DR Daniel Luria, research director for the Michigan Manufacturing Technology Center (MMTC), says he has been encouraging companies in the truck and trailer industry to participate in benchmarking because they are lagging behind those in other industries.
“Many NTEA distributors make as well as distribute, so many ‘manufacturing’ metrics apply,” he said. “If you distribute something that other companies make, you're still dealing with questions of, ‘How am I going to price it?’ ‘How do I figure out how much to mark up things I purchase from the outside?’ ‘How do I hold enough inventory to satisfy customer demand, but not so much that I have all my cash tied up?’ — which are similar questions to those who make things.”
In “Performance Benchmarking for Final-Stage Producers & Upfitters,” Luria explored an initiative between the NTEA and the Manufacturing Extension Partnership (MEP) to direct NTEA distributor members to MEP services that can help them make more money and, where it makes sense, be greener.
Step one: Work with NTEA to extend Michigan MEP's performance benchmarking to cover upfitting, service, repair, and parts distribution. Only 10 NTEA surveys have been completed so far, which he says is not nearly enough.
“It's a mystery to us why 700 or 800 companies were given this offer, but only 10 have done it so far,” he said.
Step two: To group companies with shared deficits for efficient training and consulting by the MEP program. The training would need to keep in mind the ways that truck equipment distributors are different from conventional manufacturers.
“Some upfitting does not require much, or any, manufacturing — cutting, welding, etc,” he said. “Many members live or die on service, repair, and parts sales. Less of what they do is easily amenable to offshoring. If utilization of fixed assets — ‘equipment uptime’ — is often less important, short lead times and prompt delivery may well be more essential.”
Why should NTEA companies benchmark?
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Most companies have little idea of how good they are compared to other companies in their industry — and usually overestimate how good they are.
“You always get a high proportion of companies that say, ‘I think I'm pretty good,’ which makes benchmarking very difficult, because the first time you do it, we're almost sure to give companies a negative experience. Their first reaction is, ‘I don't believe this. I'm only in the 40th percentile? 60 percent of the companies are performing better? That can't be right.’ We show the data, and over time people come to accept that, and when they take actions to improve, they start making more money.”
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Most companies manage based only on backward-looking financial data that tells them how they did but not what they should start doing differently.
“In most cases, there's almost nothing anybody can do next month to make those numbers improve, because financial data by definition is looking at the past. So if my earnings before interest and tax as a percent of my sales are 5%, and I'd like them to be 15%, what does EBIT tell me to do? We have to come up with metrics where we can actually see, looking at what's in the numerator and denominator, what you can do day-to-day to make those numbers get better.”
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Even in the same market segments, the variance in performance is remarkably large.
“That tells you that companies that are average or below average have a lot of room for improvement.”
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Poorer-performing companies pose a grave risk to their employees and communities when they decline or fail: lost jobs, pay, and tax receipts.
“Bad companies actually are a danger to good companies,” he said. “If companies don't know what they are doing and are starting to fail and in desperation are going to quote low in order to win business, that drives down prices across your industry. So you find yourself having to quote below your true costs in order to keep work — or your are forced to go after sales in unfamiliar market segments. There are companies that are beyond saving. Most of those companies intuitively know it at some level and are not going to invest much in improving their performance. These are companies that are not going to be interested in benchmarking. But if you have an intuition you are an average-performing company and want to get much better, benchmarking can give you the performance levels you should be striving for.”
Next Page: The last to know
The last to know
Luria said surprisingly few companies recognize that their performance lags. He noted that 95% of companies think they're in the top half, and almost none think of themselves as being less than good performers.
Said Luria, “A lot think, ‘We could never be benchmarked because you'd never be able to find a set of companies that do exactly what we do. We can't be compared to anybody else.’”
But benchmarking can track plenty of functions that companies perform. Luria said the typical report has 100 different metrics — everything from what percentage of bulbs is incandescent to relatively complex measures like inventory turnover.
“People often ask, ‘How do you tell which is the best company?’” he said. “There is no such thing as ‘best company.’ Companies are applying a recipe to a set of opportunities they have. You get to make a choice between, ‘How much capital do I use?’ versus ‘How much labor do I use?’ Then the recipe could say, ‘How many of these do I want a certified mechanic to work on?’ ‘To what extent do I want my business to compete on speed?’ It costs money to make those decisions. Sometimes it pays for itself and sometimes it doesn’t. Overall, how do I tell how well a recipe is being executed?”
He said that although there is no single best metric, the Value-Added FTE (Full-Time Equivalents) is very good.
“Value-added is simply what your sales were minus how much of your sales you had to give to your suppliers — so people you bought components from, raw materials from, shop supplies from, natural gas and electricity from. Your lawyer. Shipping. When this metric moves, profitability moves with it. But unlike profit measures (EBIT, RONA), you can see exactly what changes move it.”
He said that in every sector, the worst shop in the top 10% is at least 160% as productive as the median shop.
“If I was sending things out to be painted because my paint shop was too busy to do it, but I find a way to make improvements so my paint shop has more capacity, and I bring that work back inside, my value-added goes up,” he said. “Even though I may not be any better than my subcontractor is at that activity, the fact that I made it makes it part of my value-added, and not a part of purchased services.
“Lower scrap is going to reduce material and labor costs, less rework will reduce labor cost, better quoting will get you more billable hours, and if you can redesign products to lower material costs, that will help you in the numerator. Higher inventory turns are a one-time benefit to lowering material costs and having lower labor costs. If you have less inventory, less labor time will be spent hunting down items. We can actually measure that. These activities, either through material or labor costs, are going to affect your value-added, affect your number of full-time equivalent employees, and they are going to send your value-added FTE up and you will make more money.”
Snapshot of NTEA responses
He said he needed more than 10 responses from NTEA companies to make definitive conclusions, but he presented a snapshot of the companies that participated.
The participating companies had:
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Annual sales of between $3.1 million and $30.8 million, with a median of $8 million
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Annual valued-added of between $1 million and $11.3 million, with a median of $3.2 million;
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FTE of between 22 and 88, with a median of 29.1
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Days receivable of between 14 and 67, with a median of 36
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Billable-hours percentage of between 80% and 100%, with a median of 87.8%;
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VA/FTE of between $55,400 and $179,300, with a median of $93,300; and VA/Billable Hour of between $26.97 and $97.04, with a median of $59.16.
“With enough data, we can determine why some companies have high, and others have low, VA/FTE and VA/Billable Hour,” he said. “What's more profitable: upfitting, service, or parts sales? There may be no answers. The answer may always be, ‘It depends.’ Or does the mix of upfit work (custom/standard, light/medium/heavy) matter more? Are there differentials in margins serving those different segments? Or is it about which market segments you sell into? Or is it not really about the mix of work you do at all? What explains why some NTEA distributors make a lot more money than others?
“We can answer questions by asking more questions. Does getting work done in less calendar time matter? If most people are quoting a particular job and saying they can have it for you in 60 days, do you have a big advantage in being able to quote 30 days? What's the premium for time? In some areas, speed may matter. And it could matter in pricing — that a customer will pay more to get it sooner.
“Why are nearly all NTEA distributors operating just one shift? Does that matter? How are prices set? Are you leaving money on the table? Particularly when you're not very busy, your intuition is being risk-averse, and because you don't want to lose this one, you quote low.
“What would customers pay more for? Weight reduction might be a possibility. Speed might be a possibility. Should more components be made rather than bought? That's a critical thing to be thinking about.”
He said that going green may not be a big deal now to NTEA companies, but he wondered what happens if and when there is a carbon cap that gets lowered a little each year.
“Unless and until energy prices rise and/or regulations tighten, the real play in green may be on the sales side,” he said. “What's it worth to your customers if you can provide features and functionality with lower weight and therefore higher truck-fuel economy? How can you take out weight? For example, redesign, substitution of resin transfer molded (RTM) parts for steel parts? We have some clients that are replacing steel parts with RTM parts. Those air dams on top of Class 8 trucks are overwhelmingly RTM. One company's RTM air dam weighs 7 lbs and replaces an 85- lb steel part.”
Luria said he is looking for 30 to 50 NTEA members for the benchmarking project. A questionnaire can be downloaded at www.performancebenchmarking.org.