Equipment Distribution: the Three Legged Stool, leg # 2.

Dear Readers,

Last week we talked about leg 1 of the three legged stool of equipment distribution, the equipment itself. Today we are going to explore leg # 2, spare parts.

One of the most often question I have been asked over my 20+ year career as an export salesperson of equipment is "How do I get parts for a broken down machine?" We on the sales side of equipment always argue in favor of the solution we provide; however, the dirty little secret is that I have been selling a "problem" for years. That is, I sell equipment, and equipment, no matter which brand or which manufacturer, eventually will break down. When that happens, as a factory or distributor, you had better be prepared with the correct spare parts on your shelf to fix the problem which sales (simply by virtue of making the sale and putting the unit into service) has produced.

Here are some tips on how to be prepared that I have learned by observing many fantastic distributors over the years. A great distributor registers all the machines that he/she sells in their territory by serial number. Furthermore, they know of all the used and/or gray market machines which have found their way into operation. Once registered, these proactive distributors keep tabs on the hours which these machines are operating on a recurrent basis, and they compare these tables with the recommended hours and service intervals that each factory produces.

In this way, they know ahead of time when a component should be necessary for them to have in inventory. While not a foolproof system, and at times an expensive component can sit a little while. The opportunity cost of telling your best customer that "we did not order the major component in time and we have a 12 week lead time", is not an acceptable answer and will lead this customer to the conclusion that distributor X or Y might appreciate their patronage more. Thus, to avoid this eventuality, please heed the factory checklist and get that item on your shelf prior to the time it may be necessary.

Some smart people have crunched the numbers over time and have come up with some tendencies. If margins on equipment tend to be skimpy, components and parts sales oftentimes will improve the profitibilty of a line over time. For example, I sell piece of equipment "A" for a 7% gross margin because of a lot of competition. By the time I pay overhead, taxes, etc. I am losing money on that sale. One way to improve the panorama is to sell in the year(s) following this sale the spare parts for this machine at say a 25-45% gross margin, so that with every sale of parts, I am moving out of red numbers towards black numbers. Golf, not equipment sales, is the only phenomena where red numbers are a good thing.

I am not going to delve deeper into this example as it goes beyond my pay grade, but you can get the picture. A piece of equipment is sold to "seed" the market and build loyalty to the brand. The margin can be big (if it is new, or unique, or no competition, etc) or in most cases, quite modest. Subsequent component and parts sales for this equipment give the distributor the opportunity to earn more margin and increase the overall profitability (not to mention increasing cash flow) of the business generated by this original equipment sale.

I will leave you with an example of a very successful distributor that I know which started out solely selling spares. They developed a following by delivering product efficiently and at a fair value compared to what the market was otherwise offering. For more than 50 years they have followed this formula and grown from one branch (little more than a garage) to 22 nationwide. Furthermore, they now sell a complete line of equipment and have many thousands of buying customers who generate even more recurrent income for the company. It is an American success story (I say American to include both North and South America). They have fool proof systems and are continually communicating with their customers and building value into the solutions they provide. I expect this company to continue to be extremely successful in spite of any economic conditions which they may face in the future.

My next post will explore the most overlooked and underappreciated leg of the stool, service. Charging for service is not untoward or against the laws of nature. Good service and service people are worth double their weight in gold and thus, a distributor should not feel guilty at all in charging. The key here, is to add the value and communicate it to the customer so that this value is appreciated and compensated, without a huge fuss.

Until next time ....Ted Graser