Profit Center Series (Part II): Parts

Second in a three-part series:

Leadership and management are key

By Jeff Sheets

The parts department of an OPE dealership is the profit center where more people are involved and the most transactions take place every day. If you just allow the parts department to be run without really truly managing it, you’re really making the decision to allow a large part of your business to be a thorn in your side rather than your flagship. Owners need to be as obsessive as possible about this part of the business because your reputation and overall health of your business are at stake. What separates you from big box stores, shade-tree mechanics, and other OPE pretenders? Your parts department, which combined with your service department, gives you a competitive advantage over all types of competition. I will talk more about the service department in the third part of this series, but know that these two areas make for a mighty combination when they work well together.

How do you manage your parts department to be more efficient and serve your customers the way it should? Here are four ways:

#1 Serve the largest customer well

The first rule of managing your parts department is that you must realize who your biggest customer is: the service department! The service department is often treated like the smallest customer by the parts department. I have seen technicians waiting behind customers to get a part! On multiple levels, that is bad. Technicians should never have to wait on a part or leave their service bay to get one. It’s the parts department’s job to pull parts and deliver them to the service department. If you don’t have the ability to do this now, then you need to hire an employee to be responsible for doing this on a part-time basis. Inefficiency exists when a job can’t be done because it is dependent on a poor process. You need to fill this hole in your process immediately. When I go to dealerships and help them, the relationship between the parts and service departments is one of the hardest things for them to change because of years of operating the wrong way. Instead of the parts and service departments working together, there is a negative relationship, and it causes inefficiencies in both departments.

Some owners cause problems by allowing technicians from the service department to pull their own parts. This is a very bad solution to the problem. No one should touch the parts inventory other than parts personnel. You need that restriction, so that you can keep inventories in good shape. Who is more likely to make sure that a part is put on a ticket? A parts employee. If you are having inventory shrinkage problems, the culprit can be identified as the one who is allowed to pull parts. You need to be sure that every part that is taken out of the parts department is accounted for. If the parts department treats the service department as its #1 customer, you solve both of these problems.

If you’re concerned about how to afford paying a person to keep the service department supplied with parts, you can increase your parts pricing to the service department because, in a way, you have to treat it differently than an over-the-counter customer. I suggest a 5-percent-or-less increase on service parts. Some software programs will calculate this automatically if you set the additional percentage for service parts.

#2 Manage inventory

Inventory turns are extremely important. When I walked into a dealership several years ago, it was like going back into time. The dealership had a 50-foot by 50-foot room with more parts than I had ever seen in one place. It was a dealership that had been in business for about 75 years and still had parts that looked that old. It was shocking. Today, we live in a world where you want to carry the parts necessary for your customers but not be too deep in on-hand inventory, especially when you have the ability to order a part and have it shipped to you within 48 hours in most cases. Let the manufacturer be the one keeping the inventory on its shelves, especially the most expensive, rarely sold parts. Doing this makes sure that your parts department is lean and allows you to use your cash flow in other ways. Many times, I have seen dealers so over-invested in parts that their cash flow is almost non-existent.

Increasing your turns of inventory depends on a good parts history so that you understand what you have sold in numbers of every part over the years. (This is an area where a good business management system is vital.) You need to be aware of old parts that are becoming obsolete, so you can back down on the number of parts that you stock as soon as possible. If you stocked three parts and noticed you only sold one in the past year, it might be time to set your re-order point to zero. At this point, you might be asking when to stock a part, and here is my suggestion. When you see three demands in a 90-day period, then I would suggest you stock one and not more until you see the long-term demand. The worst thing you can do is try to have one of everything. What you want is to have more depth in your fast-moving parts (e.g. belts, blades, filters) that are sold and turned often. What should be your annual goal in inventory turns (parts sales cost/year-end inventory cost)? My goal for most dealers is to shoot for four turns in inventory per year. Many of the dealers I see and analyze are between one and two inventory turns. I’ve seen dealers with as many as 10 turns in parts inventory, but at that point, you have to be ordering every day and there would be a need to stay on top of this because stock-outs could pose a serious problem at any point above four turns.

To really put yourselves in the proper position, you need to get rid of old inventory so you can start fresh. I would look at your parts history, and if you have not sold an individual part in 12 months, I would write that part off and take it out of inventory. You can sell it either online or have a separate listing for obsolete parts that you can refer to if someone would need the part. Every year, you should look to write off some inventory, so that you’re as lean as possible in your parts department. You never want your inventory to be so extensive that you have so many parts that they are hard to find. That leads me into my next point.

#3 Parts area should be as small as possible

I favor using parts cabinets such as those offered by Lista, a Stanley Black & Decker storage brand. You can put an incredible amount of parts in a smaller area — generally, 8 feet of shelving back to back or 16 linear feet. Take your excessive parts space, and utilize it for service or sales. Oftentimes, you need more space in other areas of your dealership, and you have wasted space in the parts department. If you can display more products on your showroom floor or free up more room for another technician, this gives you an opportunity to redistribute space. The smaller the parts department, the closer you can get the parts to your salespeople. You never want your people disappearing for minutes where customers can’t see them. I suggest getting rid of the parts room and just place the cabinets directly behind the counter. In the long run, you will save time providing parts for your customers, and time equals money.

#4 Shoot for higher margins in the parts department

In my article titled “3 ways to revolutionize your dealership” in January 2015 OPE, I suggested implementing a parts pricing matrix that effectively can move your gross margins in your parts department from 35 percent to 50 percent by trying to get larger margins on lower-priced parts. Do not think that dealer price is all that you can sell your parts for. Matrix pricing can make your profits grow exponentially. Just do it! Hardware stores and discount stores have been doing this successfully for years.

In the first part of this three-part series in February 2015 OPE, I wrote about customer satisfaction, which would also be applicable to this discussion. Since this is a series, I don’t want to cover the same thing repeatedly. Refer to the February article for my thoughts on how you should treat customers who enter your dealership. Needless to say, you need to make sure that you are looking out for your customers’ needs and processing them as quickly and efficiently as possible. You need to be great in your organization and your efficiency behind the scenes, but it really is the customers who are the most important. You can never go wrong when you serve them well.

Jeff Sheets is the founder and owner of OPE Consulting Services. Whether a business is thriving or struggling to survive, Sheets’ rich experience in both the corporate and not-for-profit sectors allows him to partner with business owners to customize unique strategies for their needs. For the past nine years, he has worked extensively with hundreds of outdoor power equipment dealers to create best practices in business structure, personnel management and financial profitability. For more information, he may be contacted at opeconsultingservices@gmail.com or (816) 260-5430. You can also follow him on Twitter @opeconsult, connect with him on LinkedIn, and visit his website at www.opeconsultingservices.com.