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Profitable Wholesale for the Average Dealership
by: Jim Richter
In the last issue we discussed the elements required to develop and maintain a profitable Customer Base.
- Customer Development, which entails identifying, qualifying, and servicing specific customers that we want to continue doing business with over an extended period of time. We talked about the need to train our customers to work within the terms and conditions we have as franchised dealers, while at the same time learning their needs so that we provide a Level of Service that meets those needs most often. Customer maintenance is a two-way street; neither side is always right, nor are they always wrong. Be clear stating your requirements, explain them so that your customer understands, and be fair and consistent in the enforcement of them. Remember that when you set up your terms and conditions they have to be reasonable to live by; if they are not then they will be violated.
- Product Availability, which relates to the quality of the inventory that is developed for the Customer Base. Most wholesale customers fall into two primary classifications; Hard or Repair parts used by independent repair shops and other franchised dealers, and Crash parts used by Collision Centers. We discussed the need to separately source the Crash parts since they constitute an entirely different customer base, pricing structure, and demand cycle. We also talked about the need to manage these sources differently from our standard repair parts sources, and the importance of qualifying orders and controlling returns to minimize the accumulation of obsolescence.
- Customer Service, which deals with how we do business on a daily basis. We discussed handling communications, both by telephone and Internet, as to who, where, and when it occurs. We also noted the importance of having qualified people managing these contacts, both to maximize sales as well as minimizing returns and obsolescence. We also noted the importance of management involvement in problem resolution. Timely and effective problem solving goes a long way toward maintaining a loyal customer base. Finally we looked beyond traditional delivery methods using 3rd party drop when it is available, and other methods of delivery besides our own trucks.
OK, so we’ve got our Customer Base, and we’ve staffed correctly to the size of that Customer Base, and we’ve developed a selling inventory for that Customer Base (aren’t we good???); what are we going to charge for our products and services? The following is the complicated answer to what appears to be a simple question.
Break down your business into the various segments.
The Wholesale business basically breaks down into two distinct types, Collision or Crash, and Hard or Repair parts. All too often I see a store that does not make these distinctions, stocking and pricing all wholesale parts as one. This leads to poor inventory development and lost Gross Profits.
- Collision
The Collision business is managed by the insurance industry today. They dictate which parts will be allowed for the repairs, either as Original Equipment (OE), Like Kind or Quality (LKQ), or Used and how much they will pay for them. This severely limits the pricing strategy for the parts suppliers, particularly franchised dealers. Generally the MSRP price is quoted on the estimate, and the parts Gross Profit to the Collision Center is determined by the discount from that price that they are able to purchase the parts for. In the case of the independent shop this usually results in demands for the lowest price offered by any competitor. The captive dealership owned shop is usually governed by a distribution of profits determined by management, ranging anywhere from nothing for the Collision Center to a 50/50 split between them and the Parts Department. The issue here is to manage the independent accounts.
- Repair Parts
The Repair Parts business is not managed by any outside agency, unlike the Collision business, and therefore has very few rules or regulations. There is no formal pricing structure, and pricing is largely driven by availability first, and market pricing second. This is further broken down by whether the parts have aftermarket alternatives, or whether they are the only ones available. You’ll notice I listed availability first for a very good reason. The typical independent repair shop has a limited number of bays, so their objective is to move a vehicle through the shop as quickly as they can. A few dollars difference on a part is of little consequence to them compared to the hours they cannot produce while the stall is blocked with an incomplete repair, generating no revenue until parts are acquired and repairs are completed. These sales have a much greater profit potential, by their nature, than Collision parts ever will, and illustrate why inventory selection is so critical.
Break down your customers into their respective business segments
All too often I hear new clients tell me that they have a “Wholesale” or “Trade” price that they use for every wholesale customer. That makes no sense! We’ve already seen that there is a disparity between what sales to the Collision and Repair markets can provide in Gross Profits, but beyond that we need to look at how good that customer is in terms of purchases and returns.
Most Dealer Management Systems (DMS) provide reports that show the purchase, payment, and return histories of customers. Every current customer should have their history reviewed on a regular basis, checking for current tax ID as well, and have a Price Level Code assigned that reflects the quality of their business. Most of the DMS in use today provide for this level of control; the key to its success is getting your people to use it properly. In order for this to be used effectively the person quoting prices and availability must enter the customer ID number into the DMS before quoting a price. All too often I see the “Standard” price given when a customer may not deserve it, or may have earned a better one. This leads to overrides and adjustments which reduces your control over pricing and Gross Profits.
Establish Price Level Codes for various sale types and performance criteria
Price Level Codes (PLC) are assigned to customers based on the wholesale segment they participate in, and the quality of their business history.
- Collision Price Levels are usually be based on discounts from MSRP since this is the way part prices are quoted by the insurance companies. In some rare cases or locations you may be able to use a Matrix List Price (MLP), but most independent operators are wise to this by now. There should be an initial discount level, followed by successive levels which are awarded based on purchases and returns. Don’t start new customers out at the best discount, make them earn it! Be especially aware of returns, and what they do to your Adjusted Gross Profit. When you give credit for a non-stocking part you issue a check for the entire value of the part, and don’t recover the cost until it is resold or returned to the supplier. If you end up scrapping it then the entire value of the credit comes off the initial Gross Profits. Customers with high returns deserve minimum discounts; only those with good purchase and return histories deserve your best discounts.
A sample of what you may consider is as follows:
- Price Level 5 – MSRP minus 15% This is for new and unproven customers.
- Price Level 6 – MSRP minus 16% This is the first “bump” used as an encouragement.
- Price Level 7 – MSRP minus 20% This is for average established customers.
- Price Level 8 – MSRP minus 23% This is for above average established customers.
- Price Level 9 – MSRP minus 25% This is reserved for only the best customers.
- Repair Price Levels should be based on Cost Plus for maximum control of Gross Profit Levels. In most cases your customers either do not know the MSRP, or don’t care since they will simply mark up from your invoice price. Once again the highest mark-up is assigned to new customers. As they prove themselves worthy through additional purchases and minimal returns you may want to reward good performance by granting additional discounts through different and progressively lower cost PLC’s. You can even develop a published program which shows your customers how they can earn additional discounts through proper performance, thereby adding to their profitability as well.
A sample of what you may consider is as follows:
- Price Level 10 – COST plus 50% This is for new and unproven customers.
- Price Level 11 – COST plus 45% This is the first “bump” used as an encouragement.
- Price Level 12 – COST plus 40% This is for average established customers.
- Price Level 13 – COST plus 35% This is for above average established customers.
- Price Level 14 – COST plus 30% This is reserved for only the best customers.
Closing thoughts on Wholesale Operations
I’ll bet some of you thought I had a magic one-price formula for managing a profitable wholesale operation. As you should now see there cannot be such a thing. In fact, in order to be successful in the wholesale business you need to manage your business, especially in the face of a lower profit potential than you have from the dealership workshop. As the manager you are responsible for all of these activities, not your sales people.
- You establish the pricing structure through the Price Level Codes.
- You establish the criteria which assigns these PLC’s to customers.
- You review the histories and assign the PLC accordingly.
- You manage the inventory that provides product to these customers.
- You manage the Customer Service provided by your staff and resources.
- You resolve customer problems.
- You answer to dealership Executive Management for the overall performance of Parts Operations.
Do Wholesale Parts Sales have a role in the “average” dealership today? In my opinion the answer is an overwhelming YES! Every workshop goes through periods of low production, and Wholesale is a way to smooth out these highs and lows for the dealership. It should be viewed as a separate business under the roof of Parts Operations; in fact if it is run properly it can provide supplemental inventory selection for the workshop, especially if the Repair Parts segment is pursued aggressively. There are always vehicles that are outside the dealership’s control, be they too old, or perhaps too far away to be convenient for service. Why lose all of the business when you can get some of it through Wholesale Parts Sales?
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