The MHEDA Journal - Second Quarter, 2013 - (Page 31)
MONEY
ABSORPTION
MATTERS
Absorption Measures
Performance and Sustainability
BY ROBIN CURRIE
O
ne of the important measures that
Currie Management Consultants,
Inc. uses in all Currie Financial
Composites for equipment dealers is the absorption measurement.
Absorption has been referred to as a
simple, but not simplistic measure of
dealer performance and sustainability. It is a measurement used to indicate how much of a company’s total
expenses can be covered by the profitability of the aftermarket departments
in an equipment dealership. The basic
formula to calculate absorption is:
Total Aftermarket Gross
Profit $ (Parts, Service
and Rental) / Total
Dealership Expenses $ =
Absorption rate
For example, if your dealership has
combined gross profit in the aftermarket departments of $8,000,000
and overall company expenses of
$7,500,000, your absorption calculation would be:
8,000,000 / $7,500,000 =
107 percent
The model absorption for the equipment industry is 100 percent or better.
Why is absorption so important?
Here are some points that will help
you understand why achieving model
absorption is something that all dealers should continue to strive for.
When absorption is at or above
model, profitability in the sales
department (units) becomes a less
impactful issue. Margins in unit
sales are often difficult to control,
thus strong aftermarket profitability can take us through periods of
volatility in unit sales.
Studies have proven that dealers
with high absorption will be in a
position to continue showing profitability even in down cycles.
Dealers with high absorption rates
are able to spend more money on
the sales department, and we
encourage them to do so. By adding additional sales reps and sales
department support people as
needed, the dealership is able to
increase coverage. By following a
comprehensive account management strategy, the dealership is now
in a position to effectively increase,
or at the very least, maintain unit
market share. The increased coverage should also enable the sales
team to further penetrate existing
accounts and to continue in the
acquisition of conquest accounts.
Research tells us that dealers with
the highest absorption rates also
have the highest return on assets.
As we often explain to our dealer
clients, ROA is one of the most
important measurements for a dealership to track, as it affects almost
all other measures in the company.
Further, it was discovered during
the General Electric PIMS study,
and variations on the original
study, that market share correlated
with ROA more than 90 percent of
the time. With the added dimension
of market share opportunity, working toward a high absorption rate
becomes exceedingly important.
Now let’s talk about how dealers can
improve their absorption rate. Revenue
growth occurs through an excellent
account management process. The
traditional structure of units, parts,
service and rental as separate, segmented offerings is no longer appropriate in today’s markets. Instead,
dealerships should be continuously
developing their “package of value”
to include all departments as part of
a customer solutions focus. The new
mentality should provide for account
management coverage by managing
the totality of the account as a team.
Thus, an account may be visited by
two or more people from the dealership during a sales call – such as the
sales rep and the parts rep.
Increasing aftermarket gross profit
is the next focus, as it directly affects
the absorption equation. The fast track
calls for an increase in parts pricing
by examining the matrix and analyzing it by customer. Are all customers
The traditional structure of units, parts, service and rental
as separate, segmented offerings is no longer appropriate
in today’s markets. Instead, dealerships should be
continuously developing their “package of value” to include
all departments as part of a customer solutions focus.
The MHEDA Journal | Second Quar ter 2 013
31
http://www.naylornetwork.com/dis-nxt/
Table of Contents for the Digital Edition of The MHEDA Journal - Second Quarter, 2013
President’s Perspective
From the Desk of Liz Richards
Ask Your Board
MHEDA Member Profile
At Work
The Next Economic Cycle
In Case of Emergency – Disaster-Proofing Your Supply Chain
Annual Convention
Convention Program
Exhibitors' Showcase Floor plan
Absorption Measures Performance and Sustainability
Exhibitors’ Showcase Product Guide
The Parachute Congress Made
Get Your Game On
An Expert, Advisor, Resource and Single Point of Contact
What Looks Good on Paper
Instilling Work Ethic in the Emerging Workforce
How to Get People to Do What You Want Them to Do
Search Engine Marketing Value Proposition
New Members
Spotlight on Association News
MHEDA University Calendar
MHEDA Milestones
New Products
Index of Advertisers by Product Category
The MHEDA Journal - Second Quarter, 2013
https://www.nxtbook.com/naylor/DISQ/DISQ0418
https://www.nxtbook.com/naylor/DISQ/DISQ0318
https://www.nxtbook.com/naylor/DISQ/DISQ0218
https://www.nxtbook.com/naylor/DISQ/DISQ0118
https://www.nxtbook.com/naylor/DISQ/DISQ0417
https://www.nxtbook.com/naylor/DISQ/DISQ0317
https://www.nxtbook.com/naylor/DISQ/DISQ0217
https://www.nxtbook.com/naylor/DISQ/DISQ0117
https://www.nxtbook.com/naylor/DISQ/DISQ0416
https://www.nxtbook.com/naylor/DISQ/DISQ0316
https://www.nxtbook.com/naylor/DISQ/DISQ0216
https://www.nxtbook.com/naylor/DISQ/DISQ0116
https://www.nxtbook.com/naylor/DISQ/DISQ0415
https://www.nxtbook.com/naylor/DISQ/DISQ0315
https://www.nxtbook.com/naylor/DISQ/DISQ0215
https://www.nxtbook.com/naylor/DISQ/DISQ0115
https://www.nxtbook.com/naylor/DISQ/DISQ0414
https://www.nxtbook.com/naylor/DISQ/DISQ0314
https://www.nxtbook.com/naylor/DISQ/DISQ0214
https://www.nxtbook.com/naylor/DISQ/DISQ0114
https://www.nxtbook.com/naylor/DISQ/DISQ0413
https://www.nxtbook.com/naylor/DISQ/DISQ0313
https://www.nxtbook.com/naylor/DISQ/DISQ0213
https://www.nxtbook.com/nxtbooks/naylor/DISQ0113
https://www.nxtbook.com/nxtbooks/naylor/DISQ0412
https://www.nxtbook.com/nxtbooks/naylor/DISQ0312
https://www.nxtbook.com/nxtbooks/naylor/DISQ0212
https://www.nxtbookmedia.com