Many parts managers received a rude awakening when they decided that the best way to generate more gross profit was to enter the wholesale parts slugfest. Usually this decision resulted from a dire need to generate more gross profit to cover ever-rising expenses. The manager examined each category of parts sales closely, looking for some legal way to increase income, but found that most sales accounts were controlled by the performance of other managers and dubious circumstances beyond the parts manager's immediate command.
True Story
Let's check out Louie, the parts manager down the street. I remember very well his pessimistic analysis of the situation: "Let's see...service parts sales might be increased. But since I don't have control over service traffic, or the effort put into sales on the service lane, or in the stall, there is really nothing that can be done. Well, maybe a spiff or two to the writers for selling extra parts, or a bonus for technicians to generate parts sales. Naw, won't work.
"Hey, how about warranty upsell! No, I better forget that one.
"New vehicles could be aggressively accessorized. Mats, mud flaps, front covers, air conditioners, radios, mag wheels, mirrors, winches, running boards, bed liners, radar units, air deflectors for sunroofs, fog lights, disc players, custom license frames, cup holders, jackets, and hats. Naw, the sales manager didn't move the last batch I bought, and I keep getting chewed out now about those darn twenty-five-month-old non-returnables.
"Retail! That's it, sell retail parts to retail customers. Wow, what an exciting thought, actually selling parts that everybody else seems to sell but us. I wonder how much we can put in 100 square feet anyway. Maybe if we only had a real entrance door.
"Hey, how about wholesale parts sales? Heck, everybody sells wholesale parts. It's easy and we already have the parts. We will put on a couple of delivery trucks, an 800 line, and even a mailer to all the regional body shops. Everyone will love us and we'll sell parts, and get bigger, and, and we'll get rich. That's it! We'll really get into the wholesale business."
One Year Later
The Boss: "So, Louie, your gross is up by about $7,000 a month. That's the good news. The bad news is, your net is down, and you're going to lose money if this trend continues. How could your expenses have gone up $9,000 a month this year? And why is your inventory up $50,000 when you know we are strapped for cash? Help me, Louie, I don't understand what's happening."
What Happened to Louie?
Two trucks-depreciation costs, $850/month; gas, $1200/month; additional driver, $1500/month with benefits; extra phone line, $65/month; 800 line, $300/month; additional commissions, $1800/month; receivable chargeoffs, $300/month; insurance deductible for driver's wreck, $1000; truck maintenance, $40/month; additional supplies, $80/month; etc., etc. Oh, and wholesale gross margin dropped three percent because of competition.
Where Did Louie Really Go Wrong?
Louie miscalculated both the market and his competition. He also did not put a sharp pencil to the total costs of expanding his business, including the interest charges of maintaining additional inventory. He didn't spend the time necessary to calculate the risks and costs of expanding his business.
Is getting into the wholesale parts slugfest right for you? Maybe and maybe not. Unfortunately, I cannot provide the information for you to make that determination in a magazine column. But in any case, don't take this decision lightly. Make a comprehensive study into all anticipated costs, and into the delicate marketplace from which you will have to extract the gross profit to pay these added costs. Specifically outline the projections backed up by your study and then implement your plan. But be careful, and don't be a Louie.
Ed J Kovalchick is CEO of Net Profit Inc, an international automotive manufacturer and dealer training and management consulting firm located in Alabaster, Alabama. Mr. Kovalchick is a featured speaker and instructor at conventions, 20-Groups, associations, and other automotive-related events worldwide. He is also a former six-franchise new car dealer, and independent shop owner. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3. ekovalchick@dealeronline.com