Converting Data-sense to Dollars and Cents

This summer, Gases & Welding Distributor invested in an extensive survey of the gases and welding distribution industry in order to provide our readers with a benchmark of key industry metrics. Our goal was to develop a profile of the different types of businesses in the industry and then to examine the human resource, operations and business and marketing strategies, issues and activities of those businesses.

Larry Haftl , associate editor

We hired the independent firm of Noll Research in Mentor, Ohio, to conduct the survey. Noll Research told us that we needed about 110 responses to make the data statistically valid. We received 312 responses.

In the September/October issue of Gases & Welding Distributor we presented an overall view of the data in a general profile. In this issue we will examine that data in more detail by the following business types: national firms, regional firms, local firms with multiple locations and local firms with only one location.

Most of the values used in this report are medians. Medians are the values in the middle of a group, are not influenced by extremely high or low values, and therefore usually provide a better representation than averages (or means) of a typical company's numbers.

Company profiles
Almost 75 percent of the businesses surveyed are independently owned. A little over thirty-three percent are locally owned with multiple locations, 21.5 percent are local with only one location, 27.9 percent are national firms and 17.3 percent are regional firms serving one or more territories. (Table 1.)

Of the businesses surveyed, 55.4 percent operate bulk fill tank plants, only 4.1 percent operate micro tank plants, and 40.6 percent do not operate any type of fill plant. Only 31 percent of national firms operate fill plants, while approximately 80 percent of all regional firms and local firms with multiple locations operate fill plants. Only 47.8 percent of local operations with only one location operate fill plants.

Approximately 75 percent of the businesses surveyed operate a fleet of trucks. Only 46 percent of the national firms operate a fleet of trucks; however, approximately 91 percent of regional and multiple-location local firms, and 71.6 percent of local firms with only one location, operate a fleet of trucks. Table 2 shows that national firms tend to lease trucks and use contract drivers much more than regional or local firms. Even though the percentage of national firms that operate a fleet of trucks is less than half that of regional and local firms, the total number of trucks that they operate and the number of drivers that they employ is greater than the other types of businesses.

Sometimes median values don't provide a complete picture. In Table 3, the median values of annual sales indicate that regional enterprises sell more than national firms but, by looking at the minimum and maximum values for each type of business, we see that some national firms do as much as $14 billion in annual sales, whereas the regional firms' maximum is only a fraction of that amount. There is a consistent pattern of increasing sales for all business types, but it is important to remember that none of these numbers has been adjusted for inflation, and that these numbers are gross sales and do not reflect any increases in costs.

As with annual sales, it is useful to consider minimums and maximums when looking at the percentage of overall profit margin for the four types of businesses. (See Table 4.)

Tables 5 and 6 show percentages of 2005 sales and profit by product category, broken out by business type. Note that gases are the largest overall sales category, but that they represent a significantly larger portion of sales for regional and local businesses than for national businesses. Correspondingly, hard goods such as tubing, fittings, welding equipment and welding consumables are a larger percentage of national firms' sales than of regional and local firms. By comparing percentage of sales with percentage of profit, it is possible to identify the more profitable and less profitable product categories, while also identifying whether those product categories are more profitable or less profitable by type of business. For example, medical gases represent 5.8 percent of sales for regional firms but only 3.6 percent of their profit. At the same time, medical gases represent 3.5 percent of sales for local firms with multiple outlets, while generating 4.5 percent of their profit. By considering relationships such as these, companies can identify product categories that may be more profitable for their type of business. An analysis of the factors that might explain the differences also can be useful in identifying more profitable operations.

Human resources
The median number of full time employees at national firms is 116, with a range of from 12 to 17,000. The median number for regional firms is 200, with a range of 22 to 1,100. Local firms with multiple locations employ 7 to 160 persons with a median of 55, and local firms with only one outlet employ 2 to 17 persons, with a median of 5.

National firms average three hourly employees for every salaried employee. For regional firms, the ratio is about 2 hourly employees for each salaried employee, while local firms tend to have an almost equal split between hourly employees and salaried employees. The average labor turnover rate for regional firms was highest at 6.0 employees per year, and lowest for local firms with only one location at 3.0 employees per year. National firms had the highest average number of job related injuries at 8.6 with 5.7 work days lost, while local companies with only one location averaged less than one injury and less than one work day lost in 2005.

The median entry level hourly wage varied from a low of $10 per hour for regional firms, to a high of $12 per hour for national firms and for local firms with multiple locations. The median entry-level wage for local firms with only one location is $11. The median average hourly wage for national firms is $18, while all other types reported a median average hourly wage of $15. While the median values were very consistent across the industry, the minimum and maximum wages varied markedly. National firms paid $5.50 to $18 per hour for entry-level jobs, with average hourly wages of $13 to $30. Entry-level jobs at regional firms paid $8 to $14 per hour, with average hourly wages of $12 to $20. Local companies paid entry-level wages of $6 to $17.35 per hour, and average hourly wages of $9 to $21.50.

When looking at the amount of money spent on training, median numbers give predictable results: National firms, which usually have more employees, spend more on training than the other types of businesses, and regional firms tend to spend more than local firms. (See Table 7.) Also, there is a trend toward increasing budgets each year by national firms and local firms with multiple locations, but regional firms and local firms with only one location show flat or declining training budgets. However, when you consider the minimum and maximum amounts spent, the data show that some local firms out-spend both regional and national firms, and that most companies that have training budgets are increasing them. The data also shows that there are local firms that have absolutely no training budgets.

As to how those budgets are used, 187 of the survey respondents indicate they spend their training dollars on the following types of training. (See Table 8.)

Operations
Data in Table 9 shows how the different types of businesses handle compliance with government regulations. The numbers are the percent of the total number of responses.

Data in Table 10 represents the progress that has been made toward ISO certification. The percentages represent the total responses for each business type within certification status.

Tables 11, 12 and 13 contain data from a low number of respondents (as noted in the final columns of each table). To make the data as useful as possible, we have included median, minimum and maximum values in addition to noting the number of respondents. The data is not broken out by business type because the number of responses is too low to represent each type in a meaningful way. However, the data does present a useful picture of the industry as a whole.

Table 11 shows the responses to seven questions related to operations.

Table 12 shows responses related to cylinders.

Table 13 shows data on the median number of inventory turns and SKUs for each product category.

Strategy and marketing
The survey asked respondents to identify the top three objectives that best describes their marketing strategy. Those strategies are listed in Table 16, organized in descending order of importance based on the responses. We broke out the responses by business type to reveal the differences in marketing objectives from business type to business type. The numbers in the rows marked "Count" are the numbers that correspond to the responses for each objective.

As the prices that distributors pay for gases and hard goods increase, the prices that they charge to their customers for those gases and hard goods also increase. The survey asked distributors to indicate how much of an increase or decrease they saw for the product they buy (their "Costs") over the last year. Tables 14 and 15 compare the percentages of change in the costs distributors paid last year with the changes they were able to pass on to their customers in the form of price increases. The result is a clear picture of how much costs increased last year compared with the ways that distributor prices changed.

The survey asked if distributors transact business on a website. As Table 17 indicates, barely half of all respondents are able to utilize a web-site and the Internet to transact business. In today's world, the Internet is replacing the telephone books when individuals and companies look for new or additional sources of goods and services. This table tells us that almost half of all the businesses surveyed cannot effectively use this tool to transact business. Moreover, 18.3 percent of them are totally invisible to the hundreds of millions of Internet users because they lack a website.

However, another interesting fact jumps out of this breakdown of the data: Local companies are substantially ahead of national and regional companies in their ability to effectively use the Internet.

Those who responded "Yes" to being able to transact business over their company's website were also asked how profit from the Internet compares to overall profit margin. Table 20 reflects those responses. The data says that some companies achieve more profitability over the Internet, yet others experience less and that overall, and on average, there is little difference. Twenty-eight percent of the distributors who responded said their Internet profit margins are higher than their overall profit margin, while 28 percent said they have lower Internet profit margins and 44 percent said they have the same profit margins.

Businesses surveyed used the different resources to gather competitive information. The data is presented in Table 18.

Finally, the survey asked distributors what are the best sources for their new sales, and they responded as shown in Table 19.