From the Desk of Mike Anderson: Making the Most of the ‘Parts’ Portion of Your Business
Written by Mike Anderson, Autobody News
Published July 8, 2020
Parts consistently make up 40% of total repair order dollars, so it’s well worth it for shop owners to pay careful attention to the role parts play within their business.
This month, I wanted to share the first of two columns outlaying some best practices related to parts I think could improve your shop’s operations and bottom line.
Best Practice: Make sure you’re accurately tracking your parts profitability.
As almost anyone who has attended one of my classes knows, I’m a big proponent of the value of detailed and dead-on accurate accounting practices and profit and loss statements. That’s where good P&L account and sub-account categories are needed.
You shouldn’t just track labor income, for example. “Labor” is one account; the sub-accounts include “body labor,” “paint labor,” “frame labor,” “mechanical labor,” etc.
When it comes to your parts account, I believe you need sub-accounts for OEM parts, aftermarket or non-OEM parts---which may also include accessories---and salvage or recycled parts. Some people break out remanufactured parts.
But one often missed sub-account is “stock parts.” Stock parts include things like seam sealer, double-sided tape, weld-through primer and cavity wax. These are not paint materials. They are parts you put on the vehicle.
The old adage of “junk in, junk out” applies in terms of entering parts on estimates and in your shop management and accounting systems. You might list seam sealer as an aftermarket part on your estimate because there’s not a “stock part” option in that system. But when you transfer that estimate into your management and accounting systems, you need to make sure the systems are mapped properly to reclassify that item into the proper sub-account.
One of the other common accounting mistakes I see centers around parts price-matching, when you choose to use an OEM part in place of an aftermarket part, for example. When that happens, it’s important that whoever inputs your parts invoices understands how to properly change that to an OEM part within your management and accounting systems.
If that doesn’t happen, the accounting system will presume you sold an aftermarket part, but the cost for that part goes into the OEM sub-account. That results in an overstatement of your profit on aftermarket parts, and understates your profit on OEM parts.
Best Practice: Know your gross profit margins on different types of parts.
Using your sub-accounts properly will help ensure you have accurate information on your parts profits by type. Most shops I see are making between 20% and 32% gross profit on OEM parts, for example.
But keep in mind lots of factors can influence that. Your buying power can result in higher or lower discounts compared to other shops. Your mix of work can play a role; parts profits may be higher or lower depending on whether your repair a lot of domestic vehicles, or a lot of Asian or European import vehicles. Even what part of the country your shop is in can affect discounts and profits.
Most shops are making between 30% to 45% gross profit on aftermarket parts. Again, buying power and discounts vary.
Given that there aren’t list prices for recycled or salvage parts, most shops are marking up the cost of those parts. Don’t confuse mark-up with gross profit. When a shop marks up a part 20%, it is making a 17% gross profit; when it marks them up 25%, it is making a 20% gross profit.
Most shops find their margins on stock parts are similar to their margins on paint materials.
Best Practice: Don’t make parts decisions based solely on gross profit margins.
I’m not going to argue here about the merits of using OEM or aftermarket parts. But I will say you should take into consideration factors beyond just gross profit percentages.
In some cases, for example, it may take a technician added time to install an aftermarket part. Given the average collision technician generates $100 in gross profits per hour, an added 30 minutes installing a part costs you $50, even aside from any impact on efficiency and cycle time.
Can you get remunerated for that added labor? Perhaps. A “Who Pays for What?” survey last year found 29% of shops said they bill the insurer for this labor at the shop’s retail rate, and another 10% said they bill the parts vendor. But 21% said they only billed for this at a discounted labor rate, and another 22% said they most commonly didn’t bill for the labor in such situations.
On the other hand, some could argue the higher profit margin on a less expensive alternative part makes sense if an older vehicle has discontinued parts or is close to being an economic total loss.
As you read through some of my other parts best practices, you’ll see other factors---such as the availability of the part, vendor performance and parts ordering efficiency---can play a role in making the best parts decision. Price or discount should not be the only considerations.
Best Practice: Consider all the costs associated with ordering of parts.
Those of you who have studied and worked to implement “lean principles” within your business know lean is all about eliminating waste. Waste includes the time we spend on things we do for free. I don’t know any shop including a line item on estimates or invoices for “order parts.” That’s work shops do “for free.”
So if you’re not getting paid to order parts, would you rather do that two or three or even four times per job---or just once?
Making that a reality starts with 100% disassembly of the vehicle to identify every broken, damaged or one-time-use part needed for that job. (I’ll discuss one-time-use parts more in next month’s column.)
I also believe shops need to be using an electronic parts ordering solution. It saves time---no one should be waiting on-hold to place a parts order---and improves parts ordering accuracy. It ensures the parts vendor has the VIN, vehicle production date and other information to help them validate the parts ordered match the vehicle being repaired. Some electronic parts ordering systems automatically do this scrub of the parts order and tell you if a part doesn’t match the VIN. That’s a great feature for shops.
Next month’s column will offer more best practices related to parts.