Distributor Statistical Comparisons (DSC): What You Should Know
July 17, 2024
By John McKay, McKay Research Group
Why is it that one of every four material handling distributors makes two times more than the rest of the industry? Perhaps they have a great, well-trained sales team executing a brilliant market plan. Or, have they found a market niche that the other three of the four distributors hasn’t focused on yet?
2023 saw a slight decline in profitability performance for industrial truck distributors. As an industry, however, MHEDA members have realized a great deal of success in the last three years.
This article summarizes benchmarks for lift truck dealers. There are, however, three DSC studies, one aimed at each of three major segments of MHEDA members: industrial trucks, storage and handling and engineered systems.
The MHEDA DSC report provides concrete benchmarks to understand how highly successful material handling distributors managed the details of their business just a little better, resulting in a lot better return on assets (ROA). Thriving distributors achieved their success by managing what the DSC report calls the Critical Profit Variables (CPVs) as in Exhibit 1. Those key CPVs are the decisive benchmarks that separate successful companies from other distributors in the industry.
Interestingly, the high-profit firms almost never truly excelled at any one of the CPVs. Instead, they were able to manage the collection of profit drivers just a little bit better than the typical company in the industry. This small delta in performance was enough to generate dramatically higher profit.
The MHEDA DSC study provides some key insights into exactly how the high-profit firms generate better profit numbers. It focuses intently on the key profit drivers: growth, gross margin, expenses, inventory turnover and accounts receivable collections. The report provides a roadmap for any firm wanting to improve its financial performance.
Typical Versus High Profit
The term “Typical Firm” in the report means the firm that is most representative of the industry. This typical firm is the one with financial performance in the exact middle of the results for all participating MHEDA distributors. That is, on any given measure, half of the firms performed better than the typical firm and half performed worse. It is the best measure of industry performance on the profit drivers.
In 2023 the typical firm generated sales of $70.3 million in revenue. On that sales base, it produced a pre-tax profit of $4.9 million, which equates to a profit margin of 7%. Stated somewhat differently, every $1 of sales resulted in 7¢ of profit. In contrast to the typical firm, the “High-Profit Firm” generated a profit margin of 11.8%. This means that even if the high-profit firm had produced the same sales volume as the typical firm, it would have generated more profit for reinvestment in the company. Higher profit along with higher asset productivity ultimately resulted in higher return on equity to the owners of the business.
Managing the CPVs
In trying to move from typical to high-profit, the key is to understand the Critical Profit Variables with greater precision. To facilitate that understanding, the CPV results for the typical firm and high-profit firm in the industry are summarized in Exhibit 1. While there are other factors that could be examined in evaluating performance, these are the ones that really drive performance.
At first glance, some of the differences in the CPVs between typical and high-profit may appear to be so small that they don’t even deserve management attention. In fact, it is these small differences that combine to produce major changes in return on investment. This means that the typical firm doesn’t have to dramatically improve performance on the CPVs, but simply do a little better across the board. There is a multiplier impact when performance is better in a few areas, even if “better” is relatively small.
From a management perspective, it is unnecessary to do a little better everywhere. However, being “good on everything” is not necessary to generate a high level of profitability. What is important is to be good on what counts. It is important to emphasize once again that the CPVs that are the most important benchmarks to enhancing profit results are sales growth, gross margin, operating expenses (both payroll expenses and nonpayroll expenses) and inventory turnover. Each factor needs to be planned carefully to ensure adequate profits.
Sales Growth
Sales grew significantly in 2023. Customers, understandably, had post-pandemic pent up demand. When it was all said and done, sales climbed 10.7% for the year.
Somehow, the high profit distributors achieve a sales gain of over 13%.
Gross Margin
Price pressures never go away. Yet, somehow the distributors were able to earn a 31.7% gross margin higher. That is significant.
High profit distributors earned three percentage points higher margins.
Operating Expenses
Payroll is always the largest operating expense factor a distributor faces, which means that controlling payroll is essential to controlling expenses. Even with sales greatly improved, distributors were able to maintain their payroll expenses at 14% of revenue, which is lower than it has been at for the last five years. High-profit distributors also sustained 14% payroll expenses. Detailed benchmarks on employee productivity can be found in the DSC report.
Inventory Turnover
Bottom-line profit is not the only way to improve ROA. Asset Turnover is also a contributing factor. Asset Turnover measures how efficiently distributors are using the assets they have invested in. Inventory, in particular, is an important contributing factor for improving ROA.
Inventory is important because it is approximately one-fourth of the total investment that a distributor has in the business and it is controllable, that is there is something that can be done to control or reduce this investment. Once again, more benchmarks on asset productivity are profiled in the DSC report.
Moving Forward
The high-profit firms produce great results virtually every year. They also reflect the fact that there are no industry barriers to success. The key to improved performance is to develop a specific plan for each of the CPVs and combine them in a positive way. If one of four distributors in the industry can earn a 30% return on assets, it should be a reasonable goal for the other three of four distributors in the same industry. Ultimately that is why MHEDA conducts the DSC survey, to establish realistic, attainable profitability goals and determine the critical benchmarks for achieving those goals.
As I said at the beginning, there are three DSC studies, one focused on industrial truck distributors, one concentrated on storage and handling distributors and one dedicated to Engineered Systems companies. Similar insights can be gained for storage and handling distributors and for Engineered Systems integrators in the DSC report for the respective industry segment.