Controlling Parts Costs

by Art Little

This article appeared in the October 2013 issue of Transmission Digest.

"Are you out of your mind Art ? I'm not giving my checkbook to the builder ! " That is what I was told by an old school owner when I was the general manager of his three transmissions shops back in the day. We were arguing back and forth trying to figure out how to get our parts costs in line like many of you nowadays. His position was that it has always been the managers responsibility to control our parts costs . My position was that we should change that policy and make the rebuilder responsible for what parts we buy and make the manager responsible for selling the repair for enough to reach our parts percentage goal. That policy change would make the manager accountable for the sales amount and the builder accountable for the parts amount. The installers worked for the builder and all R&R parts were approved by the builder. The new policy in effect, would have employees share accountability , as a team , in an effort to reach our parts percentage goal.

Then, I suggested that we implement a bonus plan that would pay all the employees if they were successful at reaching our parts goal. We had just set a company wide goal of 22% on all retail major automatic repairs . That included mounts , flywheels, electrical components etc... Every quarter , if the goal was reached, a bonus check for the difference would be paid to the manager to disperse as he saw fit. The owners response was, "So now, you want me to pay them a bonus to do their job? I replied, "They are not going to do it because they love us sir", and the policy was changed.

I had a meeting with each shop and clearly explained the goal and the new policy. The employees liked the idea. The builders got control of what parts were purchased. That is what they wanted. The managers got what they wanted too. Not to have to mess with it. Most builders know what parts they need without the help of a manager. Besides that, if you do not allow the builder to buy the parts he wants...he will make sure the unit does not work. Or, if it comes back for warranty it is the managers fault for not letting him buy the parts he needed. A manager can't win that game. So they were both happy.

With the new policy, the builder gave the manager his parts list and the manager could not eliminate anything from the list. The manager then took the list and shopped the order with a minimum of two vendors. I monitored that procedure daily and at the end of every week, I would get the numbers together and take a look at the good, the bad and the ugly with the manager and the builder as a team and individually. That was the new policy.

It wasn't long before I started to hear builders tell managers to go back in the office and upsell the job to get the parts percentage in line. Managers began calling the dealerships and talking to the service departments to find out what the dealer charged for the same transmission they were pricing up. I heard builders in production meetings explaining how they could save some parts money if they had this or that. Installers were getting in the game too by taking flywheels, mounts, axles and other parts that were ordered and not used , and returning them to the manager so he could get credit for the parts .

It was an interesting study in human nature to see how my managers divided their bonus money with their production employees. Some just split the cash with their crew. Others were a little more creative and bought BBQ grills or refrigerators for the shop. Some chose to use their bonus check to buy tickets to sporting events and other area attractions. The bonus money financed the fun. They all worked and played together as a team. Instead of blindly spending the money at the parts house, they all worked together to control parts costs and used the savings to blow off a little steam.

Turns out , there was less warranty work and employee turnover was even slowed down because no one wanted to lose their quarterly parts bonus. But, the best news was that our profit margin immediately increased with that policy change and continued to be one of the keys to keeping our profit margin in line for many years afterwards. It would be hard to say how much money that policy change made the company over the long haul.

Lets face it, if you are going to make any real money in this businesses, you have to control your parts cost. Your parts control policy may be a potential area of your business where you can make a few changes and really make a difference in controlling costs and creating profits. If you are ready to get your parts costs in line, here are some suggestions that will help you get started up.

• Look at your current pricing Increasing the sales amount is the fastest way to decrease your parts cost percentage. Do not make the mistake of pricing your work to compete with other transmission shops in the area. Do a little research. Make a list of the most common transmissions you have worked on in the last 12 months. Take the top 15 units and call the dealerships in your area to find out what the dealerships are charging to do the same work. Price your work from there. The dealerships in your area set your current local market price.
• Set your personal parts cost goal Be realistic. Most shops are happy with a 4-5X multiple or 20% to 25 % of what the retail transmission repair sells for. Standard transmissions are 2-3X and 2-3X for wholesale or 33% to 50%. General repairs have various margins and should be monitored separately.
• Establish a team goal and a bonus plan. Have a meeting to educate the employees on exactly what your goals are and what their responsibilities are. Explain what they will receive if they meet your goals. The idea is to make your personal goal a team goal that requires a team effort.
• Let the vendors know you are shopping When they know you are shopping, they have to compete. If you don't shop, they don't have to compete. Make them compete for and earn your businesses on every order. That is the American way.
• Bulk Purchasing You can save money when you purchase in bulk but, it creates a few problems. It ties up your money, you have to keep up with an inventory and theft also comes to mind. However, if you can get by that , bulk purchasing is a way to buy parts cheaper. Place a bulk order or two. You will be surprised at what you see. A starting point might be to price shop overhaul kits for your top selling units. If you can afford to spend now and save later, this can be a money saving procedure and create more profit for you.
• Know what to stock Only stock what you use on a regular basis. Keep a few hard to get items around to expedite production. Eliminate parts from your inventory that are not used on a regular basis. There are circumstances when purchasing cores can save you money but, be careful not to purchase cores that you do not use right way. It takes up space and creates clutter .
• Monitor parts purchases daily. Policies and procedures are worthless if they are not followed up on. If the manager or builder is not following parts purchasing policies and procedures, this is the time to find out about it. Not from the accountants at the end of the month.
• Monitor parts amount vs sales amount daily. By managing just these two numbers, you can keep up with the managers sales amount and see what your parts costs are on each sale. If the manager has undersold the job you can see it and take action on it immediately with the manager to possibly upsell the job to get the parts percentage back in line. If the builders parts are not in line, you can ask them to keep on shopping and find less expensive parts. As an owner, this is where you want to address the problem, not at the end of the month, when it is too late.
• Be Consistent You must be consistent to be successful. You must hold the employees accountable for following the new policy and procedures on a regular basis. Daily monitoring and a short sales and parts purchasing meeting once a week is an easy way to do your part as an owner.
• Price shop every order. Create and enforce a parts shopping procedure that shops at least two vendors on every order. You will be surprised at how much money that proceedure will save you over the long haul.

The last one is easier said than done because most managers do not like to shop for parts. The managers say it takes too much time to shop for parts. That's easy for the managers to say because they do not have to pay the parts bill.

Most shop owners do not see it that way. They think that the cost of the parts order is far more important than the delivery time. That is easy for them to say because they do not have to talk to the customer when his vehicle is not ready.

Time or money. That's the crux of the problem many owners and managers deal with. There are times when delivery time is very important and times when it is not. Sometimes, it may be to the shops advantage to pay a little more and get it sooner. Other times , delivery time is not a big deal and the manager can save the shop money by waiting. The main thing is to take the time to shop and know the differences in price and delivery time so the manager can make an intelligent choice.

Don't be afraid to make policy changes at your shop. Good things do happen. If you just save $100.00 a week, that puts $5, 200 pure profit in your pocket at the end of the year. The real key to your success is to make parts cost important to all of your employees, not just you. Our industry has changed alot over the years, but the people haven't . It has been my experience that if you give your employees a chance to help you... they will.

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