Next to people, one of the hardest things in the parts department to manage are expenses.
My research points to two underlying reasons. One, the manager lacks a grasp of what expenses to control or how to control them.
Two, you're busting with business, and revenues just keep flowing in, so expenses aren't an important consideration.
Watching and controlling expenses must always be a number one concern, not only when business is bad, but when it's good. Any company or department that follows this discipline will be rewarded with higher profits in proportion to their sales effort. Besides, expense control is a key ingredient of profit planning, and an essential function of the parts manager.
Obviously any and all expenses must be controlled, with whatever means necessary, without adversely affecting customer service or organizational performance.
Yet, managers are only preoccupied with operating expenses that they can quickly perceive — freight charges, handling charges, payroll, etc. If it doesn't appear on the profit and loss statement, it's neither a manageable expense nor a legitimate one worthy of issue. Accordingly, the imperceptible ones get overlooked — personnel inefficiency due to lack of training, unnecessary repetitive processes, poor inventory control, are a few examples.
Making “real growth” a reality relies on ratcheting down operating expenses a few percent relative to the sales objective. But, what if your parts department is already as lean and mean as you feel it could possibly be? Where else can you look to shave those few percent off your expenses?
If you look hard enough, you can eventually identify areas where expense improvement can be made. But the idea is to look not in the obvious places, because you probably have already scrutinized those expenses, but to look in the not-so-obvious places. Let's examine some that are often overlooked.
Keep personnel productive
Parts employees who bring revenue into the department — meaning those who contribute directly to sales such as counter people, and sales people — are a benefit.
Non-revenue producing parts employees — meaning those that have functions in the department that do not directly produce income, such as clerical, shipping and receiving — are an expense.
But non-revenue producing employees are necessary to support revenue-producing employees. Nevertheless, the combined total of these two types of employees must attain the required average gross per employee in order to hit the target net profit.
For example, NADA suggests a guideline of $27,000 in sales per parts employee and $9,000 gross profit per parts employee. Consequently, if all employees can be made more productive, higher gross can be gained as a percent of employee expense. The result: fewer employees, less expense, higher profit gains.
The place to look for increasing productivity is in improving efficiency. Here are some suggestions for making personnel more productive.
Training: Have employees, particularly counter people, been sufficiently trained to do their jobs to the best of their ability? Are they receiving ongoing training? Sufficient training is not simply equipping them to perform their task. It also gives them access to all the necessary training available — both on-site and off-site. This applies not only to training offered by the vehicle manufacturer or manufacturers, but also ancillary training available for customer service, time management, and most importantly, where counter help is concerned, that which facilitates the use of electronic catalogs and inventory control systems. On-going training hones and refines skills, builds character, and expands capabilities.
Tools to do the job: One parts department I visited had two counter people and two computer terminals. However, at a busy time, one of the terminals was tied up with the stock order. Four customers deep, not including two technicians waiting for parts, and the counter persons had to alternate turns on one computer. Talk about a productivity killer. The key question: Do employees have the necessary tools when they need them to work as efficiently as possible?
Empowerment: As a manager, when you empower your employees you not only free up your time, you also provide employees with a powerful tool to improve efficiency. Here's how.
Employees are free to fully use their skills and creative initiative.
The dealership, as a whole, can cultivate the creativity that the employees can offer.
Customer efficiency is increased because employees go the extra mile to provide outstanding customer service.
Know your customers
Customers provide the revenues of the parts department. Yet like everything else, the 80/20 marketing rule applies. That is, roughly 20% of your customers provide 80% of your revenue, while 80% of your customers provide roughly 20% of revenue.
One way to squeeze expenses is to know where most of the effort is being exerted and how profitable the effort is. A good area to target for expense control is your wholesale customers. They buy parts in larger quantities and often. Yet, gross margins are usually small relative to expenses generated.
I recommend auditing wholesale accounts regularly for profitability. You may think all your wholesale customers are contributing to the net profit. But the reality is that some accounts may amount to no more than capital turnover or even a loss. Either way, it's higher expenses as a percent of sales. Here are some places to look.
Profit margin: For some business operations, “profits in pennies, volume in millions,” works. But, not necessarily for parts departments. The costs-of-doing-business seek their level in every line. They put a logical limit on how low you can price. For parts departments, additional expenses are buried in the need to carry receivables, large inventories, erratic sales volume, and so on.
I recommend an average wholesale gross profit margin of 18%-20%, including any wholesale compensation. If you're giving big discounts simply to retain a large volume wholesale customer, parts sold to other customers must be marked up proportionately to offset overhead loss. Moreover, that large wholesale customer could be contributing little to the gross while contributing significantly to expenses.
Parts returns: If your wholesale customers continuously return parts, reevaluate them quickly and often. Returns create a bloated, aging special order parts inventory, higher obsolescence and low true turns. These are expenses.
Delivery efficiency: Uncoordinated and poorly scheduled deliveries are wasteful. Look carefully at where your customers are located, then plan a route that best matches their geographic locations. Sure adjustments may be necessary, and exceptions may arise, but a planned route keeps deliveries scheduled and organized.
The message is not to abandon wholesale. Many dealerships enjoy profitable wholesale parts operations. But continuously monitor expenses relative to wholesale's lower profit margins.
Watch your inventory
Since inventory is a large part of what a parts department is and what a parts department does, it's another good place to look to improve overall efficiency. A neglected or marginal inventory reduces profits, makes routine sales activities more labor intensive, and impedes customer service. Here are four segments that should get immediate and constant consideration.
Inventory Control Setups and Guides: Review best practices with your inventory control provider, vehicle manufacturer, and outside consultants if necessary for optimum phase-in, phase-out, best reorder point, and best stocking level. Review these parameters on a regular basis.
Lost Sales: Ensure that all lost sales are reported regularly and accurately. They are the essential building blocks of an efficient and profitable inventory.
Obsolescence: Obsolescence has no profit-earning potential. It has profit-reducing effects. It renders usable storage space unusable, it increases labor costs and it reduces customer service.
Stock Order Performance: Attain a stock order performance target of 75%-85% for weekly orders, and 85%-95% for daily orders. But there are exceptions. Variables like stock order frequency, depot fill rates, and product availability all have an effect. However, the higher the stock order performance, without compromise to customer service, the more efficient and productive personnel can be. Intermediate and emergency orders are labor intensive with higher acquisition costs. The less frequently they occur the less associated expense incurred.
Cut utility costs
Assuming the physical condition of the parts department is adequate with a decently laid out storage area, what else can be done to trim expenses there? One way is to stay vigilant about wasted utilities.
Many dealerships apportion utility expenses (electricity, heat, water) according to departmental square footage occupied. You may feel that you don't have much control. However, depending on the size and arrangement of the dealership, as little as a 5% reduction on utility consumption can result in a noticeable decrease in related expenses. Turn down the heat a few degrees, turn down the air conditioner a few degrees, turn off unnecessary lights, etc.
Another thing you can do is to run a sales-ranking report and position as many of the fastest moving parts as close to the counters as possible. The least steps counter people take to get a customer's part, the more efficient the sale, and the more effective the use of storage space.
A perpetual inventory or cycle counts should be conducted regularly to ensure the physical on-hand parts quantity matches what is reported in the computer. Additionally, a bin location system should be in place and all shelving units, shelves, and bins should be clearly marked and kept current.
All these suggestions are areas where extra expenses can be trimmed if an effort is put forth. You can probably find more if you look hard enough.
Gary Naples is a parts consultant to dealers and manufacturers. Based in Wilkes-Barre, PA, he's written two books on parts management. He's at 750-824-1528/[email protected].