As we move on into June and the second of our 3-part Series on going "back-to-basics" in the Parts Department, we have yet another topic that's not really anything new as we all have to have some sort of Pricing Strategy in order to be profitable.
What's really new here is the "news" that many, many dealers are failing to achieve industry guidelines on their Parts Department Retained Gross Profit Percentages. If this is just Parts Department 101, or just basics, how can this happen? How can such a simple task of building a Parts Pricing Strategy that will retain the gross profit that we want be so difficult?...after all, it's just basic math right?
Of course, if it were really that simple and easy, we wouldn't have all these dealers out there failing to achieve these industry guidelines. These guidelines cover all of our parts sales categories from customer pay, warranty and internal parts sales.
Of these three though, only one sales category is totally under our control, which is customer pay. We can control our gross profit though on two of these categories and that would be customer pay and internal. Warranty Sales & Gross stand alone pretty much out of our control as sales and gross profits are dictated for us.
So, if for the most part, we do have control of the majority of our gross profit retention, how do we not only come up with the right Parts Pricing Strategy, how do we follow it through to the end where the results are predictable and to industry guidelines?
Like most processes, we have to start out by building the plan, while overcoming any of the obstacles and/or objections, and then hold ourselves accountable to that plan going forward. Sounds pretty simple but, like any other Action Plan, how do we prepare ourselves for the unexpected or the unknown that can, in this case, "kill" our parts gross profit?
Parts Gross Profit "Killers" are out there and if we don't know what they are, or don't have a plan to prevent them, a Parts Matrix is not going to fix it. Believe it or not there are more of these Parts Gross Profit "Killers" out there than you may think.
We all know that Parts Discounts & Overrides can reduce our parts gross profit, but what about the "not so obvious" Parts Gross "Killers" out there? What leads to these discounts & overrides in the first place? Secondly, if we have a Parts Matrix, what would drive a Parts Manager, or Parts Counter Person to change that price we created?
All the answers to these and more coming up!
Let's Get Started!..
The Parts Matrix:
Let's start out by answering one of the above questions as to why people override the Parts Matrix. Even though there are times for a legitimate Parts Matrix override, most Parts Matrix overrides are due to human instincts. In other words, our "belief system" kicking in and telling us when we think something costs too much so we have to override the matrix.
Another reason is that the matrix wasn't designed correctly in the first place with the right "cost plus" percentages in the right "cost ranges". There is actually a proper methodology that goes into building the right Parts Matrix and takes some time to do the research and math on where our sales come from and in what price ranges.
I have seen so many Parts Matrices that have the wrong percentages in the wrong price ranges, thus leading to countless overrides. Many of these overrides are also generated from the Service Department as many Service Advisors "feel" that some of these parts are priced too high. Believe it or not, there are more Service Advisors complaining about parts prices than there are customers complaining about parts prices.
Bottom Line is the Parts Matrix has to make sense where there is no desire to override it in the first place. The right Parts Matrix doesn't get overridden and produces predictable gross profit retention percentages.
Competitive Priced Parts:
Our completive priced parts, often called "Menu Priced Parts", or "Flat Price Parts" are those parts we often see on our Service Menus for Interval Vehicle Maintenance. Engine oil, oil filters, air filters, cabin air filters, wiper blades, brake pads & rotors, etc. are some of the most common competitively priced parts that are often "flat priced" in order to "flat price" the complete job including labor.
The problem here that I see often times is that the parts are not "flat priced" correctly in the first place. And now, our first "Gross Profit Killer" is revealed before we even have the chance to override the Matrix in the first place. Overriding the parts matrix is one thing, but "flat pricing" a part to a lower gross right out of the gate is another.
Most "flat prices" that I see in dealerships today were developed from a simple market survey, or "Competitive Market Analysis". In other words, let's just call around and see what others are charging for the same parts, not matter what gross we keep, as long as we stay in the same price range.
What most may not know is that it only takes an extra dollar or two on the oil filter and maybe $.50 a quart on the oil to not only stay competitive, but also retain the right gross profit. In other words, all we have to do is add another $5.00 to $7.00 on our oil change price to retain the right parts gross.
In my opinion and in most dealerships, adding another $5.00 to $7.00 on our basic gas oil change shouldn't result in losing customers as we are still remaining competitive, even though we may not be the cheapest. If we lose customers over a few extra dollars, then, in my opinion, we have other issues on retaining our customer base.
The proper way of determining the right "flat price" that should be used is done by "Weighted Parts Averaging" where we poll our top five to ten oil filters, in this case, then we "weight" the average of all those filters polled by annual piece sales and cost. Essentially coming up with one big oil filter part number to one average cost and then determining the sale price with the right gross retention.
Parts Gross Profit "Killers":
Now that we know that we need the "Right Parts Matrix" and the "Right Flat Price" utilizing Weighted Parts Averaging in order to get us to a pre-determined, acceptable retained gross profit outcome, we now have to learn how to keep it.
We have to know where these Parts Gross Profit "Killers" are and prevent them from happening as best we can. Building the right Pricing Strategy above won't matter if we let these Gross Profit "Killers" get in and steal all the work we did developing the right Parts Pricing Strategy.
As mentioned earlier, overrides and discounts by far are the Number One killer of parts gross profit. We have to have the right Matrix and Competitive Pricing Policies that don't attract human interference leading to discounts, in both the Parts & Service Departments. The Parts & Service Managers should be running a Parts & Service Override, or "Exception" Report off the D.M.S. to monitor these discounts & overrides.
It doesn't matter what the Matrix is "supposed" to do in order to increase parts gross, if it's set too high, they are just going to override it anyway. A "moderate" Parts Pricing Matrix ultimately nets more gross profit than the "aggressive" Parts Pricing Matrix due to less overrides.
2.) Parts Kits/Op Codes:
Here is one Parts Gross "Killer" that many are not aware of, especially when utilizing Parts Kits. Parts Kits are designed to make it easier in billing out certain menu parts, or even recall parts. By "joining" up a few part numbers, we can create one overall kit part number at one price that will combine all the individual part numbers and prices.
What many Parts Managers do not realize is that in many Dealer Management Systems, (D.M.S.), the Op Code can override any kit price and they wouldn't even know it. Even though on our end it looks right when we bill out the parts kit, the Op Code total parts price for that Op Cope wins out.
In other words, in an Op Code total parts price is set at, let's say at $100.00 for the total parts price allotment, and we bill out $150.00 in parts, the Op Code wins out and drops the total parts on that repair line to the "out the door" price dictated by the Op Code's total parts price allotment.
Sad thing is that on the Parts Department side, it all looks accurate and great, but when the repair order is invoiced by the Service Advisor, it will automatically adjust to the Op Code Parts Prices. This means that the Service Department ultimately controls the parts sales and gross from their end.
Technically, if the Service Advisor chooses the wrong Op Code on a 6-quart oil change, instead of an 8-quart oil change with a more expensive oil filter, we will see a "negative" parts gross profit after it's all been said and done. Even though this is an extreme example, we could actually bill out a transmission and the parts price for that Op Code would still control the outcome.
This is where "head scratching" time comes in when we look at the overall parts gross and it's much lower than expectations. We look at the Matrix, we look at our Flat Prices set at the desired levels and we can't figure out what happened...how can the Pricing Strategy not be working?!
If we don't know what we are looking for, situations like this are hidden and will not show anywhere other than on our Daily DOC's, or Daily Sales & Gross Reports. We could enter in a part number inquiry into our system and it shows the right sale and cost amounts, so why the negative results?
It's kind of like the old scenario of scissors cuts paper, paper covers rock and rock breaks scissors. In this case Op Code, (paper) covers rock, (parts) and rock breaks scissors, (parts gross). We need to know how our D.M.S. works and how these Op Codes and Parts Kits can be a Parts Gross "Killer".
D.M.S. System Defaults:
Our last Gross Profit "Killer" is also one that goes under the radar and much like the Op Codes and Parts Kits mentioned above, we may be losing parts gross and we don't even know it. Once again, pending on the D.M.S., parts "can" be defaulting to a lower price. We could actually bill out a part that we "think" is going to bill out at retail, but ends up billing out a wholesale price, or even lower.
Set ups in our Customer Information Files don't often get updated as well as pay types, automated discounts, promotions, etc, that may be set up with the "set it and forget it" mentality and before we know it, we are billing parts out as retail, but ending up with wholesale or lower.
I've been in dealerships where the customer files have not been updated in years and upon discovery, in this one dealership in particular, we found out that the dealer had been giving wholesale prices to the public. The blame was, of course put on the Parts & Service Managers for discounting and overriding parts prices.
This end result had this dealer pulling his hair out, wondering why his Retail Parts Gross Profit Percentage had always been at least 10 percentage points or lower than industry guidelines for months and years, while the Parts & Service Managers insisted that there were no unusual discounts & overrides.
Upon our "drill down", we discovered that many, many of their customers were set as Price Code 3, which was wholesale, or "Trade Price", instead of Price Code 1, which is Retail in the System Defaults on Parts Pricing. Unaware of all this, parts kept being billed out accurately, but to a different result.
Once it was revealed that a combination of these customer pricing set up defaults and some Op Code Prices that hadn't been updated in years, the mystery was finally revealed. After just a couple months, this dealers Retail Parts Retained Gross Profit is now at industry guidelines.
Bottom line is that this is all math and irrefutable. If we have a Pricing Strategy that includes a Parts Matrix that is set up with an "out of grid" Gross Retained Profit of let's say 45%. Then, we also have our "Flat Price" parts also set to retain 45%...how can the end result be any different?
The answer is rather simple....we have Parts Gross Profit "Killers" out there that we have get under control and managed properly. Parts Gross Profit should be the easiest thing that we control as Parts Managers, but ultimately, it always seems to come down to the following question...
Like the old saying goes..."How do we know what we don't know?"
"I guess...when it comes down to managing our gross profit...we really need to know!"
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...