WHICH company is the best in the industry? Which one has the best sales organization, the best customer service department, the leanest manufacturing operation?

Which one is setting the standard? And what is that standard?

How did that company become the best? And what do other companies have to do to equal it?

That's what benchmarking is all about. It's a critical component in terms of monitoring a company's success in attaining strategic objectives and it assists in the assessment of operations issues that support those objectives, according to Tim Koch of RSM McGladrey.

McGladrey has issued financial and operational benchmarks for trailer companies for the past 12 years. The benchmarks compare a company's performance against others in the industry, along with other assemble-to-order manufacturers.

The results each year are affected by the economy, labor markets, product innovations, supply-chain issues, and other market forces, along with the composition of participating companies.

McGladrey, which in 1999 expanded the benchmarks to include key operation information, worked with over 20 trailer manufacturing companies to develop the current version of benchmarks. It recently completed its 2004 benchmarking edition, which represents the averages for participating companies for 2003. Koch provided the following trends and issues:

  • Participating companies on average experienced revenue growth of approximately 10% during 2003. However, net income before taxes declined by 32%.

  • Participating companies on average had an operating cycle of 64 days — meaning the number of days it takes a company to convert its cash payments for inventory to cash collections from sales of that inventory. It represents 13 days to pay an inventory-related invoice, 58 days to convert the raw materials into a sale, and 19 days to collect payment on the related receivable.

  • As a percentage of revenue, participating companies generally paid 55% for materials, 14% for direct labor, and 15% for overhead-related items.

  • Generally speaking, participating companies averaged operating income of approximately 3% of revenue.

  • Sales per employee (based on a quarterly average of employee counts) were approximately $149,000.

  • On average, participating companies paid approximately $2,100 per employee for group health insurance-related costs.

  • The average company paid its production workforce $14.71 per hour. In this case, wages are defined as those included in an employee's W-2.

  • On average, participating companies generated approximately $211,000 of revenue per production square foot.

  • The average salesperson was responsible for maintaining a relationship with 22 dealers.

  • On average, participating companies returned 7% of total assets as pre-tax income.

Make it relevant

McGladrey's Jim Morton said his company's philosophy is to make benchmarking relevant, with benchmarks driven by suggestions from participants; accurate, with four separate and distinct levels of review, standardized chart of account, and the use of monthly/quarterly information; timely, with an issuance goal of June 15; and innovative, with Web-based collection and delivery models.

He said benchmarks are broken down into the following categories: working capital and fixed asset management; productivity and profitability; and revenue, direction, and company value.

On revenue, direction, and company value, he said: “In today's environment, there's a lot of discussion about, ‘How do you drive shareholder value?’ We sat down with a group of evaluation experts in our firm. In some companies in this industry, there's very little debt. There are others that have been recently purchased and have a lot of debt. You do get some different answers to some of these things. But the most important thing is, you can look at the three-year trend for your company.”

He said working capital and fixed asset management includes: current ratio; sales to total assets (including inventory, receivables, long-term assets, answering the question: “What kind of sales do you generate versus dollars you have invested in all the things that allow you to do business?”); sales to net fixed assets; working capital to sales; operating cycle; raw material inventory turns; and combined work-in-process and finished goods inventory turns.

He said revenue, direction, and company value includes: cash flows from operations to sales; debt to equity; return on beginning equity; return on ending assets; return on invested capital; EBITDA growth (decline); sales growth (decline); and earnings growth (decline).

He said productivity and profitability includes: income statement percent to sales analysis; functional grouping analysis; sales per employee (direct labor, production, and total); employee costs per employee (production and total); group health costs per employee; compensation data for key positions; sales per dealer; advertising and promotional costs per dealer; sales per production square foot; facility costs per production square foot; sales per salesperson; dealers per salesperson; net delivery income and expense per unit; and warranty expense to sales.

He said sales per production square foot is “very important” because “you get into throughput and lean manufacturing: How much can you drive through this facility? Facilities tend to be a fixed cost. How much can we drive the productivity through that plant relative to the investment we have?”

On warranty expense to sales, he said: “Your industry as a whole has a lower warranty cost. I have, however, found that because of the lower cost, it's probably not tracked as well. Internal costs tend to not be captured as well in this industry as in others.”

Common questions

Koch answered some commonly asked questions:

  • Is my data kept confidential? “Yes. As a public accounting firm, confidentiality is the hallmark of what we do.”

  • How long will it take to participate? Two to three hours the first time, because they ask for three years of data.

  • Will someone from your industry group be available to present or answer questions regarding the benchmarks? “Yes. Typically, we like to do a Webinar or a face-to-face. Webinars take one hour.”

  • How much does it cost to participate? It's free.

  • Why is it free? “It's a way for me to keep current on what's going on in the industry. That's the biggest benefit I have.”

  • Can we or do we have to give you three years of information upon our first participation? “It provides a better base. But if you want to provide one year, that's OK.”

Some companies that have participated in the benchmarking program say it has been extremely beneficial:

Clyde Waters, Elite Trailers: “The RSM McGladrey benchmarks for trailer manufacturers are potentially the best program NATM has ever presented to its members. We incurred a minimal time investment for the return we received. It took us two hours to provide three years' worth of data. The tool is very professional and easy to understand. We found significant value in measuring our performance against the performance of our competitors.”

Matt Arnold, Haulmark Industries: “Haulmark, and our sister companies at Universal Trailer, found the RSM McGladrey benchmarks for trailer manufacturers to be an extremely valuable tool in measuring our annual operational and financial performance compared to the industry. RSM McGladrey met with us to deliver the benchmarks and provided insightful information on our results relative to the industry.”