Dwindling Benefits

Dec. 1, 2001
As your rental company moves forward and grows its business, you have certain expectations about what you can expect from suppliers. You've become accustomed

As your rental company moves forward and grows its business, you have certain expectations about what you can expect from suppliers. You've become accustomed to a level of support that manufacturers have always offered rental companies on the local, regional or national level. But as we enter the first decade of the new millennium, relationships are about to make a major change.

Where you could, at one time, look to your major suppliers for assistance in retail selling, for regional service technicians, for rental fleet financing, advertising assistance, liability assistance for major accidents, quality inside service and parts support, and technical and sales training, the times have changed dramatically.

The terrorist attacks of Sept. 11 have played a role, but that only compounded the rental slowdown. Domestically, rental rates are still under intense downward pressure led by the major rental companies fighting for utilization and cash flow. That downward pressure will not subside until senior management forces it. They must lead the way with increased commando-effective sales training on how to increase rental rates, and how to maximize revenue from damage waiver, pick-up and delivery. I'll cover these issues more in a future article.

Just what exactly are manufacturers prepared to provide for your company in the coming years? The entire construction equipment industry is going through uncertain economic conditions. This is the first recession that has occurred since the development of electronic information ability with practically instantaneous information streams. Still, this recession is not occurring only in the United States, but, rather, is global in scope. The European economic drivers, essentially England, Germany and the Scandinavian countries, are all faced with negative growth now and, most likely, into 2003. The Asian Pacific countries will be of no assistance as they have also suffered for more than four years and have far too many negatives they must overcome before they can regain a growth mode.

Our American construction equipment base will be facing extremely difficult markets for several years. The manufacturers are faced with elevated stranded costs — that is, capital invested in fixed costs that don't produce expected returns and won't into the future. These costs are essentially product specific and not easily converted to other usages. They are stuck with substantial inventories, and, in some cases, low valued but good quality used equipment. That will severely hamstring this group long into the future or until business and profit margins again reach adequate levels. People and facility rationalization is just the beginning of the kind of steps I expect manufacturers to have to take. Sadly, it's likely that manufacturers won't experience true business growth until 2004 or possibly later.

Immediate strategies for survival

Looking at your company, I would recommend the following strategies to soften the impact of less manufacturer-supplied support. Most critical is the service area. Update your service technicians' product library and begin to effectively maintain and catalog products that are active in your rental fleet. Immediately request from your suppliers current technical manuals along with manuals for obsolete equipment that is still in your active fleet. Also, you will require sales literature to assist your sales team in retailing these units.

Take the time to reevaluate your entire service department, including your service manager and inside and outside service technicians. Now is the time to upgrade those positions, because top people are likely to be available as rental and manufacturing companies downsize. If you have not taken advantage of the remaining manufacturer-provided training classes, enroll your technicians promptly.

Visit your service group several times a week; let them know how important they are to the health of your company. Get a real handle on overtime expense. Is it documented? Is it absolutely necessary? Do you know the answers to these questions? It is my observation that many of you do not document these issues clearly.

Be prepared to no longer receive co-op advertising money. Don't expect to see this service offered. As manufacturers cut costs, these resources will quickly dry up. Consider requesting mailers, extra literature and signage immediately so that you have the resources to assist rentals and sales in the future. The mailers can be imprinted using your laser printer or by purchasing cost-effective labels.

Examine your sales team from top to bottom. Are you getting the most for the dollars expended? Consider a compensation-based program based on deal profitability, meeting territory volume and deal profit targets, reducing expenses, and how well the entire company does within its yearly financial plan. Payments quarterly, semi-annually and annually should be rated as the best possible program that develops new and more profitable business. This process will give you, as owners of rental companies, a stronger key customer base more closely tied to your core competencies.

Upgrade your parts department

Parts will play a major role in your ability to maintain fleet uptime, availability, service call response time and actual repair time. During the past eight years or so, many rental companies, in an effort to reduce cash out, have begun to allow the manufacturers to essentially be their parts department. With the ability for overnight shipment/next day air service, the parts component of your business has been relaxed to become dependent, an essentially reactive rather than proactive business segment in the industry.

Now is the time to evaluate how you plan to go forward, knowing the assistance that has been offered in past years will be reduced. Some second tier manufacturers may disappear during the business downturn and you will not be able to obtain parts to the machines they manufactured. Do you have the right person managing your parts department? Can this individual outsource parts effectively, at the lowest cost, while meeting your requirements? Can this person cross reference OEM parts for reducing purchase costs?

This is a high cash cost department. Can your manager provide current, factual dollar amount/part number inventory? If your company has multiple locations, are you focusing on a main warehouse to reduce part duplicity? Effective planning going forward for this group can provide your business more uptime, satisfied customers and profitability. Are you utilizing the manufacturers' semi/annual return policy? Pull it out of the dark dingy corner, provide direction and allow this group some visibility with financial responsibility to enhance your bottom line.

One of the true limiters to a rebound for rental companies will be the availability of finding new sources of financing. Every company will be impacted significantly and will push rental operators to the major manufacturers that have the ability to furnish funding coupled with true fleet management. For example, it is possible to negotiate a fleet management program that allows you to return used equipment on particular annual dates, depending on the agreement. The positive is that you always have the latest products available. The negative is that you become essentially tied to that supplier, you never truly own the equipment, and outside financing and funding will be difficult to secure because you never truly own the product.

Consider the continually declining value of your used rental fleet. I doubt that we will ever regain used equipment appreciation as we had in the past, as long as the national rental fleet owners continue to dump equipment on the auction market or allow other parties to resell it at extremely low prices. The major rental firms have labored with methods to eliminate used and obsolete equipment, but by not effectively managing this business segment, they have substantially reduced not only their own fleet values, but all others also. Your customers have learned to wait for the auctions and purchase late-model used equipment at affordable prices, thus reducing their rental demands. Parts and service must be an avenue to maintain profitability, secure and maintain new accounts.

Reassess your insurance status

After the tragedy of Sept. 11, your insurance carriers are reevaluating their entire portfolios. Be assured that reevaluation will only cause your premiums to substantially increase. Have you evaluated your position? Have you requested your key manufactures to assess your company as coinsured? Now is the time to consider your position. Request that you be added to the manufacturers blanket policy as a coinsured company at the suppliers cost.

Did you take the time to request a copy of your suppliers' insurance policy? If you haven't, do so immediately. Have it evaluated, so that it will provide your company adequate secondary or primary coverage. Is their SIR — the dollar amount the manufacturer is required to pay out of pocket, per occurrence — amount sufficiently low enough that the supplier can withstand several major incidents in one year? For the aerial lift industry, that dollar amount should not exceed $250,000 per incident. Other industry segments will differ in values. Ask the questions, get the information and keep it secure. This information should be requested annually and filed properly.

As business becomes more difficult, manufactures will be seeking every avenue to reduce costs. That could mean putting your company and your insurance coverage in jeopardy and could possibly affect your end user's company in the same way. Ask the questions, get the data, compile and file it appropriately.

My next article will cover how your company can improve rental rates, taking a look at key innovative strategies that you can employ.

Frank Scarborough is a veteran of more than two decades in senior level sales management in the aerial industry. He can be reached at [email protected].