Your Parts Department - A Forgotten Treasure

Simon West | 3 December 2013

The parts department is often the quiet achiever of the dealership. It lacks the glitz and glamour of a showroom or the impressive footprint of the service workshop. From a financial perspective, it contributes the smallest portion to total gross profit out of all departments – just 15% for the average dealer in Australia so far this year.

Despite this low profile, the parts department does a better job of keeping its gross profit than any of the other four core departments in the dealership and is only outperformed by the newly risen star - the F&I department.

For the period January – September 2013, the average parts department in Australia held onto 61 cents out of every dollar of gross profit it made after direct departmental expenses, such as salaries and advertising, had been applied. For the top parts operations over the same period, this figure jumped to 70 cents. In comparison, the average new car department in Australia only held onto 13% of the gross profit they made.

Not only that, but thanks to the steadying influence of the service department – which accounts for more half the parts sales of a typical dealership in one way or another – the parts department is a stable performer month in month out, avoiding the volatility that afflicts the front end of the business.
All this leads us to wonder – is your parts department a forgotten treasure chest?

Parts Department Trends

Over the past 8 years, the mix of work undertaken by the parts department has evolved with some particular changes becoming evident from 2009 as the industry recovered from the Global Financial Crisis.

The most evident trend has been the gradual reduction in wholesale business in the parts department sales mix. In 2009, 41% of parts sales going through the average Australian parts department related to wholesale business. By September 2013, this had dropped to 37% of the average sales mix.

Parts Sales Mix Percentage

However, looking at the sales mix as percentages in this way can sometimes be misleading and it is important to keep an eye on the sales turnover itself. When we do this, we see that the shift in the sales mix away from wholesale business from 2009 to 2013 was actually more about the growth in the turnover for Internal work (+6.5% a year), Warranty (+4.4% a year) & parts through the Workshop (+3.0% a year) than it was about the reduction in Wholesale business (a modest change of -1.5% a year). Total turnover through the average parts department in Australia grew by just 1.5% a year during this time.

Given the exceptionally strong period of new vehicle sales that the industry has experienced recently – with more than 1 million units sold each year after 2009 – it should not be a surprise that the flow-on effects of selling such high volumes (such as increased pre-delivery work, increased reconditioning work, and a general increase in vehicle car parks) have had an impact on parts sales.

The other relevant trend over this period is that, despite the shift in the mix towards the higher margin Workshop & Warranty sales, the gross profit for the average parts department has actually fallen from 24.5% of sales in 2009 to 23.6% as at September 2013. To put it another way, while overall parts turnover grew by 1.5% a year from 2009 to September 2009, overall gross profit (in dollars) only grew by 0.3% a year.

This has come about because gross margins have eroded across all areas of the average parts department (except Warranty). So while customers can be enticed to buy new cars in large numbers by aggressive, factory-backed retail campaigns – and the increased volume is certainly welcome in the dealership - it does not always automatically translate to easier trading conditions across the whole business.

The Difference between Average and Best Practice Parts Departments

So with the average dealer facing increasing turnover in the parts department, but declining margins, how can you look to get the most from your “forgotten treasure chest”?

A review of the ProfitFocus database shows that when comparing the average parts department with the top performers, there is actually very little difference in terms of gross profit margin. For the year to September 2103, the average parts department in Australia returned gross profit of 24% of sales, while the top 30% returned 25% - just one cent more for every dollar sold!

While it might be tempting to think that this means there is little that can be done to improve gross margin in the average parts operation, in fact, we would suggest it is a warning that dealers need to be ever more diligent in reviewing their parts operations as the pressure on margins is so strong that even the smallest of things will make a difference.

For example, the best parts departments continuously monitor the breadth and depth of their stock on hand and do so by grouping their parts into a number of categories and sub-categories (fast-moving parts, crash parts, standard service items, major service items). A stocking matrix may be used to help with this as long as it mirrors the stock categories being used in the dealership, and it is kept up to date to continually reflect the actual sales profile being experienced by your dealership. This is especially important as new models are released and repair patterns change.

The best practice here is then to use the DMS settings to order by part type by vehicle model in line with the matrix. It is important to be disciplined and review these settings regularly to ensure that aged parts – say, those greater than 365 days – are not automatically being recommended for reorder, that fast-moving and slow-moving stocks have different days supply criteria and the system is set up to utilise the optimal mix of daily ordering vs stock reordering, depending on the specific policies of the suppliers your dealership is working with.

Similarly, it is important to have clear policies on handling parts which are ordered in for a customer – a significant cause of old stock in many dealerships. The question is not just whether you should take a deposit, but how much of a deposit you should ask for. As always, having policies is one thing, but it is vital to make sure they are being followed in your dealership and that they are reviewed regularly to make sure that they remain relevant for the prevailing market.

It is when we move beyond the gross profit of the parts department that the differences between the average operators and the best start to show. In essence, the best performers are able to manage their direct departmental expenses better and hold on to roughly 10 cents more of each dollar of gross profit they earn in their parts department than the average performer.

Parts selling gross as percent gross chart

This extra 10 cents comes about as a result of two things:

  1. maximising sales throughput
  2. controlling costs

Maximising Parts Sales Throughput

Maximising the parts sales throughput for the resources you have in your parts department creates economies of scale – very simplistically, this can be thought of as trying to get more sales without needing more resources (and the costs that come with them). Easily said, but how can it be done?

There are a number of ways to go about trying to increase parts sales. Not all will work for all dealerships, and some approaches will work better for some dealers than others. The important thing is to consider these ideas, think about how they might fit with your business situation, and choose one or two to fully implement - and not just think about implementing them, but commit to them and give them a chance to work. If you are not seeing the results you hoped after three months then choose another and try again. Persistence gets rewarded!

  • Create custom parts and accessory packages – Start with your customers in mind. Tailor the packages for your different customer groups - retail and commercial vehicles, vehicles in different age categories, different accessory packs to suit the different lifestyles of your customers. The packages (especially the accessories) should be displayed on vehicles in the showroom so that customers can physically sight them. Simple brochures/fact sheets should be on display in the service reception.
  • Promote the advantages of genuine parts – Parts departments across Australia have long faced the reality of competition from grey imports. Rather than try to combat this by competing on price the best practice parts departments have responded by promoting the advantages of genuine parts. These include the impact on the overall safety, value and resale value of the vehicle, but most importantly the peace of mind the customer gains from buying parts approved by the factory. Reinforcing these benefits reinforces the overall value of genuine parts in the mind of the customer – once customers are happy with the value of something, the price itself becomes less of an issue.
  • Ensure that new and used car salespeople are trained on accessories – Accessories will differ between makes and models. It is critical that salespeople are aware of the accessories that can be fitted to the different vehicles and have the confidence to talk to customers about them. Training needs to be ongoing as new models are launched and older models are updated at model year changes.
  • Bundle the cost of parts and accessories into the weekly repayment or interest rate – In addition to making this more attractive for the price conscious customer, it also makes comparison and price shopping more difficult (as you are no longer comparing like with like).
  • Consider selling stock via the internet – This approach is low cost and provides an opportunity to reach new customer groups who might not otherwise visit your dealership. It also provides an easy opportunity to promote aging or even obsolete stock that may otherwise need to be returned or written off.
  • Consider replacing or removing existing parts and accessories on used vehicles during reconditioning – It seems obvious, but do not lose sight of the fact that for this to be successful, the eventual customer for the used car must be willing to pay the extra value of the parts fitted. As long as the new parts represent value to the customer – and this may come about simply due to the improvement in the appearance of the vehicle – then this should not be an issue. It does mean you need to understand your typical used car customers and what they value and, perhaps more importantly, what they do not.
  • Actively offer your parts and accessories for sale – Only a small portion of your potential parts customers are going to make the trek to the parts counter. Make sure your parts and accessories are being actively promoted for sale – both in the showrooms and in the service reception. Of course, this needs to be done the right way and you need to make sure that the experience is positive for the customer and they are led to understand the value of the products on offer. This approach is particularly important in the current environment of capped price servicing.
  • Reward both sales and aftersales staff for identifying upsell opportunities.
  • Increasing service retention – With over half the parts turnover for the average Australian dealer coming via the service department in one way or another, one of the most effective means of increasing parts sales is to improve service retention. With the benchmarks for parts-to-labour ratio being $0.55, $0.60 and $0.70 for the volume, prestige and luxury market segments respectively, any increase in service revenue will make a direct impact on your parts department. Encourage service receptionists to book in the next service at the point of sale (just like a dentist).

Controlling Parts Department Costs

While increasing turnover can help you get the most out of your existing cost base, it is important to keep those costs under control in the first place. The two largest sources of parts department costs are people and stock. Salaries in the parts department for the average Australian dealer in 2013 accounted for 32 cents in each dollar of gross profit made.

Managing these costs means adopting a mentality of continually focusing on cost minimisation and efficiency.

Best practice parts departments are often characterised as “lean and mean”. These operators continuously monitor productivity and ensure that headcount levels are kept in check with levels of sales throughput. Over the period January to September 2013, the average Australian parts employee achieved just over $60,000 in monthly sales.

In comparison, the top 30% of parts department employees achieved more than $80,000 in monthly sales. Not only does this mean more revenue, but the resources of these top operators are being more efficiently used: for example, the salary costs of these top operators only equate to 24 cents of each dollar of gross profit they generate – this is 25% less than that of the average parts operator.

Achieving these sorts of results does not come easily. These best practice departments frequently assess the layout and fit out of their facility to ensure that all stock is quickly and easily accessible. The layout is informed by the same information used to set up the DMS settings and build the stock matrix – your parts categories. Fast moving stock categories are located as close to the service department counter as possible, slower moving stock can be pushed further back. Parts are often pre-picked the night before for common and log book services - a practice that benefits both parts and service operations.

The margins might be tight, but with its high retained selling gross, finding improvements in your parts department can have a great impact on your bottom line. So when was the last time you thought about your forgotten treasure chest?

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