As vehicle-sales profit margins get thinner, it is essential for stores to bolster parts and service operations.
Let’s look at how parts and service-department operations affect dealership profitability and absorption.
The calculation for absorption, or if you prefer, fixed coverage, is the service and parts gross profit stated as a percent of the dealership’s total fixed overhead.
Total fixed overhead is the dealership’s expense spending less variable expenses. The resulting difference between your absorption percentages becomes the responsibility of the new- and used-car departments.
Considering the strain that can exist with vehicle-sales and finance and insurance margins, it is important that we find a way to not only maintain our existing service and parts gross, but to grow it.
Ideal absorption is 100% or more. That’s seldom the case for the average dealership. Let’s look at the most recent yearly trends.
It was 59.6% in 2010; 57.8% in 2011; 56.2% in 2012; and 55.9% in 2013. Although the rate of decline slowed in 2013, the decline continues.
There are multiple ways to affect this percentage. The first is to increase your parts and service gross while controlling the percentage of your total fixed overhead.
The second is to decrease your total fixed overhead by an amount equal to the missing gross.
The third or preferred way is a combination of the two, by increasing your gross and decreasing your total fixed overhead.
Let’s explore our options for changing this downward trend if it exists in your dealership.
First, have defined monthly plans and goals for your parts and service departments. Extend those plans and goals extend to the individual service advisers, technicians and parts sales personnel. Chart the trends in specific areas such as customer pay hours per repair order, hours per repair order in total, technician efficiency, parts sales per repair order and more.
Post the monthly results vs. the objectives in a prominent area listing the individual personnel’s performance.
Are customers offered an option of partial work? For example, “Here are the items that require immediate attention and these items can wait until your next visit.” Often customers will not only accept this option, but appreciate that you are looking out for them.
Do you offer high-closing-rate products to all customers? One of the best items is applying Rain-X to the exterior windows and mirrors. The closing rate for this is and your cost is negligible.
From a performance standpoint, what steps are you taking to improve your performance? Is there an ongoing training program?
Does your service manager conduct a daily meeting to review collective and individual month-to-date performance, workload for the day including internal repair orders, carry over units and appointments scheduled for the day?
Do you track and discuss individual appointment no shows? Do advisers make follow-up calls to those customers? Is the manager actively involved in customer follow-up?
It is important to manage your service department no differently than you manage your sales operation.
Market your service department and track the results of the individual campaigns. Routinely hold service clinics or other special events to create traffic.
Have a strong online presence. If I were to look online for a vehicle service in your city, how near the top of the search-results does your dealership appear?
Do you offer incentives to local tow service companies to create traffic?
From a total fixed overhead or expense standpoint, are you trending the individual categories of expenses?
Do you use sub-accounts to further identify items within categories that can be addressed?
One example I always use is the service-policy account. Using a sub-account, track the policy expense by individual adviser and then compare the individual’s expense with the all-adviser average expense. This is an area where you might potentially discover some misuse of the account.
Another easily misused account is the supplies account. Open a counter ticket for each technician every month and compare their individual use to the average. For those of you who use loaner vehicles, are you tracking the adviser’s use of these vehicles?
I realize a large part of the absorption decline is directly attributable to some automakers’ mandated facility improvements. But I encourage you not to stand by and say “This is the way it is.” There are real options, as many good dealers have found, to address this concern.
Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.