July 2015: Managing Parts Gross Profit

As we move into the second half of 2015, ACG "Smart Parts" will take an "in-depth" view on what I feel are the three most important skills areas that a Parts Manager needs to manage well in order to be successful.

As in any retail business, sales provide the revenue needed to feed the engines of most successful companies. The same is true for today's automotive dealership in the areas of sales, service and parts even though the parts department is a little different in my opinion.

As "Smart Parts" Readers, I believe you have all have read my blogs and posts long enough to have an open mind and sometimes, thinking "outside the box" is a requirement in processing the content each month.

With that said, I believe that parts gross profit drives the parts departments' engine and not the parts sales. Of course we know that a sales transaction has to occur in order to have gross profit come into play in the first place as sales minus cost equals gross profit.

Let me explain further as we will look at a few key areas that help the Parts Manager control & manage parts gross profit. The first area we will look at is a key driver in overall parts sales and is ultimately, the biggest contributor to parts gross profit.

Number One: Parts Demand

In my opinion, parts demand is the number one contributor in the total amount of gross profit attained as well as the overall gross profit retained percentage.

Having the right part at the right time allows the Parts Manager to not only meet and exceed sales objectives, it also allows the Parts Manager to achieve the highest gross profit as well.

Having the part in stock always makes it easier to attain the highest levels of gross profit as opposed to chasing or special ordering parts at a higher cost, or even potentially losing sales on stock out situations.

It goes even further than that as we have to be posting all of our demands in the first place, sales and lost sales, in order to phase in the right parts with the right number of days supply depending on individual parts sales movement.

So before we even try to maximize our gross profit by having the right parts at the right time, we have to have the right set ups & controls.

We also have to make sure we phase out those parts that do not have demand so we can have the inventory revenue and space to stock those parts that are selling with higher gross levels.

Wow!...all this set up "stuff" is impacting the amount of gross profit as well as the percentage of gross retained? It's pretty amazing to me that when we started out talking about sales leading to gross profit, who would have thought that we would end up talking about inventory management?

This is why I believe that the success of the Parts Department side in today's Automotive Dealership can not be measured by sales and gross objectives alone.

They are merely a residual of the Parts Manager's ability and skill level in managing inventory and increasing overall demand.

Managing demand may be the number one key driver in a Parts Manager's ability to manage gross profit.

Our second key driver also plays a big part in achieving expected sales and gross numbers and percentages, but unfortunately, is one of the most "under managed" and "under utilized" tools in a Parts Manager's tool box.

Number Two: Parts Escalation Matrix

One the best ways we can manage and retain expected parts gross percentages is right under our finger tips. Even though most Parts Managers utilize a parts escalation matrix for customer pay parts sales, many still fail to achieve N.A.D.A.'s overall customer pay parts retained gross percentage of 40% - 42%. 

How could this be if we are utilizing an escalation matrix for "over-the-counter" and service repair order customer pay part sales? Isn't that the reason to have an escalation matrix in the first place?

There are many contributing factors that eat away at our customer pay gross profit. Just naming a few such as; discounting service repair orders, advertised specials, discounts charged back to gross instead of being charged as an advertising expense, under estimating repairs, chasing parts at a higher cost, etc. and probably more!

The problem is, even though the Parts Manager as well as other department managers may already know this, nothing gets done about it! We just seem to think that this is the way it is and we have to accept it. 

When in actuality, the only thing that should be acceptable is attaining the dealers' rightful customer pay retained gross profit percentage of 40% - 42%. We just have to get it back!

Achieving expected gross profit percentages, believe it or not, is as easy as it sounds. I mentioned earlier that the parts escalation matrix is one of the most "under managed" and "under utilized" tool in the Parts Manager's tool box in many dealerships today.

If I were to ask, (and I have!) many Parts Managers today..."When was the last time you made any modifications or changes to your Parts Escalation Matrix?..."

What kind of answers to you think I got or would get from most? If you guessed..."I don't know"....You are correct!

In my opinion, reviewing and managing the Parts Escalation Matrix should be done on a monthly basis to insure overall customer pay gross retention is at guide levels. Even though we have to remain competitive in some areas, we also have to gain a little more gross on captive customer repair parts.

Believe it or not, it doesn't take that much of an positive percentage adjustment to attain 40% - 42% in overall customer pay parts gross retention. Another fact is that 80% of our parts sales come from the $10.00 - $30.00 parts cost range. 

Impacting this range with a positive escalation percentage will definitely increase gross retained percentages. As long as fair judgement is used on higher cost items with an eventual cap, higher gross percentages can be achieved without sacrificing customer retention.

As a matter of fact, a simple increase of 20% in this cost escalation range, ($10.00 - $30.00) will impact the overall customer pay parts gross retention anywhere from 2% - 6%! A little here and there can make a huge impact overall.

As an example, if a previously "escalated" part cost $25.00 and the previous matrix of cost X 100% sold the part at $50.00, increasing the matrix to 120% would sell that same part for $55.00. If properly presented to the customer, the outcome, or perception will be the same.

So, if a customer would have paid $50.00, the customer would also most likely have paid $55.00 for that same part. Especially if it was part of a repair in the shop. If the customer would pay $120.00 for the repair originally, the customer would also most likely pay $125.00 for that same repair.

Couple of things to keep in mind in this thought process though. The first one is, we should not matrix competitive parts as those parts should be "family priced" with "cost averaging".

The second is that there are occasions with value line parts carried by many manufacturers can often times have a list price even higher than the matrix price. The higher list of the two should be utilized and visible on the parts computer screen as a "List Alternate".

Utilizing a "cost plus" escalation matrix as opposed to a "list plus" escalation matrix gives the Parts Manager total control of the customer pay parts gross profit. Cost is always a constant and list price can vary from each manufacturer on various parts. 

Costing up, just like selling Used Vehicles, allows the manager to control the retained gross profit. The new "adjusted" list price now contains the appropriate retained gross profit.

Utilizing a "list plus" escalation matrix can actually take away the Parts Manager's ability to control parts gross profit as "suggested" list price is determined by the manufacturer. This leaves the gross profit margin, or percentage as a variable. 

In many cases, when utilizing a "list plus" escalation matrix, we may get more gross, sometimes we may get less and sometimes we may even get too little or even too much! Out of control gross profit controls can only lead to out of control results.

We must have an overall "mindset" that we are not overcharging the customer as we mentioned earlier that 40% - 42% IS the guideline and if not attained, the customer is paying LESS than what guide dictates.

Properly utilizing a parts escalation matrix allows the Parts Manager to actually be more competitive while still maintaining proper gross profit retention overall. A "win - win" for both the dealer and the consumer.   

Compared to the retail industry in general which averages much higher retained gross margins, automotive parts are a pretty good bargain for the consumer. Ever see ridiculous "mark downs" when out shopping at a clothing or department store? There has to be a LOT of gross built in there somewhere!

Our last key area in managing gross profit, in my opinion pretty much dictates how well the first two key indicators are managed. What works for one Parts Manager in one area of the country just may not work for another Parts Manager in another area of the country...

Number Three: Marketability 

Marketability determines a whole host of things from demographics, average population age, median income, demand, culture, etc. In my opinion, it's the Parts Manager's biggest obstacle that may be out of his or her control.

Keep in mind that within the Parts Department walls, control is what it's all about, but once you add a variable, especially marketability, overall gross can be impacted both positively or negatively. The Parts Manager's decisions concerning parts demand and pricing can be impacted heavily as well.

Marketability makes it even much more imperative that the Parts Manager's skill levels include basic inventory management skills that we started this article with. Return on investment is the primary focus in adapting to any market area.

Once again, "inventory management skills required" on how to steer the ship on managing and measuring parts gross and true turn numbers. "Gross Turn" determines how much we need and "True Turn" determines how well our stocking inventory moves.

Maintaining market share is one thing, but expanding into market areas requires an even higher skill challenge as investment strategies and pure "guts" with a vision allows those few Parts Managers to achieve gross profits higher than any other department in their respective dealerships.

The really amazing thing to me is that managing a Parts Department, no matter how large or how small, it still requires the same skill sets and it all starts with inventory management. Without these basic skills and knowledge on how to create demand, expected gross profit levels will not be attained.

So, when you think about the life cycle of a part, how it's born, how it's raised and how it matures...always remember that a part will be sold and a part will someday be put to rest. It's just a matter of making a difference in the life cycle of that part by how much you make of it!

In order to even get to a sales transaction, we have to revert back to "Part 101" to know that a sale is actually a demand and it's the demand that drives the sale.

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTM. The only "Results Based" High Return Training, Coaching, and Consulting company in the world!  Dave can be reached at Cell 786-521-1720 or E-mail at dave@smartservicetraining.com Vist our Website at www.smartpartstraining.com