Issue Date: Parts Manager Mar 1, 2010, Posted On: 3/2/2010
Internal parts sales – A source of extra profits? The amount of parts gross profit that's squeezed out of the new and used sales departments depends largely on where the dealer operator's focus is. If the dealership owner, who runs the whole show, puts more emphasis on vehicle sales and treats fixed operations more like a necessity, the chances of increasing internal parts profits are probably minuscule.
Whether the dealer/principal or general manager focuses on fixed operations or not, the fact is that more profits can be generated through internal parts sales for the store as a whole. Developing an action plan, where the dealer operator can see in black and white how extra profits can be realized, may just do the trick. Let's look at some of the ways to generate extra parts profits from internal sales to help develop a sound action plan.
Increasing internal parts prices
There is one approach that holds that internal parts prices should be the same price as the parts department's best wholesale customers. Nonsense! First, it's likely the parts department's best customer has to have great pricing or they'd buy somewhere else. Secondly the higher the parts mark up to the sales department, the more profit the store makes. That's a fact. Skeptical? Let's see why a higher mark up on parts prices can create more profits for the dealership.
As a practical example let's look at used car reconditioning. When a used vehicle is reconditioned, the parts (and labor) used are generally added to the actual cost of the vehicle. When the vehicle is sold, the salesperson is paid a commission on the gross profit. For this example we'll use the following scenarios,
25% commission paid to the vehicle salesperson on gross profit
Parts department personnel are paid a commission for internal parts sales for a total of 10% of the gross profit.
The costs of the parts is $1,000
Scenario #1 - Parts Cost + 25%
Vehicle Selling Price
$15,000
Cost of Vehicle
$10,000
Parts Used with 25% mark up
$1,250
Total Cost of Vehicle
$11,250
Gross Profit on Vehcle
$3,750
Less Salesperson Commission 25%
$938
Operating Profit on Vehicle Sale
$2,812
Gross Profit on Parts Sale
$250
Less Parts Commission 10% of $250
$25
Operating Profit on Parts
$225
Total Store Profit
$3,037
Scenario #2 - Parts at Retail
Vehicle Selling Price
$15,000
Cost of Vehicle
$10,000
Parts Used at Retail Pricing
$1,750
Total Cost of Vehicle
$11,750
Gross Profit on Vehcle
$3,250
Less Salesperson Commission 25%
$813
Operating Profit on Vehicle Sale
$2,437
Gross Profit on Parts Sale
$750
Less Parts Commission 10% of $750
$75
Operating Profit on Parts
$675
Total Store Profit
$3,112
As you can see by these two scenarios, the store made an additional $75 profit by selling the parts to the used car department at retail versus a basic 25% mark-up.
Parts Pricing - New vs. Used
As you know, the majority of internal parts sold for used vehicles goes to reconditioning and the majority sold for new vehicles goes to add-on accessories. Selling parts at a higher mark-up (at retail for example) for new vehicles might be more difficult. Even thought most dealerships have the same parts pricing for all internals, there's no reason that new and used can't have different pricing structures. Most dealerships will use a different pay type for new versus used internal repair orders. Just make sure that the appropriate pricing structures are used for the corresponding pay types.
Parts purchasing discounts
Another method for squeezing more profits out of internals, especially for used car reconditioning is with purchase discounts. The difference between purchase prices and dealer net is an immediate profit when the parts are purchased. Buying aftermarket parts and booking them at factory dealer net can result in even higher immediate profits.
Buying even more expensive parts from other dealers' aging inventory from the discount parts locator can squeeze even more profits out of internals. We recently bought a sunroof with a normal dealer net of $900 for 40% off. With a retail price of $1,500 that's a total profit of $960 ($600 + $360)!
Is your parts department "too expensive?"
Most of us have come across the used car manager that states "why should I buy from you when I can get it for less somewhere else." Unfortunately a lot of used car managers put their own department above the store as a whole. In reality, if they're paid on the profit performance of their department, higher reconditioning costs translate into a smaller paycheck. Admittedly you have to have some empathy for the used car manager.
There's been many a time that I put a pencil to the claims of the used car manager. Every single time, looking at their claims, the store as a whole always made a higher profit. If they can buy a part down the street for $100, our cost may be $80 but the retail price may be $140. The store would have lost $20 if they bought it "somewhere else." Your dealer/principal or general manager needs to see this in writing.
The same scenario works with internal labor. If the internal labor rates are say $80 per hour, the used car manager could have the work performed somewhere else for $60. If you pay a technician $20 an hour, the store would loose $40 an hour if the used car manager had the work done "somewhere else."
Sharp general managers and dealers insist that all reconditioning and accessories be done in-house. That's smart business. If you need to have a meeting with the dealer to squeeze more profits from internal parts sales, have a well thought out plan.
Show him/her, in black and white, how the store can profit by increasing parts pricing. As one last cautionary note, be prepared to accept the wrath of the used car manager.
Jim Clausen is a fixed operations director in Encinitas, California. Contact him at JClausen@roadrunner.com.
