Dr. Jim Weber had been the author of a once long-standing column in Farm Equipment entitled “The Business of Selling.” To me, Dr. Weber is one of the most influential philosophers in the ag equipment business. Every month, I would skip to Farm Equipment’s last page, read his column first and then return to page 1.
Dr. Weber’s teaching derives from my core fundamental base and has heavily influenced the lens I look through when viewing used equipment and the ag equipment business. To say he has influenced my philosophy and directional thinking as a used equipment manager would be a woeful understatement.
One of Dr. Weber’s columns entitled, “Gathering Storm Clouds,” appeared in the September 2013 issue of Farm Equipment. It had special importance to me then, and it still does today. I read it at least twice a year to stay on the path and ensure I live up to the standards I preach and the ideas I formulate. The central point of the column was around the sales mix of new vs. used equipment and what needed to change because the slide of 2014 had started.
“Next, the dealers have to focus on increasing their used equipment turnover,” Dr. Weber says. “Dealers should be tracking their used equipment turnover by product mix and by using rolling 12-month numbers and should be focused on achieving an overall used equipment turnover of at least a 3, and preferably a 4. No dealership going into 2014 should have a used equipment turnover of less than 3. Furthermore, as the equipment sales mix exceeds 75%, the used equipment turnover should increase proportionately.”
These 4 sentences have created the ethos I use today. I have a 3-legged stool theory I use to explain how to manage new and used equipment effectively.
“The way dealers must manage used equipment in today’s environment makes the 3-legged stool model more critical than ever…”
First, what is the ratio of new to used equipment sales? If new equipment sales are pacing used equipment sales, you will not be successful, and as Dr. Weber suggests, if used equipment sales are not the overwhelming majority, you will not have success.
Second, watch used equipment turn. It is an easy way to show the health of the used equipment inventory. Used equipment turn also shines a glaring light on the sales mix. As Dr. Weber suggests, understanding used equipment turn by product category is the best way to measure used equipment turn. Combines don’t turn as fast as tractors, for example.
When used equipment managers know what turnover is for each product category, it helps influence overall used equipment turn.
Third, there is the washout cycle, which takes the two legs above and tells the complete story. The washout cycle shows what moves fast and what moves slow, the associated timeline and what profitability looks like. Not understanding the washout cycle is not understanding your business.
Casey Seymour has written extensively about the washout cycle. Click here for a list of articles on the subject.
When I give this example, I am usually asked about margin and where that fits. Margin is the seat on top of the 3 aforementioned legs. But you have to have all 3 legs be successful. After all, if you have only a 2-legged stool, how good of a chair do you have? I have a philosophy I live by, but I have been saying it incorrectly for years. It goes, “turns trump margin.” It should be, “sale mix, used equipment turn and the washout cycle trump margin.”
The way dealers must manage used equipment in today’s environment makes the 3-legged stool model more critical than ever. With interest expense double to triple what it was 2 years ago, used equipment turn has never been more urgent. Knowing who the next customer is from the sale of new equipment is essential, but knowing who will buy the used equipment fills in the sales mix ratio numbers. Finally, understanding the washout cycle shows the speed with which equipment moves through the dealership.
Understanding the sales mix ratio, used equipment turn and the washout cycle will ultimately lead to your dealership’s financial success at the end of each year. Without Dr. Weber’s help, I would have never completely understood what the 3-legged stool looked like.