Tuesday, 03 April 2012 16:57

Potential Economic Impact of Parts Bidding on Collision Repair

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."

While the article was brief, Applebaum's post on the Aite site elaborated that "the U.S. collision industry repairs about 10 million vehicles annually, at an average cost of about US$3,000 each, for a total of approximately US$30 billion. Of that, parts represent 33%, or about US$10 billion. Given the level of influence carriers exert and that much being spent on parts, it is inevitable that carriers will seek to gain greater visibility into, and control over, the parts procurement process.  After all, each percentage point is worth US$100 million to someone." Less than a year later, in the early months of 2012, the carrier began testing the program - an online parts-ordering/bidding software program developed by a New Zealand firm called PartsTrader - in areas of the United States such as Tucson, AZ and Birmingham, AL. State Farm facilitated the rollout in test areas with both the parts vendors as well as the repair shops in their network. In a letter issued to parts suppliers, State Farm wrote "All repairers currently participating in the Select Service program have agreed to use automated replacement parts locating services or applications if requested by State Farm, and will be required to use PartsTrader. Suppliers registered with PartsTrader will have the ability to provide competitive pricing on the entire parts order through the quoting process which may provide opportunities to increase sales volumes." Other communications were sent to repair facilities outlining the electronic parts ordering and estimate workflow process. Under the program, State Farm instructs the repair facilities to follow workflow steps, such as: Write a complete estimate with the OEM parts listed in the database and save in preliminary status. Export the estimate to your EMS directory. The PartsTrader software will pull the parts list into the application automatically. Within PartsTrader, forward the quote request to all part suppliers (quote time is adjustable by the repairer). When the quote time expires, review quote responses and order selected parts. Update the estimate with the selected part types and prices. Upload the committed estimate. Note: The same procedure should be followed on supplements. In cases where a "recycled" assembly is required, select the "recycled" part type on the estimate with a price of zero dollars so that the suppliers recognize the need for an assembly. State Farm Auto Claims Consultant, George Avery, was quoted in a CollisionWeek interview discussing the new program in April of 2011, indicating that "the feel this time is a little bit different in that we are committed to exploring this because we see the benefit for the repairer, the supplier, the customer and, of course, us. The test before, there was a lot of learning there, that points to the fact that parts procurement offers a lot of efficiencies to be gained." However as the test rolls out, many in the industry are wondering what benefits truly exist for the repairer, the supplier and the customer? The benefit to State Farm is clear; there is an obvious savings for the carrier through the use of the program.



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.

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