Recently I had an assignment from a large insurance company that
had purchased an auto recycling yard. The company had purchased
the recycling yard three years earlier and sales had steadily
declined from about $80,000 per month to $40,000 a month average.
They bought this yard, wanting to experiment with disposing of
their salvage through a salvage yard, instead of through salvage
They decided at the beginning not to purchase vehicles, but to
supply the yard with totaled vehicles they received after settling
claims with their customers. They would re-build some or sell
as is, and part out the remainder. The problem was their inventory
supply was not matched to their customer demand and so sales declined.
(They made the mistake of thinking that their claims and total
loss vehicles should track with the vehicles their recycling customers
would be driving). Of course, they also had too many employees,
poor management, and no systems.
When I received the assignment, their average monthly sales were
$40,000 per month with about $20,000 per month in re-built vehicle
sales and about $20,000 a month in parts sales. The cost on re-built
vehicles was over 50% and they had eight employees. Expenses were
running around $44,000 per month. It didn't take but a few minutes
to see they had negative cash flow. Also, if you allocated the
employees, with, say, two handling rebuilders and six handling
parts operations and sales, they were selling about $3,500 per
employee. Remember, the goal is $15,000 to $20,000 per employee
per month, and much less than that will not provide a positive
cash flow or profit.
After three years of this negative cash flow drain the insurance
company decided they wanted to sell the recycling yard and get
out of the business. The problem was no one would want to purchase
a yard with negative cash flow. They hired autosalvageconsultants.com
to come in, and improve operations to get cash flow positive,
so they could find a buyer.
I found no systems in place, and the yard was a filthy mess.
When a part was sold, someone simply got the vehicle, took it
to dismantling, removed the part and returned the vehicle to the
yard. I implemented a cradle to grave system in the back of the
yard for dismantling. Once the proper systems were installed,
the process flow corrected and the yard cleaned up; (about four
weeks) I reduced the staff from eight to five. The yard was then
re-inventoried, and I sold cores, surplus inventory and scrap.
I sent out a direct marketing piece (thank you Mike French) to
wholesale customers and installed a purchasing plan based on customer
demand and pay for performance. Within two weeks after pay for
performance was installed one salesman quit bringing our staff
down to four. Salvage sales increased to $25,000 the first month,
a small improvement, but with only four employees, cash flow was
getting better. The second month was much better with parts sales
of $42,000. By the third month sales were up to $45,000 and we
had a positive cash flow. Keep in mind all of these sales were
used part and warranty sales with a cost of goods of about 35%,
and total expenses were reduced to around $20,000. In this period,
no new cars were purchased or sent from the insurance company.
(They had cut off all cars). In the third month, we started buying
cars at the local salvage pool, based on customer demand.
During the fourth month I was able to sell the yard for the insurance
company and net them a good price, a little more than they had
paid for it a few years earlier. In the two months since the sale
the new owners have continued with the systems I installed, and
installed The Pinnacle Yard Management System and they are now
producing $70,000 a month in sales.
I see these same problems over and over again in my consulting
assignments. I always find excess employees using bad systems
(usually no systems), weak or non-existent financial and operating
goals, and a lack of accountability. The lesson here for all small
businesses? You don't know what you don't know (think about it),
so surround yourself with others that can help, and stay focused.
I will be giving a presentation at the URG conference, with one
of our clients, a successful operator who sells $60,000 per month,
with 3 employees, and makes well over $100k per year. Be there!