Maximize profits with in-house repairs and installations
Sometimes it seems easier to go outside the dealership for an accessory.
For instance, if the new-car sales manager wants fancy wheels and tires for a showroom vehicle, why not get those from the tire and wheel shop down the street.
What about a major repair on a used car that needs reconditioning? Some used-car managers feel compelled to send out the repair because their shop will charge too much.
Unfortunately many dealerships either don't want to hassle with it or feel the charges are too excessive internally. But just about any endeavor that creates more profits requires some extra work and some hassles.
Accessory installations and used-car repairs are no exceptions.
Let's look at those.
Reconditioning Used Cars
If the used-car sales manager is free to have reconditioning or repairs performed at an outside shop, chances are that's going to happen.
After all, the used-car manager is probably compensated on department profits. If he can have the work done outside for less, it translates into more profits for his department and more money in his wallet.
You really can't fault used-car managers. They're just doing what they feel is best for their own department. However what may be good for one department isn't necessarily good for the dealership as a whole.
Even though the pre-owned department may be able to cut a good deal on parts and labor from an outside shop, the independent shop still has to make a profit.
The dealership's parts department is perfectly capable of buying parts at the same price level as an independent shop. Likewise the hourly labor rate charged by the outside shop is certainly higher than the amount paid to the dealerships technicians.
Let's look at a typical scenario where the used car manager made a deal with an outside shop for parts at cost plus 20% and a labor rate of $50 per hour.
The dealership's internal parts pricing policy is cost plus 25% and an internal labor rate of $65 per hour. For this example we'll assume that parts costs are $400, the average technician makes $20 per hour and five hours labor is charged on the repair (see figure above).
The used-car department would save $95 using an outside shop, but the dealership would earn no profits.
If the repair were done in house, it would cost more, but a fixed-operations gross profit of $300 would more than offset that. So, the dealership would be ahead by $205 doing the job itself.
The total additional profit for the dealership would have been $205. If the dealership sells 100 used vehicles a month that would be an additional $20,500 in gross profit.
External Accessory Installation
New-car sales managers is no different than used-car managers when it comes to making a profit for their departments. Given the choice, they're inclined to use an outside source for accessory installations to save a few bucks.
The same profit scenario as the example given for used-car repairs can apply to accessory installation, especially when it comes to the labor charge.
The actual cost of the aftermarket accessory could be substantially less than a factory accessory. However factory accessories can have other benefits to the dealership's customer that should be considered. Among them, they:
- Coincide with new-vehicle factory warranties.
- Could be applied to lease residual values.
- Are easier to finance.
- Are engineered to factory specifications.
Analyzing Sublet Invoices
In most dealerships, invoices for sublet repairs usually pass by the parts manager's desk. To find out how much potential profit the dealership may be losing, have the parts manager analyze sublet invoices for what the repairs would have cost if they were done in house.
Using the above used-car repair example, find out how much profit parts and service would have made. Then look at the total profit the dealership would have realized if the repairs were done in house.
Do the same for aftermarket accessory installations. Also look for sublet work that the dealership currently doesn't do in house, such as glass, upholstery, spray-on bed liners, alarms, machine-shop work and so on. Then ask: Would it be more profitable to do some of these internally?
A simple analysis of sublet work could reveal potential profit opportunities. And if the dealership elects to do more in house, make sure to show a little empathy for the new and used car managers.
Fixed-operations expert James Clausen is a veteran of the auto industry.
Questions or comments about this column?
Send us an e-mail at Dealers@wardsauto.com.