Operating Metrics: Guideposts to the Future

The most optimistic predictions for the vending industry hold that new technology will enable operators to provide customers a higher quality of service and create new operating efficiencies that will improve profitability. No one doubts this is an optimistic view when taking full account of today's market realities.

Regular readers of Automatic Merchandiser realize technology will help professionalize the industry and hence, be ultimately beneficial. In the meantime, technology presents operators a new set of challenges. New equipment and state-of-the-art software demands a higher investment than was previously required.

For a vending operation to succeed, it needs a financial road map that will allow management to know if the business is operating profitably. This is not new. But the higher investment needed to incorporate new technology — be it software, more advanced equipment or cashless card readers — requires stronger financial expertise.

Higher capital outlays are needed
The capabilities that technology provides, paradoxically, will strengthen the operator's financial management, but at the same time, it requires a larger upfront investment.

Previous articles have noted that technology presents a "chicken and egg" scenario — the operator must invest more resources to gain the capabilities to improve profitability. While this is true about all types of technology in the industry today, it is especially true about those tools that specifically allow operators to manage better financially. This mainly includes management software.

Equipment and software are not the only areas where vending operators need to reinvest periodically. As products, equipment and software become more advanced, the bar also rises for the level of training required. Operators need to invest in education and staff development as well.

This article, part 2 in Automatic Merchandiser's Wake Up Vending Series (part 1 ran in January), will identify the financial operating metrics that operators need to succeed in the new vending marketplace.

Vending industry specific software combines financial management with other aspects of operations, including security (machine security and facilities security), route accountability and marketing. Software provides the operator data that will improve inventory management, product mix, route efficiency and personnel accountability.

Generic accounting software can help vending operators who don't yet have industry specific software.

"Wake Up Vending," published in November 2005, noted that vending operators need a plan to incorporate new technology that will make them more efficient and deliver higher customer satisfaction. While the ability to invest varies among individual operators, every operator has the ability to identify financial benchmarks that will enable him to measure return on investment.

New tools are needed
The November 2005 article noted the forces of declining location sizes, higher operating costs and new competitors all call on vending operators to use new tools to operate more efficiently and effectively.

Given the historically high levels of waste and shrinkage in the vending industry, due mainly to weak accountability systems, one can safely say that most operators will benefit from an investment in better information management systems.

The first article in this series (January 2006), which addressed raising prices and lowering commissions, noted that none of the seven action steps can be implemented without consideration of other steps. In researching financial operating metrics, Automatic Merchandiser again discovered that the different action steps are largely interdependent.

In order to gather the financial information needed, an operator may need to have an employee who is trained in this area, possibly necessitating the need for additional investment in education. Once the information is gathered, the operator will be in a better position to partner with customers, another action step.

Before examining the key financial operating metrics using new technology, operators should keep in mind that investing in the future is easier when the operator has an overall game plan. Vending operators need to invest not only capital, but also time in educating themselves about their rapidly changing industry.

A business plan covers the use of all company resources, and lists quantitative goals (i.e., increase sales by 5 percent) and qualitative goals (i.e., improve employee) morale. This article will address the financial measurements a company needs to track in order to pursue its quantitative goals.

Starting point: Profit and loss statement
Most companies have a profit and loss (P&L) statement that includes gross sales for a finite period of time, and various costs that are subtracted to produce the net profit. This P&L statement provides a starting point for measuring operating efficiency.

Most operators' P&L statements include sales, refunds, taxes, commissions, cost of goods, equipment depreciation, spoilage, service and overhead.

As a company invests in tools that improve efficiencies and/or sales, the net profit improves with time.

Improved information management tools, such as state-of-the-art software, offer a higher degree of accuracy and more timely information. Software that allows an operator to analyze an account's profitability on a regular basis is essential.

The more robust the software, the more organized the company, assuming the company utilizes this organizational tool.

In a business that is as capital intensive as vending, organization impacts efficiency, in turn affecting profitability.

Operators who implement software and use it usually have access to a lot more comprehensive and accurate data than they had before. Many find they have more unprofitable accounts than they realized, and thus reduce their customer base, which makes them more profitable.

Conventional wisdom versus reality
Conventional wisdom holds that a vending company doesn't invest in management software until it at least reaches three routes. This is one piece of conventional wisdom that gets thrown out in today's operating environment.

The sooner a company invests in management software, the more easily the company will be able to make big upfront investments (i.e., new equipment, new employees, new warehouse) and monitor its return on the investment. Delaying the purchase of software increases the time it will take to input historic data, teach staff new procedures and make use of efficiency enhancing management reports.

Software's ability to track financial operating ratios is an important reason to have it. There are other reasons as well.

The use of paperless systems that reduce and eliminate hard paper copies has a number of benefits. Information that is scanned into systems eliminates numerical transposition errors. Electronic mathematic calculations are error-free. Electronic filing of data is more space efficient, easier to use and more secure than filing cabinets. Electronic reporting and analysis improves human productivity.

As operating costs increase, companies find they need more capital. Whether the need is to add staff, equipment, software, or to acquire another operation, a vending business needs capital. The financial information that software provides about a business enhances the company's ability to secure financing from lenders.

Quality of data affects market value
Accurate, comprehensive financial data also allows a company to know its capitalization value. This is important to any business owner who hopes to some day sell the business, or unexpectedly finds himself in a situation where he needs to sell quickly.

Having accurate financial information allows a company to invest in its future. Investment adds to a company's market value. Recent vending company purchases have ranged from 5 to 45 cents on annual sales dollars, largely due to different levels of reinvestment.

Many vending operators already use some type of inventory management software to monitor the profitability of machines, locations and routes. Operators use this information to calculate the company's profitability.

One of the big advantages of newer software is that it also enables operators to more quickly identify changes to some operational aspect to improve the profitability of a machine, location, route or the company as a whole.

Operators can also use information from these reports to address business goals, as determined in their business plan. For example, a company might want to improve its return on assets by a certain amount.

Key ratio: Return on assets
There are a variety of reasons for improving return on assets. It is one factor lenders look at in evaluating a loan proposal. Acquisition candidates also look at this ratio.

An operator could improve his return on assets by reducing accounts payable, reducing equipment depreciation, reducing product shrinkage, raising prices or redeploying equipment to more profitable accounts.

Before operators can set tangible goals for any of these actions, however, they need hard data. Here is where state-of-the-art, industry specific software is invaluable.

Basic inventory management
Software allows the operator to maintain perpetual inventory for every warehouse, truck and machine. Basic vending management reports include:

  • Product purchases from suppliers
  • Periodic inventories of the warehouse
  • Product movement from warehouse to route truck
  • Periodic inventories of route trucks
  • Periodic inventories of vending machines

By accurately measuring these inventories, the operator is able to track cost of goods sold, which is typically the largest cost on the P&L statement.

By taking action to improve efficiencies, the operator will notice changes in his critical profit variables. These are:

  • Sales per employee, a measure of employee productivity
  • Gross margin percentage, indicating the ability to manage cost of goods sold effectively
  • Operating expense percentage, focusing on expense control
  • Inventory turnover, indicating how well inventory is managed

Software allows the operation to better monitor these variables. The most important benefit is the insight these measures provide about the company's profitability, and how specific operational changes will affect it.

For instance, labor metrics can allow the company to know how an investment in a forklift affects its financial condition over an extended period of time. To determine this, the company needs to know the total amount of time warehouse personnel spend unloading merchandise. The dollars invested can be compared to the amount of time saved during the life span of the new piece of equipment.

Software will make it easier for a company to make the above calculation, as well as other calculations that involve more factors.

DEX: a key to the future
Perhaps the most significant technological development in recent years has been DEX, due to its usefulness as an accountability tool. The "Wake Up Vending" series has noted the important contribution DEX makes to improving efficiencies.

DEX is the protocol in a vending machine by which data is captured in a certain file type within its electronics board. A handheld can then download this DEX file which captures cash transactions, meter readings and the spiral turns from the last time the machine was serviced.
Because a software system knows what product is in each spiral, it can then calculate the sales, e.g., E4 turned five times at $1 since the last service. The software reports that Snickers, which was in the column, sold five and there should be $5 in the machine.

The operational efficiency provided by line-item tracking cannot be overstated, given the labor savings and the ability to service machines on an as-needed basis.

Payroll in most vending operations represents the largest single expense next to cost of goods, and route labor is the largest single contributor to payroll expense. Hence, an improved return on route labor can have a significant impact on profitability. DEX offers other efficiencies as well.

DEX: improved inventory control
Aside from controlling labor better, DEX allows greater control of inventory.

Most software packages that support DEX include reports that offer input on product mix based on individual product sales. These reports can improve sales and allow the company to eliminate items that are not good sellers.

Reducing inventory (to the better selling items) brings the added benefit of requiring smaller vehicles and/or servicing more locations in less time.

Reducing inventory will alleviate capital tied up in the warehouse. Forecasting what to put on the trucks for the next day's delivery will reduce truck sizes or provide the ability to service more machines. This, combined with giving them suggestions on what to bring to the account — based on estimates — can increase route efficiencies significantly.

These metrics can be identified manually, but this requires more work for the route driver.

Item-level reporting provides the basis for more efficient servicing of machines, which comes back to improving return on labor.
The reports will allow a supervisor to know the percent of machine inventory depleted when the driver arrived, the percent filled when he left, the number of sold-out columns, the number of sold-out products and the value of the dollar sales.

All of this information will allow the manager to make decisions to improve the location's profitability.

When a driver comes back at the end of the day and "syncs" the handheld to the back-end software, a report can be immediately printed and the supervisor can make any necessary scheduling changes. Once the money is counted, another report can be run that gives over/short data.

If a machine is only 30 percent depleted when the driver arrives to service it, the company may be overservicing the location. By rescheduling the location for service at a higher depletion level, the company can save on labor cost without compromising service.

Item-level reporting
Another benefit that item-level reporting provides is it simplifies the training process. If the drivers are using DEX, they will have less paperwork to do at the machine. It takes less time to teach a driver how to use DEX than to fill out reports manually and to pull his daily fills from the warehouse.

If the company is prekitting the truckloads using line-item data, it relieves the driver of the responsibility of pulling product from the warehouse. While the burden is shifted to the warehouse, warehouse labor is typically less expensive than route labor.

DEX as an investment
Introducing DEX at the route level represents a hefty investment for most operators that do not already have it. But like most major investments, the cost is not exorbitant and will yield returns in the first year, providing the company commits to it.

DEX can be implemented in stages.

The fastest way to gain a return on an investment in DEX at the route level is to use DEX handhelds to download meter readings. This will immediately save the driver the time of recording meter readings manually. The DEX file will allow the money room to compare the changer funds with the cash collected.

The operator can then expand to using the DEX handhelds to download machine inventory. This requires that the products are bar coded.

Still another benefit item-level reporting provides is in the area of customer relations. The operator can provide a customer with detailed sales reports. Operators have found this data helpful in demonstrating to customers the degree to which their employees are purchasing the company's products. (This is one of the action steps under "Partnering with customers, but FOR REAL" on the opposite page.)

In the meantime, operators can track figures such as income, assets and expenditures using generic software accounting packages.

The basic financial ratios give management the metrics it needs to know how a particular investment affects the company's financial health over an extended period of time.