Tuesday, April 4, 2017

April 2017 - Financial Management: "Five Steps To Sustained Profitability"

In part one of our three part series, (March 2017), we focused on Personnel Management, which I feel is first and foremost in running a successful, profitable Parts Department. Our people are our most important asset and having the right people in the right positions is where it all starts.

As we move on to part two of our series, knowing after part one that we have the right people, it's time to focus on the business at hand. Managing sales, gross, expense and assets, (inventory) is where it all comes down to in determining the overall success of the Parts Department.

We will focus on "asset management", which is the parts inventory in part three of our series next month, (May 2017).

In my opinion, there are five key ingredients, or "steps" that ultimately lead to "Sustained" Parts Profitability, month in and month out, year after year.

I also believe that the most successful and most profitable Parts Departments also follow these same five steps, no matter the size or location.

So let's run down the list of the "Five Steps To Sustained Profitability"!


My partner, Guy Salkeld has always said that..."Training is the Key that Leads to Knowledge and Skill and Desire is the Key that Leads to Success".

Quite simply, if we don't have the knowledge and the skills to perform the tasks at hand, success cannot be achieved. Sustained Profitability starts at the top with Parts Manager Training and trickles down from there with parts staff training.

Unlike other departments in the dealership, the Parts Department Manager is required to have a unique set of skills and knowledge in order to be successful. Even though some of these skills and some of this knowledge can be applied to the Sales Department, in my opinion, it goes much more "in-depth" and "detailed" than the Sales Department.

First and foremost, the Parts Manager must have a fair degree of knowledge in Business Accounting, including accounting integration, sales and cost of sales accounts, expense and asset management and reconciliation. On top of that, the Parts Manager also has to know the Parts Departments' role in overall "Service Absorption" and/or "Fixed Coverage".

If any of these terms are unfamiliar to some Parts Managers, then this is where you need to start if you are looking for on-going, sustained parts profitability. This training is more available today than it ever has been in the past and at a reasonable price, including a great curriculum now being offered by NADA, (National Automobile Dealers Association).

It's not just about managing a parts inventory and pushing parts over the counter anymore, the Parts Department is now a huge part of the dealers' overall business and profitability.

Unfortunately, many Parts Managers attained their position without the proper training as many were "promoted" into the position because they were next in line or perhaps, a parts counter person for many years and the owner thought they deserve the opportunity.

On top of skill and knowledge of basic accounting, managing a parts inventory that averages 5000 - 6000 part numbers in most dealerships is not an easy task.

Skill and knowledge in inventory management which includes managing inventory turns, sales activity, obsolescence, first time off shelf fill rates, stock order performance, level of service, etc. are also basic requirements. As mentioned, we will go in much more detail on inventory management next month in part three of this series.

In my opinion, this is one of today's automotive dealers' biggest "under sights" and most "passed over" areas of training and opportunity within the dealership. Due to the fact that most Parts Departments are already profitable, why the need for added expense of Parts Manager Training?

The part that most dealers miss though is how much more is out there and most importantly, how the Parts Department could be "negatively" impacting other departments, especially the Service Department.


In most successful businesses today, whether retail or any other business for that matter, having a "Business Plan" is a necessary part in going forward.

Determining items such as how much inventory we should stock, overall inventory value, market share, new and used sales volume, service capacity and area location are just a few items, or "ingredients" in putting together a viable, achievable forecast, or "business plan".

Creating a Business Plan also involves and requires our people achieving their goals and capabilities. Having a Business Plan that doesn't encourage our people to grow and achieve their goals will ultimately insure the failure of the overall Business Plan.

As I have mentioned in previous blogs, these targets for the Business Plan also need to be S.M.A.R.T. This simply means that the overall Business Plan needs to be Specific, Measurable, Attainable, Realistic and Time Focused.

Near the end of each year, the "Smart Parts" Manager should be involved in the Parts Departments' and Dealers' annual Forecast Meeting to determine the new year's Business Plan along with other dealer departments to ensure that the Business Plan is fair, achievable, and....Oh Yes...S.M.A.R.T.! 

So, as you can see, the Parts Manager has to be a business minded person, much like running their own business within a business with risks and challenges. Again, not like in the old days where the Parts Manager was just an administrative person that pushes parts over the counter and perhaps performs and inventory once a year.

Once again, if you have, or are a Parts Manager that has not had the proper training in business management, or as we used to call back in the day...Management By Objective, (MBO), you could be missing out on great future opportunities and Sustained Profitability.


In order to even create a Business Plan, the Parts Manager must have some basic goals and guidelines that will manage sales, gross profits and expenses to achieve a desirable net profit for the Parts Department.

Basic knowledge in industry guidelines in the following areas are necessary in operating to a standard that is acceptable;
  • Sales and Gross Per Employee
  • Inventory Days & Months Supply
  • Inventory Gross & True Turn
  • Gross Profit Retention, (Customer Pay, Warranty & Internal)
  • Net to Gross Profit %
  • Level of Service
  • Off Shelf Fill Rates, (Including "First Time" Off Shelf Fill Rates)
  • Sales Activity, Inventory Aging, Obsolescence
  • Parts to Labor Ratios
  • Parts Department Absorption %
These are just a few industry guideline categories that may differ from industry analysts as well as manufacturer, but they all have one thing in common and that is they all require a basic minimum standard and achievement levels.

Baseline "budgeting" as I called it back in the day required a different frame of mind in my opinion. My "frame of mind" when it came down to managing expenses was just like managing expenses, or "budget" in my own home.

You can't spend what you don't have and if the money wasn't in the bank, I couldn't write the check. Getting "credit" or "charging" anything wasn't an option with my dealer back in the day.

Unfortunately, in many dealerships, managers seem to have the mindset that the dealer has this never ending supply of money that can never go dry. Even though a department can lose money, another department still has to absorb the losses of each individual dealer department.

This is why having a good "Service Absorption" rate is critical. "Service Absorption" is the ability of the Fixed Operations to cover the dealership expenses, minus owner salaries and variable expense.

Service Absorption is as important today as it was years ago. The very survival of many dealerships today requires an overall Service Absorption rate well above 75%, in order to bring down the number of "break even" units, or new vehicle dependency each month.

The ability of the fixed operations to not only be profitable, but profitable to the point of expected guidelines of the individual manufacturers' and industry on "net to gross" percentage is crucial.

The "Smart Parts" Manager also needs to maintain expense guidelines in all three key expense categories of personnel, semi-fixed and fixed expenses. Even though fixed expenses are not controllable 100% by the Parts Manager, personnel and most semi-fixed categories are and require daily, weekly and monthly controls.

This means that the Parts Manager has to have access to accounting and financial information on a daily basis. 

Unfortunately, there are still many dealers today that will not give up the information that is needed on a daily basis for any dealer manager to manage their profits and expenses. Then they wonder why they are losing money in some departments.

You can't control what you can't see and measure, especially after the time has already passed. We can't go back to fix what has already happened, whether planned or unplanned.


There is no doubt that the overall success and profitability most often relies on the sales and gross support from other dealer departments such as Outside Sales Markets, Service, Collision Center and the Sales Department. 

Some may debate support from other areas should move this ingredient" or step higher on my list, but in my opinion, without the first three, it would be very tough to manage a high degree of sales and gross volume. It would also be much tougher to manage expenses and sustain profits without the proper training, business plan and guideline compliance.

With that said, the sales and gross environment can definitely impact the amount of sales and gross volume from one dealer to another, but on a percentage perspective, it really doesn't matter the size of sales and gross volume. What matters most is the Absorption Percentage, how it's managed and what's left on the bottom line. 

In most dealerships, the Parts Department is dependent on the Service Department for their sales and gross volume in excess of 60%, with the exception of high volume Parts Wholesale Dealers. In most dealerships, the Service Department accounts for the majority of the parts sales and gross volume in customer pay, warranty and internal parts sales areas.

On the reverse side of things, the Parts Department can and does highly impact the overall Service Department sales and gross volume as well.

Service productivity can impacted a great deal from the Parts Departments ability to provide a high level of service, with high "First Time Off Shelf Fill Rates". In the Service Department, it's all about productivity and cycle times that allows the Service Department to run efficiently.

The support from the Sales Department cannot be overlooked as well as a healthy front end Sales Department, both new and used keeps the "iron on the road" and provides on going customer retention and sales for the Service, Parts and Collision Center Departments.

The last area of support that can highly impact the overall Parts Department goal in Sustained Profitability is location, location, location. Although, it's no guaranty that having the right dealership location will sustain profitability, it still can make an impact in overall sales and gross volume.

We also have to understand that a prime location with higher sales and gross volume can also impact cost and expense in a negative direction.

It's not uncommon that higher volume dealers actually miss out on the more opportunity than smaller volume dealerships. This is because there can be so much sales and gross going on at a high rate that added cost, waste and missed opportunities go unnoticed.

I've always believed that the time to "dissect" and "drill down" opportunities should be when sales and gross are at their highest levels. We always tend to only do our "drill downs" when sales drop below expectations.

It's easy to overlook and not pay attention when we are "satisfied" with current sales and gross volumes. Once again, more evident in higher volume dealers as opposed to the average sized dealership.

The same holds true in high volume wholesale parts dealers as cost aren't usually measured thoroughly to include acquisition and holding costs, insurance and added personnel expense. All should be measured on a scale that represents all sales, gross and overall expense, including the parts inventory assets and purchase discounts and allowances.

Overall support from all these areas are extremely important, but the most important factor is that all the previous three steps need to be applied, no matter the size, location, and overall sales and gross volume in any particular dealership.

Step Five: DESIRE!

As I mentioned in Step One with my partner Guy Salkeld's quote on Knowledge and Skill, without the Parts Manager's "desire" to succeed, sustainable profits cannot be achieved. Even though training to acquire the skill and knowledge is necessary, we all have to have the confidence and desire to succeed. 

Desire comes from within, but there are many ways to increase that desire if the Parts Manager is "goal oriented". The successful, "goal orientated" manager in any department or business have many things in common. One major commonality that I have witnessed and experienced is that they all have a passion for what they do.

They are also self motivated, reading and studying from noted authors, speakers and industry analysts. They don't approach each day as "just another day" as each day, week, month and year has a goal to be achieved. Once each goal is achieved, the challenge begins all over again with new goals and heights to attain.

If the Training that allows us to acquire knowledge and skill, along with the right Business Plan, which includes the proper Guidelines, Budget and Support, we can and will achieve Sustained Profitability month in, month out, year after year.

After all, as my partner Guy Salkeld also says..."We only do things for two different reasons....either by Desire or Fear!"...which basically means...either I WANT to do it...or, I HAVE to do it! Question is....What's your reason?....

Dave Piecuch is the Vice President of Automotive Consultants Group Inc. and is the Head Coach for Smart PartsTMThe 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