When parts managers look to increase profits, they generally focus on increasing sales or reducing expenses.
Increasing sales takes time and is usually difficult without increasing expenses. The main expense reduction is usually payroll. Decreasing payroll can decrease the department's efficiency and can hurt sales.
There are other methods to help increase the parts department profitability quickly and without sacrificing efficiency.
Convert Shop Supplies to Parts Inventory
Shop supplies are generally used by technicians and are not charged out to customer repair orders. Look at what's being charged to the shop-supply account. Determine if any of the supplies can be purchased as parts inventory and charged out to customer repair orders.
Typical items that are often charged to the shop supplies expense account may include:
- Standard hardware (i.e. nuts, bolts, valve stems, fasteners)
- Cleaners (i.e. brake cleaner, engine degreaser)
- Electrical (i.e. wire, shrink tube, connecters)
- Lubricants (i.e. grease, lube)
- Adhesives (i.e. glue, epoxy)
Converting shop supplies to parts inventory is actually a double-profit opportunity for the dealership. Not only will it improve the part department bottom line, it will improve the service department bottom line at the same time.
Buy It Right
Ordering parts from the factory or distributors via a stock order normally has benefits like discounts and obsolescence credit that will add to the parts department profitability. There may also be other means of realizing even bigger discounts then a stock order can provide.
Parts locators will often display what other dealerships are offering at a discount. Some dealerships actually have an employee dedicated to searching parts locators for large discounts.
Certain parts brokers will also match one dealerships aging parts inventories with other dealers that show a sales demand. The brokers charge a small fee (usually 5% to 7% of dealer net) to each dealer to consummate the transaction. The going purchase rate is generally 50% off dealer net.
Other options for bigger discounts include buying fast moving parts in bulk. Certain aftermarket parts may also realize a substantial savings over factory OE parts.
Parts Appreciation
Just like any other consumer goods, the cost of parts generally increases overtime. When parts pricing is updated (usually monthly), the dealer-management system will report the appreciation. The total appreciation is the actual amount the parts inventory increased due to new pricing.
Check with the dealerships controller or accountant, but the appreciation amount should be booked as profits. Most dealerships wait until the physical inventory and then make the adjustment. Why not book parts appreciation monthly? Of course if parts show a depreciation, which is unlikely, the depreciation would be a decrease to gross profits.
Engine Oil for Warranty
Most dealerships carry bulk oil because it cost less than quart bottles and it's more convenient for the technicians. When bulk oil is charged out on warranty repairs, the factory may allow the cost of oil and trans fluid at the individual quart dealer net price.
The difference between the costs of bulk versus quarts should be booked as profits. In most instances the actual part number for quarts is used on the warranty repair order. Simply run a transaction on each quart part number and any quart part number that's billed on a repair order should be adjusted on the books.
Since the costs are different between bulk and quart bottles, inventory should be adjusted simultaneously when reconciling bulk oil. A simple accounting entry of a credit to a gross profit account like discounts earned and a debit (increase) to part inventory should do the trick.
Parts Pricing Matrix
Customers that shop the competition for a better price on parts normally only shop parts that are more expensive. Increasing the price on less expensive parts or captive parts can help increase the parts department bottom without sacrificing sales.
Dealership management systems have the capability of increasing parts selling price on less expensive parts while maintaining a more competitive price on expensive parts. The DMS can also increase prices by source, allowing the parts manager to separate captive parts form non-captive parts.
Sometimes creative thinking can reduce expenses, increase gross profits can add to the bottom line.
Fixed-operations expert James Clausen is a veteran of the auto industry.
