Monday, April 2, 2018

April 2018: "Are We Getting The Right Gross Profit On The Right Parts?"

Opportunity comes in all shapes and sizes, or in this case, all parts gross retention ranges, and in my opinion, capitalizing on our gross profit opportunities can only be measured by one's ability to recognize it even exists in the first place.

Most "Smart Parts" Managers have their own pricing strategies and expectations on parts gross profit, whether we are talking about overall parts gross in dollars, or parts gross retention in general. In my opinion, this is where the problem begins for many parts managers.

We have grown so accustomed to accepting "the way it's always been" when it comes down to gross profit dollars and gross profit retention. Certain parts are priced to bring certain gross retention and that's been our expectation for years.

Here's where I believe we have been "missing the boat" as we haven't taken into consideration for the most part the "separation" that needs to exist between actual gross profit dollars and gross profit retention.

In other words, would we rather have a 40% parts gross retention on $200,000.00 in parts sales, or would we rather have a 20% parts gross retention on $1,000,000.00? I think the answer is quite simple, but this is what I'm referring to.

So, here's the question.....

"Are we capitalizing on ALL our parts sales opportunities by getting the right gross profit on the right parts?"

The key word in the above phrase is "ALL", as none of us really know how much opportunity from lost sales are missed due to overpricing certain parts. We can't know what we don't know as many lost sales go unknown and undetected. 

Maybe the customer calls another dealer, or another parts vendor to acquire a part because our part may be priced too high, or maybe just the reputation causes the lack of opportunity and no one would know the difference because the call didn't happen in the first place.

This is why I felt the need to "drill down" ALL of parts gross profit retention percentage ranges to see if we are actually getting the "Right Gross On The Right Parts". This is where it all starts as setting and getting the right gross profit retention determines the actual overall gross profit dollars.

We will also take into consideration where our parts sales sources come from, ranging from repair order sales to wholesale and retail sales within our dealerships and all outside dealership sales on all ranges of parts.

The most important part of this exercise, in my opinion, will be "where we draw the line", and make the separation from gross retention percentage to actual gross dollars as I referred to in my example earlier between 20% and 40% gross retention.

We will start out with parts sales that we would expect to retain a lower gross percentage all the way up to the parts sales that we have more opportunity to retain more parts gross. Determining these parts gross ranges is what will ultimately determine how much opportunity and overall gross profit dollars we can capitalize on.

Here We Go!....

Negative to Zero Gross Profit Retention Range:

That's Right!...who would ever think that we would have a category of "gross profit" that doesn't have any gross profit built in to begin with? Quite simply, if you are a "Smart Parts" Manager that deals in high volume parts sales that requires high volume purchases, there is a LOT of gross profit to be made from high volume purchase from the manufacturers.

Much like in new vehicle sales, high volume purchases incur high volume discounts which are 100% profit. So, in other words, the parts manager can sell parts at, or below cost just to gain the purchase discounts from the manufacturer and often times, these "monies" generated from purchases can be the difference of making or breaking the "bottom line".

Parts Sales In This Category:

Major components such as engines, transmissions, differentials and transaxles. Collision parts sold either at wholesale, or if the manufacturer offers wholesale compensation, and parts sold at cost to outside packaging vendors to be resold in the aftermarket, etc.

Note: High inventory turns, both gross and true are necessary and crucial in this category in order to realize overall gross profits retained.

0% - 15% Gross Profit Retention Range:

This gross profit retention range incorporates some of the above categories as it pertains to high sales volumes as well as some other parts sales that any size dealership parts department. It also incorporates parts sales that have a "required" low gross profit retention just to remain competitive. 

One example could be some highly competitive "lost sales leaders" such as "Lube, Oil & Filter" Services and others that even though a low gross profit is initially realized, the overall gross dollars retained could be substantial.

In the case of "Lube, Oil & Filter" services alone, as much as 10% - 15% of the parts department's monthly overall gross profit "dollars" are generated from this one single service operation in some dealerships. Low gross retention, but very high sales volume.

Even with a combined average of $7.00 to $15.00 gross profit dollars that are realized from the oil filter and oil sold from each "Lube, Oil & Filter" Service, it all adds up at the end of the month as this service is the number one "elective" vehicle service in the Service Department.

After all, there wouldn't be all those aftermarket lube shops out there if they weren't making money doing this primary service in the first place, and we can also include tires as I don't believe there is a shortage of aftermarket tire stores out there either.

Parts Sales In This Category:

Competitive parts, such as oil and air filters, oil, tires, batteries, wholesale collision parts, some major component parts such as engines, transmissions, transaxles, differentials, etc., including manufacturer controlled gross profit major components sold under vehicle warranty.

15% - 30% Gross Profit Retention Range:

Even though competitive and wholesale parts sales still fall in this category, we can start to "dial up" the gross profit retention percentage a little bit more. Some service specials still fall into this category, but they may have a little more profit opportunity as well.

Wholesale parts sales are of their own breed and in my opinion. Achieving the proper gross profit retention, while maximizing all sales opportunities can be determined by insurance companies, the market and the competition in a given market. 

Many studies and calculations have been done, including my own, on the actual cost of venturing into the wholesale business in the first place, so many other cost considerations need to be understood. Gross profit retention in wholesale parts sales is a whole other ball game.

Other examples in this category would perhaps be brake pads and rotors, packaged interval maintenance services and "a la carte" services such as coolant, brake fluid, transmission fluid exchanges, power steering fluid exchanges, etc.

The determining gross retention percentage factor in this range, along with the next gross profit range coming up are, in my opinion, the most crucial to the overall parts gross profit dollars. By their numbers, they are by far the leaders in overall parts sales opportunities. 

The problem is that many parts and service managers "overprice" these parts and services, trying to get, believe it or not, too much gross from these competitive areas resulting in lost sales due to outpricing themselves out of the market.

If this were not true, we wouldn't have all the competition from aftermarket service facilities and aftermarket parts stores. We seemed to have been geared to a "set gross profit retention" range and we end up losing business due to this fact.

There are many other parts gross profit retention ranges yet to come where we can achieve our overall goals in gross profit dollars and overall parts gross retention. 

Parts Sales In This Category:

Brake pads and rotors, cabin and air filters, batteries, wiper blades, coolant, brake fluid, power steering fluid, differential fluids, spark plugs, A/C coolant or freon, accessories, wholesale parts, (collision and mechanical), etc.

30% - 40% Gross Profit Retention Range:

As I mentioned above, many parts sales in this gross profit retention range can be categorized as some of the parts above along with some additional parts sales. As we move closer to the 40% parts gross retention range, we can now start to expand our gross profit opportunities.

These opportunities may require a higher skill level technician to perform some "captive" services and/or repairs such as steering, suspension and frame repairs, transmission and engine overhaul or replacement, air conditioning repairs, electrical repairs, etc.

The difference from the parts gross retention range of 30% to 40% is determined by the nature of these above services and/or repairs as being minor or major in nature. Minor services and/or repairs such as ball joint replacement, shocks and struts, some steering components, etc. would fall into the "minor" category.

Parts gross retention ranges on these "minor" component replacement parts would lean to the 30% - 35% gross retention range. The reason for the slightly lower gross retention range for "minor" component replacement is that we still have to "stay in the ballpark" with our pricing to remain competitive. 

The "major" parts component replacement parts would carry the higher parts gross retention, inching closer to the 35% - 40% range. These "major" component parts replacements tend to require a higher skill level to complete the repairs, thus, the parts retention range can move closer to the 40% range.

Parts Sales In This Category:

Engine mechanical and engine electrical components, transmission overhaul parts components, steering gears and racks, major suspension, wheel bearings, ABS parts and components, differential and transaxle parts, fuel injection and fuel induction parts, etc. These are what I call the "meaty parts".

                     40% Gross Profit Retention Range and Above:

We are now in the sales and gross range where we can make up our overall gross profit retention. These parts sales tend to be more "captive" and more "factory specific" giving us more opportunity in all parts cost of sales ranges. This is also where a parts escalation matrix can be applied.

Creating the right "cost plus" matrix is key to just how much parts gross retention can be achieved, anywhere from just above 40% all the way up to 100% or more, depending on the parts cost of sales range. The most important thing we have to keep in mind with this matrix is to understand customer perception, while utilizing basic, common sense.

We all know that we can get quite a bit more parts gross retention from "captive parts" that cost less than $5.00, but we still can't go overboard to the point that too much is too much. We also have to know where our biggest "opportunity range" lies by creating a Parts Ranking Report on our Dealer Management System, (D.M.S.)

This Parts Ranking Report can be generated on most, if not all Dealer Management Systems. The report should be generated in total piece sales and gross profit in a descending format, highest piece sales and highest gross retention down.

Generally, the biggest "cost of sales" range where up to 80% of our overall sales comes from the $10.00 - $30.00 parts "cost of sales" range. Once we determine the largest percentages of parts piece sales and gross profit retention, we can than structure the parts escalation matrix to maximize the highest opportunity ranges.

Another important factor for creating the "right escalation matrix" is that it has to be set up with a descending percentage, starting with the lowest parts cost range, with the highest percentage on the lower cost parts, with descending percentages as the cost ranges climb. 

Most importantly, the percentage needs to be "capped off" with one defaulting percentage at a cost of sales range of approximately $250.00. At which point, the matrix should reflect close to Manufacturer's Suggested List Price, which is usually cost plus 67%, which will result in a 40% parts retained gross profit.

Where many parts managers fail is they tend to include ALL parts in a particular "cost of sales" range, including some competitive parts along with "captive parts". Fast moving parts and even some medium movement parts need to be excluded from the matrix to remove the risk of lost sales and a negative customer perception.

This separation is usually done by creating different parts sources by annual piece sales. Many Dealer Management Systems have the ability to rank and separate parts in various annual piece sales ranges in order to keep the more "captive parts" separate from the faster moving, competitive parts.

Parts Sales In This Category:

Engine, Body Control, ABS modules, switches, relays, wiring harnesses and connectors, fuel pumps and fuel sending units, head bolts, front engine timing covers, pulleys and tensioners, certain engine and transmission "hard parts" and gaskets, driveline components, A/C compressors and clutches, manual transmission components, etc.

So, by these examples given, I think most "Smart Parts" Managers get the idea of what parts we need to "stay in the ballpark" on and what parts we can "hit it out of the ballpark" on. The most important thing that we all need to remember is....

"We can't spend a percentage, but we can spend overall gross profit, and in most dealerships that I know, it's the gross that pays the bills."

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 Vist our Website at