As we move on into the second half of the year, and as a follow up to last month's issue of ACG "Smart Parts", we will take it to the next level along with our "Parts Department Insurance Plan" by adding some Parts Bottom Line "Protection".
Even though we may do a great job on Parts Sales & Gross Profit, all that effort may just go by the wayside if we are not managing our Parts Department Expenses. We also have to keep in mind that in Parts, we are responsible for our portion of the overall dealership's "Fixed Absorption" Percentage.
The Parts Department is responsible for 25% of the Total Fixed Absorption Percentage if we have a Collision Center, and 20% if we do not have a Collision Center based on Industry Guidelines.
Even though these Absorption Percentages are based on Parts Gross Profit, we have a dual role here as we are not only responsible for this Absorption Percentage, but we are also required to have a "Net Profit" of up to 40% or even higher depending on the Manufacturers' Industry Guidelines.
This means that the Parts Department, by percentage, should be the highest "Net Profit" department in the whole dealership. A huge responsibility for "Smart Parts" Managers and we cannot achieve these numbers without controlling our Parts Department Expenses.
In this issue of ACG "Smart Parts", we will focus on protecting our "Parts Bottom Line" by managing those Parts Expenses that are in our control. All dealership departments have expenses that may be "out of our control", which are usually "Fixed Expenses" and maybe even some "Semi-Fixed Expenses".
Not only do we have many of these Parts Department Expenses in our control, but there are also many Parts Department "Unseen" expenses that we may not be aware of. Many of these Parts Department "Unseen" expenses can also highly impact the Parts Bottom Line as well as the dealerships overall Bottom Line.
Question is...
"What Parts Department "Seen & Unseen" Expenses should we be focusing on and how can we bring them to the surface?"
Once Again "Smart Parts" Readers!...Let's Get Started with our "Top 5 Parts Department Controllable Seen & Unseen Expenses!"
As mentioned, there are many Parts Department Expenses that may be out of our control which are usually Parts Fixed Expenses. There are also some uncontrollable Semi-Fixed Expenses, as well as some overall Dealership "Allocated" Expenses depending on the Manufacturer.
Let's get started with our Top 5, and as in last month's issue, they will be listed in no particular order, but we will save the best for last with our "Unseen" Parts Department Expenses that may be impacting the Bottom Line.
Here We Go!
Parts Personnel Expense:
In order to control the overall Parts Department Expense, we first have to look at some Industry Guidelines. There are some key guidelines that will help us manage this overall expense even though we do not control many of these Personnel Expenses.
Personnel Expenses such as Owners Salaries, Employee Benefits, Taxes and Absentee Compensation are just a few that will just be there each and every month. This means that we have to look at the overall Parts Department "Expense to Gross" Guideline which is usually between 30% - 35% depending on the Manufacturer.
The only way to hit these "Expense to Gross" Guidelines is to either increase Parts Gross Profit or reduce Parts Department Personnel Expenses. That being said, we need to first look at the total number of Parts Employees with a second set of Industry Guidelines.
To determine the right number of Parts Employees, Industry Guidelines indicate this total by both Parts Sales & Parts Gross Profit per Employee. On the Sales side, the number is $55,000.00 in Sales per Employee for Domestic Dealers and $70,000.00 per Employee for Import Dealers.
On Gross, the numbers are $20,000.00, (domestic) per Parts Employee, and $22,000.00 - $25,000.00, (import) per Parts Employee. The reason we have both the Sales & Gross Guidelines is that we may have high Parts Sales Numbers, which would dictate more Parts Employees, but due to high Parts Wholesale Sales Numbers, we still may not meet the "Gross Profit per Parts Employee" Guidelines.
Even though some Manufacturers do not really measure the "Parts Personnel Expense to Gross" Percentages of 30% - 35% due to their Financials measuring "Allocated" Personnel Expenses. We can still measure the right numbers of Parts Employees by these Sales & Gross per Employee Industry Guidelines.
Parts Advertising Expense:
This "Semi-Fixed Expense" should be anywhere from 2% - 4% as far as "Expense to Gross", again, depending on the Manufacturer. The reason we need to watch this expense account is that there usually isn't that much spent on "direct" Parts Advertising per say.
That being said, the Parts Department may share in some Total Dealership Advertising Expense, which all departments participate in. Unfortunately, I've seen in many dealerships the Parts Department may just be sucking up more of these Dealership Advertising Expenses than they should.
Even though this is a decision made from upper management, or ownership, it is not unusual to see the Parts Department paying more than their fair share. One reason may be the fact that the Parts Department usually has the highest "Net to Gross" Percentage in the dealership as mentioned earlier.
Parts & Service Advertising is definitely a shared advertising expense that we often see due to Service Promotions, Coupons and Specials that will help drive Service Lane Traffic. It is extremely important that the percentage of this "shared" Advertising Expense is "fair" based on how much total gross each department generates.
Another Parts Advertising Expense may actually be the discounts that are applied to these Service Lane Promotions. Some dealers will actually apply these discounts against Customer Pay Gross, thus lowering the Parts & Service Customer Pay Gross Profit.
This is also a decision that the dealer will make along with the Accounting Department, but we have to be careful when we charge back these discounts to Customer Pay Gross Profit. When these coupon discounts are charged back to gross, it is much harder to track as these discounts, or "costs" as they get swallowed up in what I call the "sea of gross".
When these "direct" Advertising Expenses are in fact charged to an Expense Account, it is much easier to track and compare them to Industry Guidelines. In my opinion, the actual cost of the Advertising Expense should be charged to Advertising Expense and tracked monthly.
Parts Freight & Shipping Expense:
This Parts Expense can obviously vary from dealer to dealer depending on wholesale sales, delivery expenses with the number of delivery drivers, outside delivery services, or even warehousing costs.
We could also include "Parts Return Fees" into this category as repacking fees, damaged parts, and Manufacturer Return Fees can highly impact this Parts Expense. There will always be Parts Returns, much like Amazon or any other online retail outlets, as there is always a cost of doing business.
We have to have a policy that will "recoup" some of these costs from our customers, or even the dealerships' Service Departments and Collision Centers. There especially has to be more accountability on who's really responsible for these return costs.
Although, it's always easier said than done as many Parts Managers out there do not want to mess with their so called "good customers" that buy a lot of parts each month. In my opinion, we need to do our research to see what other dealers are doing about return fees to remain consistent and competitive.
You may be surprised but there are actually many dealers out there that are charging for delivery fees, return charges, repackaging fees and late fees for untimely monthly payments. We just seem to assume the negative at times when we really don't know until we do the research.
In my opinion, especially in our own dealerships, the person or department that is authorized should be responsible for the initial Parts Special Order "cradle to grave". They should also be responsible for any return or restocking fees. It should not be just assumed that the Parts Department pays for the cost of returns, or the burden of potential obsolescence.
Parts Data Processing & Outside Services Expense:
I kind of "looped in" two actual expense categories here as some dealers will use either one or the other depending on their particular preference. Either way, they both include outside companies that charge the dealer for their product usage or services.
This expense category may also be called "Information Technology Services" on some of the newer Financial Statements. Ultimately, these two expense categories usually include the Parts Department's share of the monthly DMS Fees, Parts Catalogues, Electronic Estimating Programs and perhaps even E-Commerce Fees to name a few.
Even though these expense categories could be referred to as "Fixed Expenses", they are still considered "Semi - Fixed Expenses". We do have a degree of expense control on these two in the way of making sure the expense allocations are fair, especially in the monthly DMS fees.
Controlling as a matter of "awareness" is most important and not just "assuming" that these expense entries are accurate each month. We need to follow the monthly trends to make sure we don't see any unusual "spikes" due to Accounting changes or entry errors.
We also need to do an ROI, (Return On Investment) breakdown on some of these Outside Companies to make sure we are getting our "bang for the buck". There are still many new "flavors of the month" companies out there that may tease us into buying some new computer program.
It's a fact that our own DMS Utilization Factors are at a stunning 20% - 25% and we can easily get sucked into some new computer program out there. Only to find out that we could get the same out of our own DMS, but just didn't know.
Parts Department "Unseen" Expenses:
As our Number 5, we wanted to save the best for last as these Parts Department Expenses will not be found on any Financial Statement. Even though they are technically "Unseen", you can be assured that they are out there and affecting the "Bottom Line" monthly and especially by the end of the year.
Parts Acquisition & Holding Costs are one of these "Unseen" Parts Expenses. There is actually a cost of acquiring and holding Parts Inventory. If you were to "Google" Acquisition & Holding Costs, you would see that the average "cost" of holding any inventory or retail commodity, the costs are anywhere from 25% - 30% of the total inventory value.
Handling the parts, Physical Inventory Costs, Asset Insurance, Damaged Parts, Building Rent and Warehousing Equipment are just a few that fall into this Acquisition & Holding Cost Percentages. That being said, holding Parts Obsolescence can just add to these costs each month and year.
We know that these Acquisition & Holding Costs are there, we just have to make sure that we are "turning" the Parts Inventory at Industry Guidelines. We also have to make sure that we are not carrying too much in the way of "excess" inventory and of course, parts obsolescence.
In other words, if we were still carrying approximately $100,000.00 in Parts Obsolescence, it is actually costing the dealer $25,000.00 - $30,000.00 a year just to hold those parts that will never eventually be sold. Again, you will not see this expense on any Financial Statement.
Another "Unseen" Parts Expense is lack of proper training in the Parts Department. If you drill it down, dealers for the most part, do not invest in Parts Department Training compared to other dealership departments.
Instead of spending the money on training the right, qualified Parts Employee that we already have, often times we just add more Parts Staff. Adding more Parts Staff to make up the difference for lesser trained employees can also add to this "Unseen" personnel expense.
It also doesn't go over well with the dealer when we simply say that we need more help to get the job done. Long lines at the Parts Front & Back Counters can be justified if we don't have enough Parts Staff based on the above Industry Guidelines, but if we are "under-trained" in Parts, that's a different story.
For the most part, the qualifications for hiring Parts Department Staff are minimal at best, especially for Parts Counter Staff. The lost productivity to the Service Department is also "Unseen" as technicians are waiting longer to get the right parts due to lack of proper Parts Training.
Lost Sales Reporting may also be affected due to lack of training and/or accountability. They need to be trained and informed on the proper definition as well as tracking their Lost Sales Reporting Performance daily. Most importantly on Lost Sales Training is explaining the actual purpose and reason why we report them in the first place.
This "Unseen" expense goes even further for Parts Managers as proper DMS Set Ups & Controls are incorrect based on the math. This Parts "overlook" leads to low "Parts First Time Off Shelf Fill Rates" thus reducing Service "Cycle Times" waiting for or chasing parts we perhaps should have had on the shelf "the first time".
We just "assume" that the math in the DMS is correct, but unfortunately, many, if not most of the DMS Trainers/Installers don't even know the right math. The initial Parts Set Ups & Controls initially installed are "cookie cutter" at best and don't follow basic math, which is irrefutable.
Keep in mind and don't misunderstand that we are not blaming the Parts Manager as it is more the question of "How Do We Know What We Don't Know?" Most Parts Managers that I have met are very intelligent, as it's mostly due to the fact they haven't been trained or informed about the math that could increase the "Parts First Time Off Shelf Fill Rate".
Unfortunately, in many Parts Departments today, the dealers have more of the parts they don't need and not enough of the parts they do need as far as inventory "breadth". This is also why Parts Obsolescence overall is at an all-time high.
It's hard enough these days where Parts Coverage, or the "Life Cycle" of a part is lower than it was years ago. The "Life Cycle" of a part 20 or 30 years ago used to have a nice "bell curve" during its Life Cycle. Today, it's more of a "sharp spike" up and then back down for 6 - 8 months and then the part is on its way out, dropping into the obsolescence category sooner than ever before.
Having the right "Parts Insurance Protection Plan", (last month) and "Managing Parts Department Expenses", (this month) is the best combination a "Smart Parts Manager" can have in achieving Predictable Results each and every month.
Last Question...
"Is Your Parts Bottom Line Insured, Protected and Covered?"
If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @ www.smartpartstraining.com, or...just pick up the phone and call me at :
(786) 521 - 1720...After all, not knowing is not worth not "fixing" it...
....
No comments:
Post a Comment