Tuesday, May 7, 2019

May 2019: Low Parts Gross %?: "Don't Blame Your Parts Escalation Matrix!"

Have you ever heard the term that refers to gross profit as just a "State Of Mind"? This statement or term is probably most evident in our business when we talk about pricing our Used Vehicles in the Sales Department once the Used Vehicle has gone through reconditioning.

Usually, Used Vehicle prices are determined from "cost up" once backed in costs are added to the vehicle such as mechanical/body repairs and vehicle reconditioning. Once "true cost" is determined, the sale price is added from "cost up" in order to retain the desired gross profit margins and percentages.

In theory, the same thought should be applied when determining our "desired" retained gross profit percentage in the Parts Department, but unfortunately, there are many more variables to deal with in parts. There are also many more transactions in the Parts Department that can impact the overall parts retained gross profit percentage.

If it were that easy, we could just double our cost on all parts, (except for competitive parts), and we would realize a 50% retained parts gross profit. As a matter of fact, I have actually met Dealers and Parts Managers that have suggested that for a solution and they still didn't realize their "desired" retained parts gross percentage.

Once again, it's just not that easy as there are far too many variables in the Parts Department that eventually lead to less than desired retained parts gross percentages. Simply doubling the parts cost, or increasing the parts escalation matrix could actually lead to more problems.

These two simple solutions, (doubling parts cost & increasing the matrix), can lead to "overpricing" parts on certain parts invoices and repair orders that could eventually lead to losing customers and lower customer satisfaction and retention.

Even though I am a true believer that overall gross profit "dollars" are what we can really spend, as we can't spend a "percentage", but I also believe that both gross profit "dollars" and retained gross profit "percentages" should and can be achieved in the Parts Department.

The prime reason for my belief in achieving both overall gross profit "dollars" and retained gross profit "percentages" is that parts cost is a "constant" and very rarely changes as opposed to Service Labor and Used Vehicle costs that are always fluctuating due to various Technician Rates and Used Vehicle Reconditioning Costs.

So, what's the solution?...

Much like any situation, or problem that requires a solution, we first have to identify the areas where the situation, or problem exists in the first place. Simply applying solutions, or "band aids" to a situation or problem without "drilling it down", only leads to undesirable results.

After countless situations that I have experienced over the years in many dealerships on this topic, I have decided to focus this month's "Smart Parts" edition on my list of "Top 10" causes for Low Parts Retained Gross Profit Percentages. 

We will start at Number Ten and work our way up to our Number One cause for Low Parts Retain Gross Profit Percentages.

Here We Go!!!

Number 10: Mistakes

We know that everyone makes mistakes, but there are actually more chances for this to happen in the Parts Department because there are more transactions in the Parts Department in a single day than there are in the whole dealership in a single month.

Mistakes are made in the areas of "fat fingering" parts quantities, receipting parts, billing parts to the wrong repair order at the wrong price, or line number on the repair order, and more importantly, pricing errors. Pricing errors often occur because we tend to "assume" far too often.

Pricing Levels and Pricing Strategies also tend to cause many errors in billing parts as mistakes are made in the basic assignment of these Pricing Levels, or Pricing Strategies. Parts counter staff can often make mistakes in applying the right Pricing Level, or Pricing Strategy to the right customer.

Finally, the most common mistake made in the Parts Department is billing the right price on an invoice, or repair order from outside purchases. Parts may be billed out at factory cost without any adjustments made on the actual "true" cost that was paid for the part, especially on warranty repair orders.

Number 9: Proper Sales Training

That's right!...who would ever think that we would ever consider sales training in the Parts Department. In many Parts Departments, other than "over the counter" sales, parts counter staff are rarely exposed to the vast number of customers that flow through our dealerships each day.

Having the confidence and knowledge in selling is a skill that requires the proper training in any retail environment. Lack of training, skill, knowledge and especially confidence not only impact overall parts sales, it can also impact potential profits at the desired retail retained parts gross percentage.

The biggest impact from the lack of sales training is counter staff  "assuming" a part costs too much in their mind, thus giving the customer a discount up front, even before the customer objects to the original sale price of a given part or accessory.

Number 8: Sales Mix

Believe it or not, the "Sales Mix" of our parts sales can highly impact our Parts Retained Gross Profit Percentage. Depending on location, demographics, customer and area median income, etc., the Sales Mix between Competitive, Maintenance and Repair Parts & Labor Sales can vary.

For example, if my Service Department's repair order sales and repair order count leans more heavily towards Competitive and Maintenance Repairs and/or Services, my Parts Retained Gross Profit is going to be lower than expected industry guidelines.

On the other hand, many Fleet Service Dealers tend to realize even higher Retained Gross Profit Percentages because their Parts and Service Sales tend to be more "Captive" Repairs that usually outweigh Competitive and Maintenance Repairs and/or Services.

Even if an Escalation Matrix is installed, when we are considering the Competitive and Maintenance Categories, the Escalation Matrix is often substituted by parts "Flat Pricing" which is locked into fixed parts sales price with a fixed gross profit in order to remain competitive in the marketplace.

Number 7: Flat Pricing

Speaking of "Flat Pricing", that is Number 7 on our list of causes on Lower Parts Retained Gross Profit Percentages. The problem or concern that I have with "Flat Pricing", even though I'm a big fan in the concept is that many Parts Managers just throw out a "Flat Price" on a part such as an air filter without doing the proper math.

Even though these "Flat Priced" parts are usually competitive in nature and are usually considered Menu Items, it doesn't necessarily mean that we have to assume an expected Lower Parts Retained Gross Profit Percentage. If we do our homework and apply "Weighted Parts Price Averaging", we can get the best of both worlds.

By utilizing "Weighted Parts Price Averaging", we can actually research our annual piece sales of, let's say our "Top 10" air filter part numbers, combine the total annual piece sales of these "Top 10" air filters, then divide the total annual piece sales of all ten part numbers by the total cost for all ten air filters annually and come up with one average cost for all air filters.

Once the average cost is determined for all these air filters, we can then apply our markup percentage to achieve our desired Retained Gross Profit Percentage. For example, if my average cost for all these air filters is $11.87, then we can "markup" from cost by 1.67 to achieve my desired Parts Retained Gross Profit Percentage of 40%. So, in this case, all the air filters would sell at a sales price of $19.82.

The theory, (which actually works!) is that the air filters that we sell the most, usually cost less and the air filters we sell less, usually cost more. Once the weighted average kicks in, we may make less on the air filters that we sell the least, but...we make a much a higher Retained Gross Profit Percentage and more often on the air filters that we sell the most, thus retaining an overall "average" gross profit percentage of 40%.

Number 6: Emergency Purchases

I believe it's pretty obvious that Emergency Purchases has made our "Top 10" List, even though some may question it's position at Number 6. Quite simply, and much like in the Sales Department, if we have to chase it, we lose gross profit, both in dollars and retained gross percentage. 

This problem is even more magnified if the Parts Department has a low "First Time Off Shelf Fill Rate". I guess opinions may vary on where Emergency Purchases falls in to our countdown as it would depend on how low a particular Parts Department's number is, or what their percentage is on their "First Time Off Shelf Fill Rate". 

Emergency Purchases would actually rank a little higher on our countdown for some if "First Time Off Shelf Fill Rates" percentages are drastically low, resulting in more Emergency Purchases. More Emergency Purchases means lower gross dollars and percentages.

Low "First Time Off Shelf Fill Rates" that result in Emergency Purchases not only impacts the Parts Retained Gross Profit Percentage, it actually impacts the Service Department with lower shop productivity, efficiency and ultimately, lower labor sales and profitability.

Number 5: Service Estimating

As we reach our top five, we will see a higher impact, or potential higher impact on not only Retained Parts Gross Retention, but also missed gross profit opportunities in dollars which is a "double whammy". Ironically, in many dealership Service Departments, there is no real Service Estimating Program.

Whether there is a Dealer Management System, (D.M.S.) integrated Estimating Program, or one that operates electronically and separate from the D.M.S., chances are less likely for lost gross profit dollars and percentages in both parts and in service labor.

The sad truth is that many dealers' Service Departments still operate on a manual Service Estimating Process where estimates are written on the back of a repair order. Parts and Labor quotes are scratched on the back of the ticket and communication between parts and service is poor at best.

Poor communication in the areas of E.T.A., (estimated time of arrival) on parts, omitted parts, added costs to obtain parts, addition errors, etc. are just a few parts "gross killers" out there that can and does happen more often than we would expect, or even see.

Number 4: Pay Plans

Now we are getting to the "real meat" as we get even closer to our Number 1 reason for Lower Parts Retained Gross Profit Percentages. If you don't know it already, most of our employees "work their pay plan" as most of us want to maximize the areas that will end up in our back pockets.

Let me give you an example....

Let's say that I'm a Service Advisor and my pay plan is steered more towards selling labor than it is parts. I will even go one further and say that my pay plan is also steered more towards selling customer labor as opposed to warranty and internal labor.

That being said, which jobs are going to have the higher priority? Of course, warranty and internal parts and labor will take a back seat as customer pay labor is my number one priority. So, whether it's incentives, or the clock, (if I'm paid by the hour), that's how I am going to work my pay plan.

Here'[s another one...let's say that I have a transmission job in the shop that requires either  a transmission replacement or a transmission overhaul. Which one do you think I would want to push, or sell to the customer? Of course it would be overhauling the transmission as that we pay me more with the customer pay labor.

Also, wouldn't it behoove me to "pad" my labor utilizing labor grids more than the actual parts needed for the repair and at the parts escalated price?

Even though both the grid and matrix should be applied, the tendency to discount, or reduce my estimate may be what it takes to make the sale. If I did have to make cuts somewhere, it would definitely be on the parts side.

On top of that, and in my opinion when it comes down to ethics, replacing the transmission with a
re-manufactured unit with a better warranty would be a better value to the customer in many cases. Unfortunately, ethics isn't always the case when pay plans come into play.

Pay plans also impact Retained Gross Profit Percentages for Parts Managers and their counter staff. If my parts pay plan leans heavily towards "total sales", or even "total gross profit", then percentages really don't mean anything to me.

I would tend to lean towards making the sale and applying discounts just to drive the numbers instead of making sure I retain the right gross percentage.

Number 3: Overrides

Some may think that "Overrides" is the same as "Discounts", but they are quite different as overrides are directly linked to overriding stated Escalation Matrix Sale Price, or maybe even the Manufacturers Suggested Retail Price. Overrides may also be legitimate when we look at our Pricing Strategies, or Pricing Levels to certain customers.

So, it doesn't really matter what the Escalation Matrix is, or how strong it is, if I'm going to override it anyways, the actual sale will be determined by how much the override is and not how good the Escalation Matrix may appear.

Even though overrides may be legitimate in many cases, the real factor in overrides that can contribute to Low Parts Retained Gross Percentages is that there is usually very little "policing" by Parts Managers. Once a parts counter person has the ability to override once, they may just do it again and again, even if the customer does not qualify in a particular Pricing Strategy, or Pricing Level.

The ability to change a selling price of any part, or overriding the selling price, should always be accompanied with the accountability that comes along with it. In my opinion, giving the ability, or access to parts overrides should be treated like giving someone your personal bank account number.

Unfortunately, in many Parts Departments, pretty much every parts counter person has the ability to override parts selling prices. That's why I always recommend that Parts Managers run their D.M.S. Exception Reports at least once a week which will reveal any unauthorized parts price overrides.

Number 2: Discounts

Even though they may seem similar, parts "Discounts" are different than parts "Overrides" because discounting parts has many more people involved and reasons for applying parts discounts. Coupon Specials, Service and Parts Promotions, Customer Rewards Programs, Competitive Pricing, etc. are just a few areas where we normally see parts discounting.

When we talk about the "people" side of parts discounting we see far more people involved compared to parts "Overrides". Parts overrides are usually centered around parts counter people and management, where parts "Discounting" has far more people involved.

Parts discounting can involve not only parts counter people and management as Dealer Principle, Parts & Service Managers, Service Advisors, Cashiers, Sales People, Advertising Managers, Internet Sales People and even the Ad Companies themselves may ALL have their "hands in the till" on parts discounting.

The danger in all this is not only the number of people involved, it's actually how all these parts discounts go "under the radar" until end of month numbers are revealed and the lost revenue and opportunities are discovered. That's usually when the "finger pointing" starts because with so many people involved, it's rather easy to escape personal responsibility.

Parts discounting also crosses into some of our previous "Top 10" causes listed as parts discounts can also be taken advantage of when we look at our pay plan category, or even Number 5 on our list with Service Estimating.

In my opinion, the one thing that separates "Discounting" from all the rest is the actual impact of discounting when it comes down to lost gross profit dollars and percentage. It is by far the top individual reason or "gross killer" in our "Top 10". Number 1 in actual dollars lost, but not our Number 1 "reason" for "Low Parts Retained Gross Profit Percentage".

And Now!...Drum Roll Please!...

Number 1: Belief System

In my opinion, our personal "Belief Systems" incorporates all the above and is our Number 1 when you think about it. After all, if we are willing to accept lower than desired gross profits and percentages in the first place, we would never have the any of the above reasons to begin with, or they wouldn't even happen in the first place.

Let me give you a few examples of how our "Belief System" could impact gross....

Advisor: "Wow, that part cost way too much, I wouldn't pay that much for that part!"

Parts Counter: "The part sells for $97.89, but I can give you a 10% discount!"

Cashier: "I'm sorry you aren't happy that your car broke down, how about I give you a discount on your bill?" 

Salesperson: "Thanks for your vehicle purchase, here's my business card, just show this card to the parts people and they will give you a discount on parts and accessories!"

I think that most of us can relate to any of these situations where we "freely" give away our hard earned gross profit, just because our "Belief Systems" are not where they should be all around. Also, it's just human nature at times when we feel threatened for any reason, the answer is always to give away money.

When our "Belief Systems" affects our management team, especially in a negative gross profit "state of mind", it will definitely end up being a trickle down throughout each department. Also, if our processes aren't what they should be, that's another reason to give gross away. These are just problems waiting to happen and will always result in lost gross dollars and percentages.

One of my favorite quotes from one of my favorite Motivational Speakers is...

If YOU Don't Believe In What Your Selling....Then, Don't Expect Your Customers To Believe In What You're Selling!"
- Warren Greshes

Your Parts Escalation Matrix can be a great tool in "fine tuning" gross profit retention. But, if we look at it logically, and if we were to just bill out everything at the Manufacturers Suggested Retail Price, with just a moderate Escalation Matrix to support those times where we have to sell at a Competitive Price...we would then, in theory, attain expected Retained Gross Profit Percentages.

"If you are not "hitting the mark" on Retained Gross Profit Percentage...Don't Blame The Parts Escalation Matrix,  you may just find your answer in our "Top 10" List!"

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