Accessory offering and win-win plans with vendors can increase profitability through disruption.
By KIM ARCHER
Tips for strategic planning
Supply chain management:
The past two years brought many challenges for multiple industries. The pandemic forced many of us to stay indoors and rethink how we do business. We also thought about where we live, how we use our homes, and what we deemed most important. Many industries were forced to pivot in different directions to stay relevant during a time of uncertainty and volatility.
The need to navigate problematic waters is also relevant for the home service industry. Supply chain issues created complications for distributors, dealers, and customers. For dealers, acquiring equipment, especially ultra-high efficiency equipment, became a concern as lead times stretched out as far as six months. This continues to negatively impact revenue and gross profits for dealers as well as customers who need HVAC systems now.
While there is no quick-fix solution for current supply chain issues, strategic planning can soften disruption difficulties. The message to homeowners, distributors, and dealers is clear: plan early. Building effective communication between the dealer, distributor, and customer is vital. There are multiple tools to create effective communication and messaging to your existing client base.
Inventory management
The need to keep more inventory on hand is paramount. For years, many dealers operated on a just-in-time inventory system. That method no longer works. Inventories need to be stocked. BDR’s best practice recommendation has always been to have at least a one-month supply of inventory on hand. With lead times to acquire desired equipment extending out to four months or more, we’ve seen that number increase to as much as three months. Building a strategic business plan will provide the dealer with the ability to project future equipment needs, allowing them to get ahead of the demand and meet the homeowners’ needs.
With additional inventory on hand, space issues arise. We’ve seen dealers and distributors rent space to store the extra inventory. Some distributors have signed three-year leases to ensure they have enough inventory space. Dealers are having to do similar things to bring in all the products they need. With the supply chain disruption, extra inventory is a necessity to thrive.
The vendor relationship
To combat supply chain disruption, it is important for distributors and dealers to work together to strategically plan a course of action. The two parties need to be coordinated with one another and having a sound plan will help build a positive relationship. For dealers, create a plan based on jobs you will sell throughout the year. After the plan is developed, the dealer should plan a meeting with their distributor and territory manager. During the meeting, iron out details regarding the projected equipment needs for the next one or two quarters, equipment that should be bought, and products that can be used across multiple applications.
Developing a plan is a win-win for all parties. Many dealers do not have a plan or know how many systems they‘ll sell in the next three months. They do not have any projections, and this can be problematic for distributors who place orders months in advance. If a dealer comes with a proactive business plan, it provides the opportunity to better plan and meets the dealer’s needs.
Pricing and accessories
Over the past year, we have seen multiple cost increases on equipment, and it is going to continue this year and into next year. It is paramount to stay on top of price increases. Every week, and sometimes daily, the dealer will need to update pricing based on new and ever-changing prices.
The business owners’ responsibility is to produce a profit. We must drive profitability to grow and pay our bills. One of the more difficult challenges we are seeing with the supply chain disruption is protecting dealers' gross profit per man day (GPMD). Maximizing GPMD on every job is vital to achieving 20% + net profit. One of the methods used to maximize GPMD is by selling high-efficiency equipment which results in increased gross profit dollars. Here lies a challenge: the high-efficiency equipment is not always readily available, thereby forcing the dealer to offer lower efficiency equipment, which drives the GPMD down. Keep in mind that it is the gross profit dollars that will cover increasing overhead. So how does the dealer maximize their GPMD when high-efficiency equipment is not an option? They offer accessories.
Accessories provide an extra revenue stream. Most customers are not aware of upgrades, but many will purchase if they know about them. These accessories can range anywhere from upgraded filtration systems, safety items to humidification. Various accessories or system enhancements drive additional GPMD, resulting in improved profitability by more quickly overcoming overhead. Offering accessories can take the gross profit per man-day on a job from $1,200 to over $2,000. Profitability soars because they earn additional gross profit dollars which will more quickly overcome overheads.
The combination of effective planning, inventory management, and pricing will help those in the home service industry navigate supply chain issues while also keeping up with rising overhead. Developing a plan can be the difference between your company surviving the supply chain disruption and finding yourself without the necessary equipment needed to operate.
Kim Archer is Vice President of Coaching and Trainer with Business Development Resources (BDR), the premier provider of business training and coaching to HVAC contractors and distributors. Every year, more than 1,000 industry professionals attend BDR’s Profit Launch Business Planning workshop. The three-day event helps contractors build a detailed, five-year business plan that guides their company to new levels of profit and growth. For more information, visit www.bdrco.com/plan.
