Parts Network Cuts Warranty Firm’s Costs, May Lead to New Car-Dealer Offerings

Texas-based dealer-services provider EFG Companies is using its purchasing power to cut costs and improve the reliability of vehicle repairs performed under its extended-warranty plans, a movement that ultimately could translate into new services for franchised automobile dealers.

Earlier this year, EFG launched its Parts Wizard network that leverages the firm’s $40 million-$50 million in annual parts-buying power to ensure repair shops use only certified components when making fixes to vehicles covered by its service contracts.

The network saves EFG a tidy sum of money and customers considerable frustration by helping ensure vehicles won’t need to be brought back repeatedly for the same repair, the company says.

“Before Parts Wizard, there were several cars we saw multiple times for the same failures,” says Barry Carter, EFG’s chief financial officer and chief operating officer. “We had one particular Mercedes (in which) we replaced the front struts on three times.”

Since launching Parts Wizard, the number of returning problems has dropped drastically, he says.

Here’s how Parts Wizard works. EFG has built a network of close to 10 go-to components providers with strong quality-assurance programs who have agreed to provide warranties on both parts and labor performed during an EFG-covered repair.

If one of their replacement parts fails prematurely, these suppliers will absorb the cost of replacing it again for the remaining life of the extended warranty (up to five years), saving EFG money and helping ensure only high-quality parts are delivered in the first place.

Repair shops that call in a claim against an EFG extended-warranty policy – typically independent operations, not franchised dealers – must agree to meet those same cost and warranty requirements on the parts they use and work they do or EFG will tap its Parts Wizard exchange to secure the necessary supplier-backed components and ship them directly to the repair shop.

“Parts Wizard is an electronic interface (that) allows us to source the highest-quality, lowest-cost part from our suppliers and provide it to (independent) repair facilities so we can ensure we get a quality repair and we’re not seeing that same repair over and over again,” Carter says.

“(Franchised) dealerships do a very good job in their service bays of ensuring the customer gets high-quality service,” he adds. “What we try to do is when the customer defects from the dealership circle, (we want to) provide that same level of quality in the (independent) repair facilities.”

In addition to the money it spends on parts, EFG doles out an equivalent amount on labor to complete the repairs covered by the more than 1 million warranty contracts it has in force. So the bottom-line effect from making the fix right the first time is considerable.

“Our sense is that it is saving us over seven figures a year,” Carter says.

Although Parts Wizard mainly is focused on supplying high-quality, low-cost parts to independent repair shops, it also is leading EFG in new product directions for franchised dealers.

Under study is whether the firm can begin to offer warranties on spot repairs made by franchised dealers by taking advantage of the Parts Wizard network and its deep understanding of parts failure rates and repair costs.

The goal would be to offer the service customer the option of purchasing an extended warranty on a full vehicle subsystem after having a related defective part replaced. For example, someone bringing a vehicle to a dealer for replacement of the vehicle’s air-conditioning compressor could opt to pay slightly more in exchange for a 3-year extended warranty on the entire cooling system.

“We’re trying to crack that puzzle,” Carter says of the business model, noting EFG already has started down this path by offering warranties on engines and transmissions through its Drive Forever program. “There are a couple of selective parts we’ve taken the risk on and worked with actuaries and underwriters to offer protection on those ourselves right now.

“We’re testing, getting our feet wet,” he adds. “There’s still a lot of math we have to do.”

The service drive is where EFG sees the biggest opportunity for dealers to boost revenue near term, particularly if U.S. new-vehicle sales ease over the next couple of years as expected.

“The circles I’m running in say we’ve got to get real good at keeping the customer coming back for our service” notes John Stephens, EFG senior vice president-dealer services. “So fixed ops is something we’ve got to get really good at.”

Offering the extended warranty on system repairs could be one way to help build repeat business at franchise dealerships, the company says.

“(There’s) an opportunity for some loyalty and a little bit of incremental profit,” Carter says, adding more study is needed. “We know from our partners that offer the lifetime powertrain warranties, they have greater customer loyalty, and we know people go to their dealerships as a consequence of them providing that protection.

“So connecting all the dots, there’s a segment of customers who want protection…and that would drive their buying behaviors,” he adds. “But we don’t have good data about how much they would value that in the service drive.”

That leaves timing for launching such potential products still to be determined, Carter says, but EFG is tentatively targeting sometime next year.

[email protected] @DavidZoia