The Dreaded Annual Inventory Count

Yes, it’s that time of year…again! A lot of my distributors are already dreading the annual counting of inventory. I remember donning old worn out jeans and a t-shirt I would probably never wear again to count thousands of packs of sex nut bolts during my history with Pleasants Contract Hardware.

Counting the keying room was the absolute worst! All those key blanks and tiny little keying pins, ugh!

If you are about to tackle this wonderful annual event, you may want to read the following article by Jason Bader of “The Distribution Team”.  Jason is a managing partner at The Distribution Team and has written many articles shared in Doors & Hardware Magazine.

He offers some great tips to make this task as painless as possible. Click on the link to read his full article.

Tips for a Successful Annual Inventory Count
           By Jason Bader
           Managing Partner – The Distribution Team

It’s that time of year again. The leaves have turned. The NFL is in full swing. The political season has come to a close. And, the dreaded annual inventory count is on the horizon. During my distribution career, I was involved in no less than twenty of these events. Let me tell you, they were not something to look forward to. Several hapless souls would trudge in to the warehouse on Saturday morning ready to spend the day sifting through our wares. We would entice them with coffee, orange juice and donuts, the official snack food of inventory counting. We would “invite” people from the clerical staff to join in the merriment. Wouldn’t want to make them feel left out. To compound the fun, we would invite the offspring of our employees and a few manufacturers reps to round out the crew. Is it any wonder that certain employees grandmothers conveniently “passed away” the weekend of the count?

The Benefits of Commission vs Salary

Many distributors across the nation are seeking to hire employees as a result of the increase in activity in the commercial construction industry.  One glance at the classified section of Doors & Hardware Magazine confirms that there are a lot of opportunities out there.

It is refreshing to know that distributors are busy and for the first time in a while have a backlog that makes them feel comfortable enough to consider hiring.

But we all know that the decision to hire is only the first of many decisions to be made when bringing on a new employee.

One topic that often comes up when discussing hiring a sales professional is compensation structure. Our industry offers a  wide array of possibilities, each with its pros and cons.

• Hourly Wage
• Salary
• Base Salary plus Commission
• Straight Commission
• Commission can be based on smaller percentage of gross sales or larger percentage based on net profit.
• A tiered structure where commission percentage grows as goals are achieved.

Before continuing with the payment structure that you’ve always used, take some time and research other options.  You may decide another system fits your needs more efficiently or find a way to tweak the system you have.  The ultimate goal is a satisfied, motivated employee.

Here are some articles that I found that may help when you are considering your options:

HOW CAN I GET YOU TO SELL…Have you been frustrated by under-motivated salespeople who are paid a handsome salary for selling to legacy clients and maintaining easy business?Or are you being plagued by turnover issues based on no one being able to “make it” on commission only?

THE ADVANTAGES OF PAYING COMMISSION VS SALARY When you are deciding how to pay your employees, you should consider the benefits of paying by commission versus the benefits of salaried pay. There are advantages to both options for the employee as well as the employer. Consider all the possible advantages when you develop a payment scheme for your employees.

BLOOMBERG BUSINESS WEEK: BEST WAYS TO PAY YOUR EMPLOYEES A base salary should cover reps’ basic living expenses (rent and food, not lease payments on a fancy car), or a minimum of $1,500 to $2,000 a month. “The reason you offer base pay is not to make people hungry,” Bremen says. “It’s to help them manage cash flow.” If you can’t pay that much, don’t bother paying a base.

After getting past the initial fear of a commission only payment structure, statistics show most motivated sales persons prefer a commission only or salary plus commission system at the least.  I would think as an employer you would get a more engaged employee. This system also ensures that the employee helps to shoulder the weight of the employee expense, in literally earning their income.

I hope this helps you in your decision making.  And remember even though it may be a difficult decision it is a much brighter predicament than facing layoffs! I’d love to hear your opinions on commission vs salary, chime in on the comment section below.

Dealing with “Pay If Paid” Clauses

When I first heard of this provision I thought how ridiculously unfair. Sub-contractors and material suppliers are the least able to take the hit of non-payment.

I also thought there was no way that they would stand for it.  I still feel the same way on the first count, but have been surprised by the willingness of sub-contractors to agree to it.

If every single contract that had this provision included was returned un-signed with a post it that said “are you crazy? There is no way we will sign this!” the idea would have quickly died.  But in our highly competitive industries, companies are just too desperate to turn down work. Realizing that a united front against this injustice is unrealistic I have spent a little time researching the effectiveness of this clause.

I have learned that overall the law is not in favor of these provisions.  Also, that agreeing to this provision does not, necessarily, impact your your lien rights.  Here are some links to useful information to store away in case you are in the unfortunate position to fight for your money.

There is a difference between “Pay If Paid” and “Pay When Paid”.

In Minnesota, a “pay-if-paid” provision must expressly and unequivocally state that the risk of owner insolvency is being shifted to the subcontractor for this provision to be enforceable.  Otherwise, the provision will be treated like a “pay-when-paid” provision, focusing on timing of payment and not shifting the risk of payment.

“By Far The Best Thing You Can Do Is Perfect Your Construction Lien of Bond Rights”

So what can you do to protect yourself if you make the decision to enter into a contract with enforceable conditional payment language? By far the best thing that you can do is to perfect your construction lien or bond rights. Conditional payment language in a subcontract is not a defense that is available to an owner in a lien foreclosure action. Likewise, unless a “conditional payment bond” is utilized, the contractor’s surety is not entitled to the benefit of conditional payment language in a subcontract and your bond claim can proceed whether or not the contractor has been paid. Conditional payment bonds are not available on public construction projects and are seldom used on private construction project. Where they are used on private projects, you have the right to record a lien to the extent that the contractor has not been paid for your work and the right to assert a claim against the bond to the extent that the contractor has been paid for your work.

By perfecting your lien or bond rights, you establish an alternative right to payment from the owner’s property or the contractor’s surety that is not dependent on the owner paying the contractor.

“Pay If Paid” Clauses Are Not Enforceable in All States”

Pay if paid clauses are not enforceable in all states because they may be considered waivers of the contractor’s lien rights. There is a growing legislative and judicial trend finding “pay if paid” provisions against public policy and unenforceable. In those states, contractors must pay subcontractors within a reasonable period of time for their work.

I hope you never have use of the above information!  Have a prosperous week!

Subcontractor Bidding Tips

George Hedley is owner of Hedley Construction and Development, Inc. He started his construction company in 1977 with a pick-up truck and $500 in the bank. He grew his business to $50 million in revenue in seven years. He is one of the top 10 contractors in Southern California.

He now shares his business expertise and leadership style through his writing, speaking and coaching services.

I ran across his website, Hard Hat Presentations, while doing an internet search for tips to help sub-contractors and suppliers land more work.

When I read the statement…”most contracts are awarded to the lowest qualified bidder based on price. The bidder who offers better service for more money rarely gets the contract” I knew he understood the problem, the fact that he had more to say after that intrigued me.

Here is an excerpt from his article “7 Ways Subcontractors & Suppliers Can “WOW” General Contractors”, click the link to read it in its entirety.

I am a general contractor & developer of commercial and industrial projects from $2,000,000 to $15,000,000 in size. On every project we select from our database of over 3,000 companies to eventually hire at least 35 subcontractors and buy from 5 to 10 suppliers. The bottom-line when choosing subcontractors and suppliers is all of them are almost the same except for price. Very few contracting companies do anything different than the others. They give you what you pay for, the minimum, no more and no less. Because of this, sadly, we usually award based on price.

If you don’t wish to read the entire article, at least take away these tips George shares to better your chances with being awarded a contract. Probably 95% of you will discard them thinking they are a waste of time. What if your competition is in the other 5% that will implement even just of few of these tips.

I mean seriously, how much cost and effort is involved with writing a thank-you note? How many of you have ever written one? If you would like to treat your best contractor customer to dinner, schedule it next time I’m visiting and I will treat you both!

7. More WOW ideas

–         Send me a thank-you note

–         Bring me leads

–         Get bids in on time

–         Give me value-engineering ideas

–         Don’t overcharge on change orders

–         Send me product literature

–         Keep me informed of new ideas

–         Help me make a profit

–         Give me a referral

–         Train my superintendents

–         Get an email account

–         Carry a handheld email device

–         Use email

–         Carry a digital camera

–         Use your digital camera

–         Take me to dinner

–         Ask me: “how can we improve?”

Have an awesome week!

IMPROVING YOUR GROSS PROFIT MARGIN pt 2

Last week I shared my intent to post articles each Monday morning focused on the business part of your business.

I kicked off the series by sharing part one of a two part article by Jason Bader, the managing partner of The Distribution Team. I continue last week’s theme of increasing your gross profit margin with part II of Jason’s article.

A more sophisticated pricing matrix In the excerpt below Jason speaks of the benefits of creating a more sophisticated pricing structure. Be sure to click the link to read the full article.

One of the best ways to maximize gross margin potential is to adopt a velocity based, or popularity based, pricing model in the company.  For example, many of us set up our matrix where a particular customer type receives a flat discount off of list price, or multiplier on cost, for the entire line.  Unfortunately, we tend to base this discount on the most popular item in the line.  What percentage of a vendor line do you think your customers know what they should be paying?  I suspect that it is less than 5 percent of the line.  It is the most popular items that get shopped around.  These items should receive an attractive discount.  Everything after that should receive a lesser discount or higher gross margin.  This is what good price matrix set up can do for you. 

It is definitely easier to set up one discount across the board for a customer, but Jason’s tip of assigning different multipliers or discounts based on particular items in lieu of a blanket approach wouldn’t take much effort and could yield a considerable increase in margin.

As usual, I welcome your input.  Do you see a downside to this suggestion?

IMPROVING YOUR GROSS PROFIT MARGIN

After a discussion with a few of my customers about what might be useful to distributor owners and managers, I decided to dedicate Mondays to the business side of your business.  Topics like improving gross margin, cash vs accrual accounting, managing inventory, retaining employees, etc will be featured.  I have reached out to many professionals and will share their expertise and advice all aimed at improving your bottom line and reducing your stress.

My first post in this category is about improving your gross profit margin. I found a great article from Jason Bader, a managing partner of The Distribution Team.  The Distribution Team is a firm that specializes in helping distributors become more profitable through strategic planning.  Jason has written many articles for Doors & Hardware magazine. I will be sharing a lot from Jason Bader in these Monday posts!

In his article titled ” Improving Gross Margins, Part 1″ he notes a few methods to do just that.   I chuckled when he says he finds it humorous that every city he visits is a “really competitive market”.  I have heard that about our dear state of Florida at least 100 times during my career in this industry and I must confess I am guilty of saying a few times myself!

One method he shared piqued my interest.  Read the excerpt from his article below, click the link to read his entire article. None of the distributors I  worked for utilized this method, but since becoming a representative I have discovered a few that do.

The mechanics are fairly simple.  Take the base replenishment cost, this is the one that comes from the supplier price sheet, and add a nominal percentage to that figure.  I suggest half a percent to 5 percent depending on the popularity of the item or product category.  The result, after adding the percentage bump, becomes the new standard or loaded cost.  This is the cost that your sales people will see in the system.  Most sales people have an acceptable gross margin in their head.  We are just starting them at a higher place.  In some packages, this is new cost field referred to as a “commissionable cost” because it is what sales commissions are based off of.  I tend to shoot for an overall accumulation in this fund of 3 percent of cost of goods sold. 

If estimators are using manufacturers price lists to figure their estimates, of course this would be more difficult to accomplish.  I do see it being an excellent way to increase gross profit margins for stock and over the counter sales.  It would be easy to pad the product’s net cost by a half to five percent, as recommended by Jason, in a software database.

Please feel free to comment below and let us know what you think about this idea, we all welcome your input!

I will cover tips in Part 2 of Jason’s article next Monday.