Issue Date: Parts Manager Aug 2008, Posted On: 8/3/2008
Case study: Parts manager runs a tight ship, but profits keep dropping The parts department at an established Mazda dealership in eastern Pennsylvania, by all accounts, is well managed and gets positive feedback from employees and customers alike. The dealership is blessed with a wealth of parts management experience. In addition to the current parts manager, both the service manager and general manger have parts management backgrounds. And yet, the last several years have seen parts department net profits steadily decline.
Let's set the scene:
The department is staffed with 5.6 "full-time equivalent"
Parts manager - 1 ½ years as parts manager; 7 years as a service advisor
2 counter people - one with 2 years experience and the other with 6 months on the job
1 part-time employee who handles inventory stocking
1 wholesale parts rep
Parts deliveries are handled by an outside vendor - PDX
The service department has 9 technicians working in two modules.
Hours of operation:
Monday and Wednesday - 8 a.m. to 8 p.m. Tuesday, Thursday, and Friday - 8 a.m. to 5 p.m. Saturday - 8 a.m. to 4:30 p.m.
Annual sales: $2,292,000
Sales per employee: $43,124 monthly
Gross profit per employee: $9,547
Retained income after controllable expenses: $21.1%
CSI: 93% (1st in the region and 12th nationally)
What set off the alarms in the store, though, is the fact the department, while still profitable overall, has seen its net income drop 32% in a year and it has been trending down for the last ten years.
Performance analysis With nearly $2.3 million in annual sales, we'd expect this parts department with relatively low overhead to be comfortably profitable. But it's not.
At $43,124 in monthly sales per employee (including the outsourced PDX drivers), the department is $4,300/employee below the dealership's benchmark of $47,500. Gross profit per employee likewise is $3,000/employee below the target. And the standard for profits retained after controllable expenses is 30%. So at 21.1%, the department has a steep hill to climb.
And yet, sales on repair orders are running comfortably ahead of forecast and the manager believes he is understaffed for meeting the routine daily demands of the business.
Everyone in the dealership, except perhaps the owner, thinks the parts manager is doing a great job. What's going on?
The story behind the story This case study provides a good example of the Law of Unintended Consequences as applied to a dealership parts department.
About a year before the study was undertaken, the parts manager, in consultation with his general manager, decided to reduce, but not exit, the wholesale parts business. The decision was made for all the right reasons:
Profit margins on wholesale were low
Returned parts created operation headaches and contributed to obsolescence
Credit losses ate up too much profit
Local competition made it very difficult to grow the business to the desired level
The precipitous drop in gross profit and net income is directly attributable to the reduction in wholesale parts sales. The perception among the dealership's wholesale customers is that the store is not committed to them and that they are phasing out the wholesale segment.
The use of an outside service for deliveries contributes to the problem. PDX makes only a morning delivery to the current wholesale customers. If an emergency delivery is needed or if the wrong part is delivered in the morning, nothing happens until the next morning delivery.
Here's the "unintended" part: When the store cut back its wholesale trade, the manager found himself overstocked with parts he had ordered in anticipation of a higher sales level. Around the same time, Mazda instituted an automatic stock replenishment program called RMI (Remote Managed Inventory) and purchase allowances and return reserves were curtailed. Obsolescence has become a chronic problem. Six-months-no-sale parts are now 22% of total inventory.
A plan for profit improvement There is no "right" answer here. Any suggestions for improvement have risks and downsides attached. But clearly something has to be done to get this parts department back on track.
Because of the current work schedule, the department really does need another counter person. But how do you justify adding a person when profits are on the decline?
The big decision is whether or not to re-grow the wholesale business. This was the recommendation and the general manager and parts manager accepted it.
Here's the plan:
Create a plan - the parts manager was charged with developing a business plan for wholesale parts.
Hire a "jack-of-all-trades" type person to cover the parts counter and to make afternoon and emergency deliveries.
Have the current wholesale sales rep tested for aptitude and skills and determine if he is the right person for the job. If not, get someone else.
Limit the wholesale territory to a 25-mile radius around the store.
Work with the dealership controller to establish a proper credit policy, to include running credit checks on customers. This had not been done in the past.
Drop PDX and use a truck with the dealership's name and logo to establish brand identity.
Increase the wholesale discount from 25% to 30% to match the competition.
The payoff While the sales from the expanded wholesale effort can be expected to produce some incremental departmental profit, the ability to generate increased purchase allowances is the real benefit, at least at first.
This is a case of trying to "grow" the store out of an obsolescence problem. As DealersEdge has recommended in our CD How to Rescue Obsolescence Without Crushing the Bottom Line, it is possible to mitigate an obsolescence problem over time by dramatically increasing stocking levels on certain types of parts.
In the case of our Mazda store on the RMI program, increased orders to support the wholesale business plus higher stocking levels on fast-moving parts can produce the following benefits:
Return allowance grows to $10,000 - $12,000 per month
An additional $2,800 monthly allowance is provided for ordering certain fast-moving parts.
By signing on to RMI, the store gets two free end-of-year returns for all obsolete parts.
It's too soon to tell whether the plan will work, but the story is a good illustration of the creative approach one parts manager took to work himself out of a problem that he had created in the first place.