We make no apologies for returning to the subject of parts wholesaling again because it appears, judging by our workload, that this sector is seeing a real renaissance in the franchised sector. However our work with several vehicle manufacturers, looking at network performance on their behalf, has highlighted one interesting problem – staff lacking basic knowledge.

To be more specific, staff, and this sometimes includes parts managers, are less than adequately equipped to extract maximum performance from their business. It is not, as you might think, a deficiency of technical skills or product knowledge, but a lack of commercial acumen. Perhaps this was inevitable given the sophistication of stock control computers, which mean many staff members can get by with a minimal understanding of how the parts department’s financial model works – until the day dawns when thing go wrong, of course. In this respect it seems that available training quite often misses the mark.

By way of example, we came across a franchised parts wholesaling operation turning over £3 million including retail, workshop, bodyshop and trade; the latter accounting for 70% of turnover. The overall gross profit margin on these sales was just over 20% (after stock adjustments) and the operating or direct profit margin a fraction under 10%. With a contribution of almost £300K to the dealership you might be happy with this result and, admittedly, it is by no means the worst we have come across. What made us unhappy was it could have been so much better – at least £30K better.

The problem was a simple one: small percentages building up to bigger percentages. Buying margins were off the average of similar franchised operations as were sales discounts. All of this added up to an overall gross margin that was at least one percentage point – equivalent to a shortfall of £30K in profits - down on the average and some way off the best performers.

Ignoring stock adjustments, the dealer’s parts department results could be described as follows. For parts worth £100 at retail, they paid £54.40. When they sold the parts the average discount given was 31.9% off retail resulting in a sale price of £68.10. Hence the overall gross margin was £13.70 divided by £68.10, or 20.1%. The average overall gross margin for almost identical businesses of the same franchise, with a similar buying and selling mix, was 21.2% because they bought at £54.00 and sold at £68.50.

The lower than average buying discount was caused by bad deals on non-OE parts and equally poor deals on OE parts bought from other dealers. The selling margins suffered because discounts given on captive accident repair parts were too generous.

The parts manager in this case could extract the relevant data from the computer, but he was unable to analyse the results and isolate the fall-down areas. With appropriate training and a better grasp of key yardsticks, he has now added £45K to his department’s contribution.

Written by Trend Tracker director Chris Oakham, this piece first appeared his column in the subscription monthly Auto Retail Bulletin in December 2007. (See //auto-retail.co.uk
for subscription details.)

Chris Oakham

Trend Tracker Limited

0870 421 4350

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