Financial numbers alone offer scant profit improvement insights. For real improvement, you must develop a theory for how to improve service value and/or cost effectiveness and then create and capture new metrics to test your theory. This gives you the data to act on what is working. Amazon, for example, has roughly 500 proprietary metrics: 80% are related to customer value improvement.
However, the National Association of Electrical Distributors (NAED) industry overview PAR report does provide some helpful ratios. Insight into the NAED 2016 PAR report can help you understand how to improve your profit.
Insight Into the NAED 2016 PAR Report
Regular readers may recall my theory of Service Value Productivity per Full Time Equivalent Employee, which is measured by gross margin dollars/FTEE. (For more info, Google: merrifield + gm$s/ftee). No financial ratio correlates better with high return on total assets (ROTA) than a high GM$s/FTEE.
Upstream ratios that grow GM$/FTEE are: higher GM$s per line, order, and customer. Further, this chain of ratios all improve if you get a bigger share of and more orders from bigger customers, and you avoid accumulating small customers with small orders that have a good gross margin percentage, but unprofitable gross margin dollars per order.
NAED’s PAR supports this logic. Their survey divides participants into three groups by ROTA: bottom 25%, middle 50% and top 25%.
Facts: Middle 50% Versus Top 25%
ROTA numbers were significantly different with the middle tier at 8.4% and the top tier at 16.8%. Here are some of the detail numbers:
- There was a 2.8 point difference in profit margin (Middle: 3.5%, Top: 6.3%)
- A .5 point difference in gross margin percentage (Middle 21.9%, Top: 22.4%)
- There was a 2.1 point difference in operating expenses (Middle: 19%, Top: 16.9%)
In addition, I did some extra calculations to find that the top tier pays 5% higher wages, but has 88% of the middle tier’s operating expenses.
Some Other Significant Numbers:
- Gross margin dollars per line: Middle – $35.91; Top – $37.33
- Gross margin dollars per invoice: Middle -$119; Top – $128
- Expense dollars per invoice: Middle – $106; Top – $112
- Profit dollars/invoice: Middle – $13; Top – $16 (23% more!)
- Gross margin/FTEE: Middle – $132K; Top – $159K (20% more!)
- Pay/FTEE: Middle – $78K; Top – $82K (5% more)
- FTEE net of pay (for all other expenses and profits): Middles – $54K; Top $77K (42% more)
- The Top tier had 13% fewer customers with 31% more sales/customer
The Middle tier had $10,380 GM/customer versus the Top tier’s $12,358
One thing to note is that there was no correlation between sales size and ROTA. There were no economies of scale; bigger is just bigger!
Insight Into the NAED 2016 PAR Report: Conclusions
Insight into the NAED 2016 PAR report shows that the Top tier improved all downstream ratios by averaging more gross margin dollars per invoice from bigger customers, with better penetration. For analytics and tactics to double GM$s/FTEE and increase profits 4-10 times per FTEE, please be in touch!
Lastly, contact me at: firstname.lastname@example.org