From 2007 to 2009 State Farm Insurance, the nation's largest auto insurer, tested a parts ordering program with repair facilities who participated in their DRP program in California and Indiana. That program revolved around a parts discount to State Farm from the auto manufacturers, which was facilitated through an electronic parts ordering program. In April of 2011, nearly two years after the conclusion of the previous test program, State Farm released an online video discussing future parts ordering initiatives. That same month, Insurance & Technology published an article referencing a report released by Stephen Applebaum and the Aite group, which clearly stated that "State Farm is leading the way to greater control of the auto repair procurement process with its announcement of a new electronic parts-ordering initiative."
Below is a real example of the resulting quotes from the bidding process for parts necessary to repair front-end damage on a job requiring only 4 parts: 3 bumper components and a lamp.
These slides are screen captures of pricing bid on by OEM dealers where the PartsTrader program is currently testing in the United States. As you can see, one dealer maintained the OEM MSRP list price, while the other two offered a 15.46% discount off the list price, reducing the list price by $54.42. You will also notice that the margin on the discounted parts is 2% lower than the part with the MSRP pricing. What this means is that the repair facility will make $25.00 less profit on this part and the dealer will make $29.42 less in profit. The insurance carrier will save $54.42 due to the reduction in the list price. Will the consumer ever see any of these savings, or do these savings increase the carrier's profit margin?
On this part, the two of the dealers have offered a 23.52% discount on the list price, with a 2.01% decrease in margin. This equates to a $5.66 loss in profit to the repair facility, a $7.97 loss to the dealer and a $13.63 savings to the insurance carrier.
On this part, two of the dealers have offered a 23.39% discount on the list price, with a 2% decrease in margin. This equates to a $2.57 loss in profit to the repair facility, a $3.62 loss to the dealer and a $6.19 savings to the insurance carrier.
As you can see, on this part, two of the OEM dealers have offered a 22.09% discount on the list price, with a 2% decrease in margin. If the shop selected OEM, this equates to an $18.29 loss in profit to the repair facility, a $25.20 loss to the dealer and a $43.49 savings to the insurance carrier. However, this slide also contains 3 "Recycled Grade A" part options. The cheapest used part is listed at $25.00 cost. Hypothetically, if the repairer were to bill this part with a 25% markup, that part would list on the estimate for $31.25, producing $6.25 in profit to the repair facility. In comparison to the OEM part with the OEM MSRP, the used part could equate to a $62.65 loss in profit dollars to the repair facility, while saving the insurance carrier $165.61.
Looking at this scenario, a small repair with only 4 front-end parts, the numbers appear to be staggering. If the cheapest part was selected in each of these occasions, the overall parts order would result in the repair facility losing $95.88 in parts profit in comparison to if all the parts were ordered using traditional OEM MSRP; conversely, this program will save the insurance company $239.85.
Every collision repairer could ask themselves, is this a win-win situation? For anyone looking to understand the impact on their business, there are numerous resources available to repair facilities to analyze the economic impact that adjustements to profit centers, such as this, can have on your bottom line.
Aside from the loss of real money associated with parts dollars, there are additional expenses to consider as well. There is a waiting period before an estimate can be locked while the repair facility waits for quotes. Once those quotes are received, each part price needs to be manually re-entered into the estimate before it can be committed. This particular example only has 4 parts; how much administrative cost is associated with that task if there are 40 parts? What is the cost of potentially dealing with multiple suppliers to maintain the most "competitive price"?
It is too early to have answers to many of these questions, but repair facilities in the U.S. would be well served to start looking at how programs such as this impact your business now, and how you wish to react to them in the interest of your business' health and welfare.