Monday, April 12, 2021

April 2021: Drilling Down Parts Gross Profit Opportunities

As we move on to April 2021, ACG "Smart Parts" once again will devote our topic to "Drilling Down" yet another Key Performance Indicator, (K.P.I.) that directly affects our overall performance, duties & responsibilities in our role of Parts Manager.

Parts Gross Profit is obviously not to be taken lightly in these "Drill Down" categories as Sales & Gross is our primary reason for being in business in the first place. Even though the Parts Department is usually the most profitable department in the automotive dealership by percentage, many Parts Departments still fail to achieve dealership and industry expectations.

There are many reasons for not achieving dealer and industry expectations as markets and competition varies across the nation. Another factor in not achieving these expectations could also be due to where our parts profits come from in dollars even though we may not necessarily achieve the industry guidelines by percentage.

Even though maximizing profit may not be measured only by percentage as we really can't spend a percentage, but we can spend gross, I still believe that there is more out there. Many volume Parts Departments may also depend on the "back end" gross by achieving manufacturer discount and "cash back" levels to attain overall gross profit expectations.

Aside from those volume Parts Departments though...the average Parts Department has to combine both areas of Gross Profit Dollars and Gross Profit Retention Percentages. Achieving the ultimate goal in both categories requires it's own set of Guidelines, Duties & Responsibilities by the "Smart Parts" Manager. 

Let's start our "Drill Down" of the Parts Gross Profit Opportunities with our current industry guidelines on the Parts Gross Profit Retention Percentages in all five categories of Customer Pay, (Repair Orders & Counter), Warranty, Wholesale and Internal Pay Types.

Customer Pay Parts Sales - Repair Orders: 40% - 42%

Customer Pay Parts Sales - Counter Retail: 40% - 42%

Customer Pay Parts Sales - Counter Wholesale: 23%

Warranty Parts Sales - Repair Orders: 28% - 40%

Internal Parts Sales - Repair Orders & Counter: 40% - 42%

The first thing that I want to point out is the wide range of the Gross Profit Retention Percentage Guideline on Warranty Parts Gross Retention. For years, the Warranty Parts Gross Percentage Guideline for most manufacturers was Cost + 40%, which leaves a Net Gross Profit Percentage of 28%.

Now, with many states mandating that the manufacturers pay at least MSRP on Warranty Parts, or perhaps an "uplift" on Warranty Parts based on average Customer Pay Mark Ups to as high as 190%, or even higher. Thus, the industry guidelines vary in the Warranty Parts Gross Profit Retention Percentage.

Now that we have established the Parts Gross Profit Retention Percentage Guidelines, let's find out where we can maximize and most importantly, "manage" our Gross Profit Opportunities to expected levels...

The one thing that has always amazed me is that many Parts Managers, or even other department managers often find out at the end of the month that they did not achieve expected Gross Profit Levels. However, when the Dealer Financial becomes available, it's too late because we can't go back and fix it.

The time to manage and achieve expected gross profit levels is "before and during" the month and we have to have our own set of guidelines, checks & balances with "end goal" in mind. That being said, there are many ways to accomplish this as we list them individually as we move on.

Here We Go!

Parts Pricing Escalation Matrix

Even though utilizing a Parts Pricing Escalation Matrix is far from new, the surprising thing to me is that even though many, if not all Parts Managers utilize a matrix, they still fail to achieve expected Gross Profit Retention Percentages. Kind of makes me wonder..."What's The Point?"...

When you think about it, if we create a "cost plus", or even a "list plus" matrix and looking at the math, the matrix has to achieve expected gross profit levels. So how do we end up with less at the end of the month? In my opinion, if we are utilizing a matrix that does not achieve our goals, then we have the wrong matrix.

Or perhaps we do have the right matrix, but due to underlying factors, we haven't properly "managed" our Parts Escalation Matrix and our Overall Parts Gross Profit Opportunity in this category. What many may not know, there is a "science" to creating the right recipe for a Parts Escalation Matrix.

Having the right "recipe" actually starts with our "Escalation Price Levels", and not necessarily the percentage of mark up from cost or list, which I prefer cost always as cost is a constant and I can better manage my gross.

Managing the "Escalation Price Levels" is where it all begins with one simple fact and that is that 80% of our parts sales at cost are between the $10.00 - $40.00 cost ranges. That being said, there in lies are biggest Gross Profit Opportunity if we focus on more levels in that range. The actual percentage of mark up may vary from dealer to dealer and market areas.

Parts Discounting

Our biggest gross profit "killer" whether we utilize a matrix or not is Discounting & Overrides and this is where we have to "manage" our Pricing Policies. If our Parts Counter Staff is overriding our parts matrix or pricing strategies, we first have to ask ourselves why.

If our Parts Escalation Matrix doesn't make sense, or is over inflated, you can guaranty that people are overriding the matrix to what they seem makes sense. This leads to inconsistent pricing as each Counter Person thinks differently with their own opinion as to what that part should sell for.

If we are not running a DMS Exception Report each day to see if anyone is overriding our Pricing Policies & Strategies, then I guess we won't know if there was a problem until the end of the month when it's too late.

The Parts Escalation Matrix has to make sense where we can get a little more "all the time" instead of a lot more "some of the time". In other words, if I have a part that has a MSRP of $34.87, then I could definitely get $37.45 for that same part, as long as the part is a "captive" part and not a "competitive" part.

This would also result in fewer, if any overrides from my Parts Counter Staff and we would also achieve more consistent profit "all the time". Customer Perception and Customer Retention is what it's all about because if the customer "perceives" that they are paying more than they should, they will not buy and perhaps never come back.

"So!...Where should we apply the Parts Escalation Matrix and where should we not?" 

Weighted Average Pricing 

The answer to the above question is a simple one as we should only apply the Parts Escalation Matrix to "captive" parts only and all other competitive parts should be "weighted" to arrive at one sale price for that particular part. In other words, all oil, air and cabin filters should all be sold at one price with a "fixed average" back end gross.

The way we achieve an average overall Gross Profit Retention Percentage on all oil, air and cabin filters is by combining all the piece sales at cost from the top 10 filters, and combining the overall sales at cost and essentially combining them all down to one overall "average" individual cost on all of the top 10 filters in each category.

Once we have established an average cost for all the filters, we can now apply a "cost up" percentage to achieve an overall average, competitive gross profit percentage while selling all at the same retail price. The other benefit to "weighted parts averaging" is that it's much easier for the Service Advisors to present and increase overall closing ratios.

The "Sea Of Gross"

The other area that we have to manage daily is what I call "The Sea Of Gross" which is where all the approved journal entries in Accounting get charged back to gross. It is not uncommon to see Parts and Service Discounts and perhaps even some expenses charged back to the gross which lowers expected Gross Profit Retention Percentages.

We could be tracking along rather nicely through the month at expected gross profit levels, then all of a sudden..."BAM!"...once the Financial is out, the Gross Profit Retention Percentages just fell below what we have been tracking all month.

If we are going to have expected charge backs to gross, we should know what they are and plan accordingly by making the appropriate adjustments in our Parts Escalation Matrix and Overall Pricing Policies & Strategies. 

In my opinion, there shouldn't be anything charged back to gross in the first place because if we have an expense account for these charge backs, we can then "manage" the expense to expected guidelines. If we just charge it back to gross? just gets lost in "The Sea Of Gross"...

Discounts & Allowances/Inventory Adjustments

Both of these categories are deceiving, but they are a part of Drilling Down Our Parts Gross Profit Opportunities. First and foremost, these two categories are primarily "paper money" categories as they are mostly entries on our Accounting Ledger Balance and our Financial Statements.

In the category of Discounts & Allowances, these entries add to parts gross profit, even though we do not actually realize the "cash" itself until when we actually "sell" the part. So, if we have a part that has a cost of $10.00, but we received a discount of $2.00, that profit is not actually realized until we sell that part.

If we purchase parts solely to "pad" our Discounts & Allowances category, while inflating our parts inventory and adding to our obsolescence, we are only fooling ourselves as that money never gets realized, even though it shows it on paper. 

On the other hand, if our Parts Gross and True Turns are at industry guidelines, we are actually seeing that money turn with the additional profits realized. If our Gross and True Turns are not at industry guidelines, then we never actually realize that profit.

In the Inventory Adjustment category, we can actually realize an investment profit on our parts inventory if we achieve an "uplift" at the end of the year that is considered profit by reconciling the Controlled Parts Inventory on our DMS versus the Ledger Balance Inventory in Accounting.

Parts Training

It all comes down to training, and not only for our staff as Parts Managers need to be well versed and trained in Business Accounting, Asset Management and Sales. In order to achieve expected Gross Profit Retention Percentages, Overall Gross & Net Profit Levels, we have to manage it like it was our own business.

We have to have a trained staff in managing our Parts Gross Profit Opportunities as well as we can't watch everyone at all times, but we can hold them accountable to all Policies & Procedures in the Parts Department, especially when it comes down to Managing our Gross Profit Opportunities.

The "Bottom Line" is if we are not achieving our goals and expectations in our Parts Gross Profit Opportunities, then we don't have the right "recipe" for success. Each market is different for sure, but we can achieve our own goals and expectations if we ask ourselves this one final question...

"Are You Maximizing Your Gross Profit Opportunities?

If you want to learn more about ACG Smart Parts "Eight Habits of Highly Successful Parts Managers", visit our website @, or...just pick up the phone and call me at (786) 521 - 1720...After all, not knowing is not worth not "fixing" it...