By Bob Clements
As we begin setting our sights toward the 2009 season, many of us as business owners enter it with nervous hope. With the economy struggling and consumers uncertain about the future, the 2009 season will be a roller coaster at best. As business owners, we should be asking ourselves, “Are we prepared for what is going to happen whether it is good or bad?”
In this article, I want to share some of the strategies my consulting company has been working on with Ahearn Equipment, Inc., an OPE dealership in Spencer, Mass. Owners Tim and Donna Ahearn and their sons Jeremy and Josh decided to take their dealership back to the basics and reset their business to be positioned to grow during these uncertain times.
With the Ahearns, we started with the backbone of every dealership — the service department. Working with Jeremy, who oversees parts and service, we documented their current processes, starting from the point a customer contacts the dealership to initiate a repair until a contact is made within 24 hours after a repair has been completed.
Most service departments follow nine basic steps:
1. Check in
5. Work begins/ends
6. Work documented
7. Customer notified
8. Payment received
9. Customer follow-up
Within these nine steps, there are 62 processes that need to be performed in order for a service department to achieve its maximum efficiency, which is each technician doing eight hours of billable work in an eight-hour day. By breaking down the service process into the basic elements, you have the ability to quickly identify a “bottle-neck” in your system, which will cause service to back up during the heat of the season and hinder your ability to hit your target.
After we addressed the processes, we made adjustments in the compensation programs for the service techs, the parts department and the service manager to make sure they were all rewarded based upon proper execution of the processes. It’s always important in business to remember you get what you inspect and reward. If you want to achieve a higher level of production out of your service department, you have to clearly define your profit goal, inspect what you expect on a daily basis, reward those who meet those expectations, and replace those who can’t.
Just as a quick reminder: When it comes to rewarding techs and service managers, your labor costs-to-labor sales ratio should not exceed 35 percent for the techs and 10 percent for the service managers.
From service, we shifted our attention to the parts department. Again, working with Jeremy, we focused on four basic measurements:
1. Inventory days: Most dealerships look at how well their parts department is doing based upon their “inventory turns” instead of their “inventory days.” Knowing how many times you are able to turn your inventory each year is important, but it’s not a fine enough measurement. While there is no difference between a parts department that averages three turns a year compared to having an average of 126 days of inventory on hand, I would have to question a parts manager who believes in needing to stock more than 70 days of parts inventory. Running tighter inventory levels requires parts managers who can play at the top of their game, but that’s what you are paying them to do.
Use the following formula to determine your inventory days for 2008:
Average Parts Inventory x 365 / Parts Sales
2. Fill rate: Your fill rate is the percentage of time you have the proper part available for your customers without them leaving to purchase the part from one of your competitors. I have seldom found a dealer who couldn’t reduce inventory levels by 25 percent and still have a fill rate in the upper-80- to low-90-percent range. Too many dealers have too many parts, thinking that a lot of parts means a good fill rate. Seldom is that the case. It’s not as important to have a lot of parts as it is to have the right part at the right time.
3. Gross profit margin: As you look at your gross profit margin, regardless of where you are at, your focus should be to move it up. It’s important to make sure the basics for customers — blades, belts, plugs and filters — are priced right. Outside of those items, I encourage all of my dealers to get a little more aggressive with their parts pricing. There is a fine line between overpricing and underpricing parts, and dealers have to make adjustments based upon the lines they handle and the proximity of their competitors on captive parts.
4. Order fill time: Order fill time is a measurement of the time it takes customers to enter and exit your dealership with the part they sought to purchase. The location of your parts relative to your parts counter will determine your order fill time. The OPE and Ag industries have an interesting phenomenon that takes place when it comes to customer flow. You can have no customers in your dealership for two hours and then have 15 come in all at once. As a result, there is no predictable way to staff for the customer flow so you have to work hard to make sure your 100 fastest-moving parts are placed as close as possible to the parts counter.
At Ahearn Equipment, Jeremy is changing his parts location from “Part Number” to “Bin Location.” By doing this, the parts manager has the ability to easily reset the parts department so that the fastest-moving parts are close to the parts counter. With the dual seasons in Massachusetts, between spring and winter, Ahearn Equipment will reset its parts department twice each year — once in January to prepare for the mowing season and again in October to get ready for the snow season.
Now is a great time to measure your order fill time. The next time a customer comes in to buy a part, note the times that customer enters and exits. Your goal is to do anything you can to improve upon that time.
As an OPE dealer, your wholegoods make up your single largest area of exposure when it comes to issues relating to the economy or weather. If everything is great, you come out on top. But with the current issues involving credit availability and job losses across most sectors of the economy, it’s going to be more important than ever to keep your eyes keenly on inventory levels and margins.
As Ahearn Equipment’s sales manager, Josh is focused on three basic elements of wholegood sales:
1. Reducing inventory days: This is a tough area to improve on because it heavily depends on your wholegoods suppliers and how much they pressure you to keep your inventory levels high to receive the best pricing. One of the most important things you can do to help reduce your inventory days is to know your customers well. Many dealerships have equipment sitting in their inventory that isn’t going to be a good fit for their average customer. When times are good, there is nothing wrong with doing some experimenting on different models you don’t normally sell. But when things get tight, the basic meat-and-potatoes equipment is what is going to move. Josh’s focus early in the season is going to be to work hard to sell any “unique product” out of his inventory by offering special pricing to his customers and incentives to his salespeople and then to stay away from restocking it despite possible pressure from the manufacturer.
2. Reduce selling time: During season, time is your enemy and in no department is that more evident than in wholegoods. In selling equipment, it’s critical to find ways to reduce the amount of time it takes to move a customer through the selling process. There is a simple way to accomplish that feat, which involves staging equipment in your showroom or lot.
Most dealers have equipment staged by brand. Brand A is in this area, Brand B in this area, and so on. By segregating your equipment by brand, you are guaranteed to have your customers walk you to each line and have you explain the difference between Brand A and B and then back to Brand A again. To reduce your selling time, put similar models together, regardless of the brand, so that you can quickly move the customer from one to another.
The same holds true with handheld equipment and walk-behind mowers. While it is important to have this type of product available to your customers, it has to be treated like candy at the checkout counter of your local grocery store. You can’t spend 20 minutes trying to sell a product that makes you only $20. If you handle more than one line, put comparable models together so instead of having a customer walk you from one corner of your store to another to explain the differences between one brand and another, you can stand in one spot and quickly outline each product’s unique features.
3. Improving gross profit margins: Selling equipment that starts with good margins is the best solution for boosting your bottom line, but most dealers are like Ahearn Equipment and are set on the major lines they are going to promote. To help add extra margins to the bottom line, we are working with Josh to create packages for each piece of equipment. Those packages will include a combination of extended service, pre-purchased annual maintenance, pickup and delivery, and parts. Your goal in selling wholegoods is to find a way to sell the complete dealership with each piece of equipment. For Josh, a package will add about 10 percent to the investment the customer is going to make in the equipment and will add about 5-percent net profit to the sale for Ahearn Equipment. Although only about 60 percent of the people who purchase the equipment will purchase a package, an extra 5-percent net on 60 percent of your wholegoods sales will add some nice cash flow to any dealer’s business.
Although I don’t know what lies ahead for the 2009 season, I do know for sure that it is going to be turbulent and that you need to be positioned to take advantage of any opportunity that arises. I encourage each of you to take time over the next couple of weeks to give some serious thought to ways you can take your dealership back to the basics. Evaluate your service, parts and wholegoods, looking for ways to reduce wasted time in the service department, a bloated parts inventory, and low margins on wholegoods. Going back to the basics in your dealership will improve its cash flow and give you the edge you are going to need to make the 2009 season a success.
Bob Clements is the president of Bob Clements International, Inc., a consulting firm that specializes in the development of high-performance dealerships. His organization works hands on with dealerships throughout North America, helping them attain the personal freedom and financial wealth all owners strive to achieve. For more information, contact Bob Clements at (800) 480-0737 or firstname.lastname@example.org or visit his website at www.bobclements.com.