt and his team then reviewed Middleroad Tire’s balance and capacity to handle the projected growth in volume and profits. They recognized that their primary functions and resources needed to be well-balanced to generate winning customer experiences while earning a better and sustainable profit level. When functions and resources are unbalanced, profits and customer service often suffer. (See my MTD Business insight article “Balance is a primary business strategy”on www.moderntiredealer.com from November 2006.)
Customers expect friendly, personalized service and a pleasant buying experience. That requires product availability, adequately trained staff, short waits and clean, comfortable stores. Customers go where they feel invited and only return if they feel appreciated!
Alignment checks
Profit improvement can be derailed by certain policies, procedures and programs. Milt and his team carefully reviewed their policies and programs to ensure that they were in alignment with the company’s new goals, strategies and plans.
One area that can be particularly troublesome is employee compensation plans. For instance, service employees being paid only by the hour have no incentive to increase productivity, rather they often get rewarded by overtime pay if they work slower. Such plans work against the firm’s desire to improve productivity and profit. Alternate plans that reward more effective time utilization work better. Problems are sure to arise when different incentives act at cross purposes between functions.
Employee policies and procedures need to be written and well-communicated. Employees appreciate knowing what is expected and where they stand. Manuals and frequent refreshers help avoid misunderstandings and possible litigation.
Employee hiring, on-boarding and continuing individual development are vital management activities. Leading tire dealers invest significant effort in developing people and offering advancement opportunities. Happy employees help create happy customers!
Other alignment areas include:
- streamlined marketing and customer-related policies and procedures with outstanding customer experiences as a primary goal, both in-store and on-line;
- financial policies, reporting and organization, authorities, and control guidelines, where first line employees are empowered to make most customer-related decisions;
- administrative and HR policies, payment policies, hiring, terminations, discipline or changes in compensation; and
- contingency plans, risk management, insurance and catastrophic loss to the business.
Immediate action plans
Several issues arose during the review sessions that cried out for action by the team. Milt’s advisor recommended that the team establish specific action plans for each issue so that work could begin immediately. The work was organized using the following steps:
- individual, specific action plan for each identified issue;
- each action plan assigned to a single individual as “coordinator”’ even when several team members would be involved in completing the plan;
- establish an initial target date for completion of each action plan. The team, owner and coordinator to agree on timing, considering other daily job requirements and the potential for positive results;
- coordinators to determine the specific steps to complete plans, along with an estimate of the costs and benefits of each plan;
- Milt to review all action plans, prioritize to gain greatest overall effect, and commit the time and money required to complete the plans; and
- tthe management team to hold frequent review sessions to keep all action plans on track, and to celebrate completion of the vital action plans as they occur.
Outside resources
There are numerous outside resources available to owners like Milt. The predecessor to the Tire Industry Association (TIA) published a profitability guide back in 1989 which can be helpful in developing specific benchmarks and sample analyses. A firm’s CPA can assist in developing a more detailed, individual version of a financial impact study. Statistics for other similar retail and commercial dealers may be available from the U.S. Commerce Department.
Other local and state organizations also may offer assistance. For example, the Texas Consilium is a non-profit organization dedicated to the growth and improvement of small and mid-size companies within the state. Their business experts develop detailed impact studies, diagnostic analyses, and implementation assistance for relatively low fees when compared to the striking improvements clients gain. Check out www.txconsilium.org for more information. Other states may have similar developmental programs. ■Dick Morgan has more than 43 years of tire and retread industry experience, working with manufacturers, retreaders and tire dealers. He is one of the judges for MTD’s Tire Dealer of the Year award each year. Morgan is a Certified Management Consultant and a Fellow of the Institute of Management Consultants USA. He founded Morgan Marketing Solutions Inc. in early 1989 to help leaders accelerate profitable growth by enhancing a team’s ability to create and deploy right actions, right now. Morgan is the author of “Marketing Facets, The Market-Focused Guide to Company Analysis,” a practical resource for those involved in determining the current health of a company and gauging its future prospects. He also speaks on marketing and management topics at industry conferences and for state and local business organizations. Contact Morgan at (972) 931-7993 or [email protected].
