Issue Date: Parts Manager May 1, 2010, Posted On: 5/5/2010
Parts Manager Case Study By the numbers: Why this Nissan parts department struggles to turn a profit The parts department for a Nissan dealership in New Jersey generated over $3 million in annual sales. Using the DealersEdge guidelines we would project a net profit of about $240,000 if the parts manager is at the top of his game. This dealership, however, saw only $22,125 in parts profits. What went wrong? Let's take a look at the numbers.
To make sure we're all on the same page, here are the DealersEdge guidelines for a parts department with significant wholesale business:
Parts Department
Target
Method
Sales per employee/month
$47,500
Average monthly parts sales divided by the number of full-time parts dept. employees per the financial statement
Parts gross profit per employee
$12,500
Average monthly gross profit divided by the number of employees
Controllable gross profit
30%
Parts gross (net of parts transfer) minus
personnel expenses, company vehicle expense, other supplies, advertising, policy, data processing, outside services, training, bad debts, freight
The financials
Here's what the parts department financial statement looks like for the year ended December 31, 2009:
Sales
$3,017,640
Gross
754,755
Total Personal Expense
443,704
Total Semi-Fixed Expense
189,069
Total Fixed Expense
99,857
Operating Profit
$ 22,125
The parts department was assigned 11.5 full-time equivalent employees: 1 manager, 2 clerical people, 4 counter people, 4.5 shippers/drivers (the .5 indicates a part-timer).
So right off the bat we see a staffing problem. With average monthly sales of $251,470 the department should support only 5.5 parts employees generating $47,500 in monthly sales. If we look at the average monthly gross profit of $62,896 and a guideline of $12,500 in gross per employee, the recommended staffing level comes in about the same. Any way we cut it, the department is carrying 6 extra people.
At 25% the gross profit percentage is low even considering the wholesale business. So it's not surprising that the controllable gross profit (gross after personnel and semi-fixed expenses) also comes in well below the guideline.
Pricing
Here's a summary of the problem: too many employees or too little revenue and gross profit. Let's dig a little deeper. The sales mix and gross profit results tell us a lot.
Sales
Gross
%
Customer RO
$ 639,603
$225,041
35
Warranty RO
$ 474,207
$125,058
26
Internal RO
$ 199,272
$ 48,027
24
Counter Retail
$ 155,832
$ 65,691
42
Wholesale
$1,507,843
$271,516
18
Now the crux of the problem comes into focus. The parts manager needs to take a more aggressive approach to pricing - across the board. Unless the service department is doing nothing but L-O-Fs, a gross profit margin of 35% is too low. Using a basic pricing matrix we ought to be able to get margins on customer repair orders over 40%, more in line with industry norms. That goes for warranty parts too. In New Jersey, courts have rules that automakers must reimburse dealers at retail rates for warranty parts. While there is some paperwork to be done, most dealers, import and domestic, are marking up warranty parts at 77% to yield a gross profit of 44%.
The question of how to price parts for internal work is a perennial issue. DealersEdge comes down on the side of charging full retail and we have lots of firepower on our side. Mike Nicholes, Lloyd Schiller, Ray Branch, Don Tipton, and Richard Owen have all recommended having the used car department pay retail rates for parts.
At a 42% gross profit, it looks like even the retail parts are being sold too cheaply.
And then we come to wholesale parts. The dealership generates fully half of its parts sales from the wholesale trade, but at what cost? Four parts employees are dedicated to the wholesale business but they are moving all those parts for only 18% gross profit. Is it worth it? When we deduct all the expenses associated with this part of the business, salaries, benefits, delivery vehicles, fuel, bad debts, etc. there is some question as to whether the wholesale business even breaks even for this store.
By simply increasing prices and following a standard matrix, gross profits and net profits can be brought up to industry standards. But the dealer and the parts manager need to have a heart-to-heart talk about the wholesale business. If the dealership owner wants to chase the wholesale trade at cut-rate prices, that's his business. But regular readers of The Parts Manager know that we don't recommend it.
By ranking wholesale customers in order of their profitability and eliminating the losers, the dealership would likely lose a significant portion of these sales, but would also see the parts department profitability surge.
