It's hard to believe that we have reached yet another milestone here at ACG "Smart Parts" with our 150th Edition. In this edition, and as a follow up to our last edition titled "Don't Take Your Foot Off The Gas!", we are going to challenge "Smart Parts" Managers yet again in this month's issue.
For years, we have measured our individual dealership success by meeting or exceeding the standards set by industry analysts, companies and of course, the manufacturers. These guidelines have changed to some degree over the years, but overall, they have been the standards that we have all been compared to.
These comparisons, or "composites" have given us industry information in many areas in all dealership departments and help us determine if we are above average, just average, or below average. This collective information has also helped many dealers meet or exceed these guidelines by sharing different processes and ideas with other dealers.
Since the Covid-19 Pandemic began a couple years ago and, in my opinion, much has changed in how dealers operate their businesses. Along with supply chain issues, employee shortages and rising inflation, dealers had to adapt to a different way of doing business in order to survive.
That being said and fast forwarding to today, I have noticed that many of our industry guidelines are being replaced by new goals and guidelines set by individual dealers. One good example of this is what dealers are achieving today in their average "front and back" New & Used Vehicle Gross Profit Margins.
Many have over doubled their "front and back" New & Used Vehicle Gross Margins to offset supply chain issues and overall lower New & Used Vehicle Sales. Many are actually making more with less with Floor Plan Expense dropping by thousands of dollars.
This phenomenon is also true in the Fixed Operations as dealers became even more dependent on their Service Absorption, or "Fixed Coverage" in the dealership's "back end". This trickle-down effect, in many dealerships today between the front and back end has made them more profitable than ever!
"So, what has all this done to our industry guidelines, especially in the Parts Department?"
In my opinion, the results of these past few years have definitely impacted our industry guidelines, especially in the area of parts for sure. As a matter of fact, the impacts are so great that we need to start thinking about "raising the bar" on some of our parts guidelines.
In this issue, we will break down five of these guidelines and perhaps, get a new perspective on where we should set that bar. Even though, we are not challenging or disagreeing with these industry guidelines, we are just challenging ourselves to achieve what is possible.
"If other dealers are doing it...What should MY new guidelines be and how far do I raise the bar?"
First and foremost, we can't just throw crazy numbers and percentages out there to achieve some crazy goal as these goals and guidelines have to be S.M.A.R.T.* Each guideline has to be carefully thought through, make sense and most important, the math has to work as well because Parts is not about opinions, it's "black & white".
* Specific, Measurable, Attainable, Realistic and Time Focused
In each guideline category, we will list the current industry guideline and then we will list our ACG "Smart Parts" Perspective Guideline and as you will see, the math will have to work to match other parts industry guidelines. Also, we will back these ACG "Smart Parts" Perspective Guidelines with formulas, and/or definitions to confirm the perspective guideline result.
The following five guidelines are not listed in any particular order, and we will list industry guideline first, then followed by our ACG "Smart Parts" Perspective Guideline. We will follow with our reasons and explanations for "raising the bar" if need be, or if we maintain our current parts industry guidelines.
Customer Pay Parts Retained Gross Percentage:
Industry Guideline: 40% - 42% (Matrix When Possible)
ACG "Smart Parts" Perspective Guideline: 45% - 48% (Matrix Captive Parts, Flat Price Competitive)
This guideline is the one that I've seen climb the most over the past few years in many dealerships that I have visited as well as the most under achieved guideline. It seems that many dealers are either "over-achieving" the industry guideline, or they are not even coming close which has resulted in the biggest gap of all the guidelines.
In my opinion, there should only be two Pricing Strategies on Customer Pay Parts. One being the proper utilization of a Parts Pricing Matrix in the right "cost plus" ranges on "captive parts" and the second Pricing Strategy being "flat priced" parts for "competitive parts".
The reason the industry guideline is at 40% - 42% is because most Manufacturers Suggested Retail Prices are set to retain an average of 40% - 42%, even though some are higher and some lower, the overall average will retain a 40% - 42% retained gross, which matches the industry guideline.
The ACG "Smart Parts" Perspective Guideline for Customer Pay Retained Gross Profit goes a little further. The reasoning for "raising the bar" on Customer Pay Gross follows two basic, commonsense principles. Plus, this 3% - 5% increase in Customer Pay Gross Retention doesn't really change customer perception when it comes down to what people buy.
The first basic principle is the cost of doing business has gone up expensively, especially in Parts from Acquisition & Holding Costs, Cost of Employees, Insurance, etc., just to name a few impacts of what we are experiencing today versus just a few years ago.
The second basic principle is customer perception when buying parts and services in our dealership. As I mentioned, the average MSRP of parts today is pretty much set to average the current industry guideline of 40% - 42%, which from a "cost plus" standpoint, we are marking up from cost by 67%.
In addition, and another fact is that approximately 80% of our parts sales are coming from the $10.00 to $40.00 cost range. That being said, if I have a $20.00 cost part, the manufacturer will most likely have an MSRP of approximately $33.40. This is where it all starts as this price at MSRP drives the customer perception, if any.
If I were to "matrix" that same part that costs $20.00 cost + 82%, instead of 67%, I would be selling that same $20.00 cost part at $36.40, which is only $3.00 more. The difference though is that I achieved a 45% gross profit margin instead of 40%. In my opinion, if the customer says "yes" to $33.40, they will also most likely say "yes" to $36.40.
This, of course only applies to those "captive parts" when customer perception doesn't usually play a role as much as "competitive parts" would. In my opinion, those "competitive parts" should be "flat priced" and weighted for average pricing at cost + 67%, which would retain a 40% gross margin.
Parts Sales Per Employee/Gross Profit Per Employee:
Industry Guideline: Sales: $45,000+/Gross Profit: $15,000+
ACG "Smart Parts" Perspective Guideline: Sales: 50,000+/Gross Profit: $20,000+
The reasoning behind this one is quite simple as the math doesn't lie. Our industry guideline math results in a 33% overall gross profit margin and we should be trying to achieve at least a 40% retained gross margin overall. The ACG "Smart Parts" Perspective Guideline does result in a 40% overall gross margin.
The other reason for the higher gross margin is now with most manufacturers having to pay full list on warranty parts, or a substantial "uplift" to dealers for those warranty parts, our target should be at least 40%. With exception given only to those few states that have not yet litigated for this warranty parts uplift, a 40%+ parts gross profit overall is achievable.
Lastly, and if anyone hasn't noticed yet...the cost of everything is going up. We are actually selling the same parts for more as all manufacturers have raised their prices this year at least once, if not more already. That means our Parts Staff is selling at higher price and higher gross with the same effort and number of transactions, and not necessarily selling more parts.
Lost Sales Reporting:
Industry Guideline: 5% - 10% of Total Parts Sales at Cost
ACG "Smart Parts" Perspective Guideline: 10% - 15%+ of Total Parts Sales at Cost
Actually, the industry guideline for Lost Sales Reporting has gone down over the past few years as the guideline for reporting Lost Sales used to be at 10%, but now has been reduced to 5% - 10% which does not make sense to me. In my opinion, Lost Sales should actually be called "Potential Missed Opportunities".
Lost Sales is a key component in recording "parts demand" along with parts sales. The more we record parts demand, the more we will see and be able to manage on potential parts that may phase into the Dealer Management System, (D.M.S.) The less demand we record, fewer parts will phase in, resulting in a lower inventory "breadth", or coverage.
Posting Lost Sales at a higher rate will result in better inventory coverage and defining what is a true Lost Sale is very simple. At the time of part inquiry is our best opportunity to post Lost Sales as one of the four following things will happen...
Number One: We have the part and we sell it, or...
Number Two: We don't have the part and we Special Order the part, or...
Number Three: We don't have the part and we have to chase the part, or...
Number Four: None of the above three happens and we post a Lost Sale.
Overall Fill Rate/Level of Service:
Industry Guideline: 90% - 95%
ACG "Smart Parts" Perspective Guideline: 85% - 90%
It may look like we are actually lowering the bar on this one, but that's not exactly true. First of all, Overall Fill Rate, (Level of Service in some D.M.S.'s) has a different definition than most may think. The Overall Fill Rate, (Level of Service) is defined as "Total Sales at Cost Minus Lost Sales at Cost".
All this category means is that we sold the part, whether today, tomorrow, next week or next year, minus any Lost Sales posted at cost. This is why the industry guideline is 90% - 95% because that's the opposite of the industry guideline for Lost Sales Reporting at 5% - 10%.
That being said, we could actually report no Lost Sales and the Overall Fill Rate, or Level of Service will show up the Parts Monthly Management Report as 99.9% or 100% Overall Fill Rate, or Level of Service. So, I guess in that case, we would look like a hero at 100% Fill Rate!
This also explains the ACG "Smart Parts" Perspective Guideline for Overall Fill Rate is at 85% - 90% as it too is the opposite of the 10% - 15% Lost Sales ACG Guideline. So even though the ACG "Smart Parts" Perspective is lower the industry guideline, the results are better.
On a side note, the most important fill rate to measure is the "First Time Off Shelf Fill Rate", which is the actual percentage of time the part is sold on first visit. That calculation cannot also be measured on the D.M.S. as it has to be calculated the old fashion way....
Total Sales of Normal Stocking Parts at Cost Minus Emergency Purchases at Cost
Stock Order Performance:
Industry Guideline: 75% - 85% of Total Parts Purchases at Cost
ACG "Smart Parts" Perspective Guideline: 75% - 85% of Total Parts Purchases at Cost
I agree with this industry guideline, but I wanted to put this one in because most Parts Departments will never achieve this guideline if they are only utilizing the manufacturer's Vendor Managed Inventory Programs, (V.M.I.) to replenish their stocking inventory.
If we don't utilize our own D.M.S., (with the proper set ups of course by the math) in addition to the Manufacturer's V.M.I., the best we could ever achieve is a 50% - 55% Stock Order Performance as the Manufacturer's V.M.I. only covers approximately 50% - 55% of their total inventory breadth.
This guideline 75% - 85% should also be our guideline for our First Time Off Shelf Fill Rate as it only makes sense that if 75% - 85% of our parts should be ordered for stock replenishment and it's our guideline for Stock Order Performance, then we should be selling those Normal Stocking Parts at a rate of 75% - 85% as well.
There are many industry guidelines that I agree with and abide by, but I believe that these five industry guidelines not only can be attained, but they could also reach our ACG "Smart Parts" Perspective Guidelines as well. Sometimes it doesn't take much to make a difference and achieve higher levels of expectation.
To me, it's the "expectations" that we have on ourselves that allows us to achieve even higher levels and the first step to getting there is to realize that it's "Time To Raise The Bar!"
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...