Re-Examine Absorption Rate Components

In these very uncertain economic times, there is great value in strengthening Absorption Rate. Achieving a 100% Absorption Rate for Machinery dealers helps ensure Gross Profit from Parts, Service Labor, and Rentals covers all of the dealership's Fixed Operating Expenses.

Machinery dealers with a high Absorption Rate are in a much stronger condition to weather an economic downturn. If new machinery sales decline, even tank, at 100% Absorption Rate the fundamental core of the business can be sustained.

Improved Absorption Rate has been a high-priority dealer performance objective for years but dealers often tell me they are uncertain where to start. Here is a procedure many find helpful.

High Profit/High-Performance machinery dealers first focus on making sure each Revenue Center is achieving target sales volume in the overall dealer Sales Mix. Sales Mix is the percent of total dealer dollar sales from each business revenue source. Sales Mix is the key to the overall profitability of the dealership. This has major strategic implications on profitability and the dealership's ability to reinvest in market share gains. A more profitable Sales Mix is the key to achieving 100% Absorption Rate. You want to sell more of your highes-margin offerings. Here are the Sales Mix score ranges of High Profit/High-Performance dealers:

• Parts-- 22% - 24% of Total Dealer Sales
• Service Labor-- 13% 15% of Total Dealer Sales
• Rentals-- 10% - 12% of Total Dealer Sales

You don't want to sell less machinery, just more parts, service, and rentals.

Next, examine your Gross Profit Margin Percent for each Revenue Center. Here are the Gross Profit Margin score ranges of High Profit/High-Performance dealers:

• Parts--30.0% -- 39.0% Gross Profit Margin
• Service Labor -- 65.0% - 68.0% Gross Profit Margin
• Rentals -- 31.0% - 42.0% Gross Profit Margin (Using Standard Depreciation Schedule)

These are the high-performance “ ranges for sales mix and profitability for each of these revenue center components of Absorption Rate.

Here is a table to help determine the total dollar value impact of % sales mix and % Gross Profit Margin for each component in the numerator of the Absorption Rate formula.

The calculations are based on the lower end of the Benchmark Score for Sales Mix and Gross Profit Margins.

What is the GAP between your actual Gross Profit $ vs. the target Benchmark Target Score? Which area needs the most work? How can you drive that priority improvement area company-wide?

What can your Leadership Team do to build the focus of the entire organization toward Absorption Rate improvements?  Does each Revenue and Cost Center understand the contributions they can make? (Generating revenue, containing cost?)

If you would like to discuss any aspect of this article, please contact me: walt@mcdonaldgroupinc.com