A. Little Help
- Author: Art Little
- Subject Matter: Management
- Issue: Parts expense
“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 was, and always has been, the manager’s responsibility to control our parts costs. My position was that we should change that policy and make the rebuilder responsible for which 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 companywide 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 distribute as he saw fit. The owner’s 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 which parts were purchased. That is what they wanted. Most builders know which parts they need without the help of a manager. Besides, as a manager, it has been my experience 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 manager’s fault for not letting him buy the parts he needed. 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. 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. That was the new policy.
It wasn’t long before I started to hear builders tell managers to go back into the office and up-sell the job to get the parts percentage in line. Managers began calling the dealerships and talking with 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 but not used and returning them to the manager so he could get credit for the parts. The new policy caught on fire and kind of went from there.
It was an interesting study in human psychology to see how my managers divided their bonus money with the production employees. Some just split the cash with their crew. Others were a little more creative and bought barbecue grills or refrigerators for the shop. Some chose to use their bonus checks 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 even slowed because no one wanted to lose their quarterly parts bonus. The best news, though, was that our profit margin immediately increased with that policy change and continued to be the key to keeping our profit margin in line for many years afterward. It would be hard to say how much money that policy change made the company over the long haul. That was one time that changing a policy really paid off for the company and everyone who worked there.
Our industry has changed a lot over the years, but the people haven’t. The old-school “transmission man”-type owners are slowly fading out and giving way to the “businessman”-type owners. This is nothing new, but the difference is that there are a lot more businessmen than transmission men nowadays.
Businessman owners are defined as absentee owners or owners who do not spend all day working at the shop as the transmission men do. They look at their shop as a business investment. These guys are tied to the computer and look at numbers all day. Many have mastered Google advertising and have killer websites. They know how to get hits on their websites and they know how to make the phone ring. However, many of them have everything going on except a profit margin that is in line with the money they have invested in their businesses, and they don’t know why.
Transmission men are defined as working owners with technical backgrounds. They look at their businesses as a workplace where they are their own boss. They typically have a good crew who work well together and pride themselves on being able to fix anything. However, many of them struggle with marketing and sales and don’t know how to compete in today’s market.
The businessmen tend to focus on numbers their accountants have assembled for them. The transmission man is more involved in the workflow decisions, tends to look at production reports and parts costs, and gives less focus to what the accountants give him. In today’s world, to be successful, each has to focus on both. The transmission man needs to be more sales and business minded, and the businessman has to get more involved with the workflow process.
When you stand back and look at it, most transmission men do not understand or do not want to be bothered with the marketing and sales process at their business. They have no interest in talking with the customer. As a result, they have to rely on marketing and sales professionals to advise and help them. They have no real control over that because they do not have the educational background or experience they need. So, they focus on what they do best – improving workflow.
On the other hand, most businessmen do not understand or do not want to be bothered with the workflow aspect of their business and, as a result, have to rely on employees to make workflow decisions. They have no real control over that part of the business because they do not have the educational background or experience they need. So, they are not involved in the day-to-day workflow decisions. They get involved only when it is time to cut a check. By then, workflow decisions have been made and the money has been spent. It is too late. So they do what they do best: cut a check and try to figure out how to cover it.
Regardless of whether you are a transmission man or a businessman, if you are going to make a decent profit in today’s marketplace you have to control parts cost. When you look at the costs of owning a transmission specialty shop, parts and labor are your big expenses. The recession forced us all to figure out creative ways to cut waste and save money on our labor costs. I am suggesting in this article that your parts-purchasing policy is a potential area of your business where you can make a few changes and really make a difference in controlling costs and creating profits.
Here are some commonsense suggestions that will get you started whether you fit the businessman model, the transmission-man model or somewhere in between.
- 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 past 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 a parts goal for the shop. I have looked at a lot of pricing models, and basically we all like to price according to what our parts cost us. Most shops are happy with at least a four- to five-times multiple, or 20%-25 % of what the retail transmission repair sold for. The multiple is two to three times for standard transmissions and for wholesale. General repairs do not fall into those categories. They typically are priced according to what the market will bear but can be monitored for gross profit.
- Make everyone responsible for parts costs by setting up a bonus plan. 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 so that they have to compete. If you don’t shop, they don’t have to compete for your order. Make them compete for and earn your businesses on every order.
- Bulk purchasing. You can save money when you buy in bulk, but it creates a few problems. It ties up your money, you have to keep up with an inventory and theft can be a problem. 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 the top 15 units. If you can afford to spend now and save later, this can be a money-saving procedure and create profit.
- Know what to stock. Stock only what you use on a regular basis. A few hard-to-get items are good to have around to expedite production. Remove parts that are not used regularly. There are circumstances when buying cores can save you money, but be careful not to buy cores that you won’t use right way. They take up space, create clutter and tie up your money. A starting point for what to stock might be to look at your shop’s top 15 units and stock what you need for those units. Get volume pricing on kits and other parts that commonly fail on those units. Stock only what makes sense to you.
- Never price a job until you know your parts costs. This is the quickest way to get upside down on parts costs, and it’s hard to make up lost ground.
- Monitor parts purchases a couple of times 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 sales and know your parts costs on each sale. If the manager has undersold the job you can see it and take action on it immediately with the manager and possibly up-sell the job and get the parts percentage in line. If the builder’s parts are not in line, you can send the manager back to shop for 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. If you just change the policy and do not consistently monitor the sales and parts costs with your employees, there is no sense in changing the parts-purchasing policy. You must hold the employees accountable for following the new policy and procedures regularly. Daily monitoring and a short sales and parts-purchasing meeting once a week are an easy way to do your part as an owner.
- Price-shop every order. Create and enforce a parts-shopping procedure, and shop at least two vendors on every order. You will be surprised at how much money that will save you over the long haul. If you save just $100 a week, that creates a profit of $5,200 a year.
That last one is easier said than done, because most managers do not like to shop for parts. The crux of the problem between owners and managers is that 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 explain to the customer why 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. It may be to the shop’s advantage to pay a little more and get it sooner. Other times it is not a big deal and the manager can save the shop money. 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. A good parts-control plan can be easily accomplished by clearly defining your parts-cost goals and creating policies and procedures that define each employee’s responsibilities. As an owner, you have to make sure the new policy is realistic and then consistently follow up to make sure everyone is doing their job. The real key to success is to make parts costs important to all employees, not just you. That way you are not in it alone. Misery loves company. Get everybody on your team involved and working on parts control with you. It has been my experience that if you give your employees a chance to help you, they will. As I said, our industry may have changed, but the people in our industry have not.
Art Little is the founder of TransTeam. His website is the home of the National Employment Headquarters for the transmission industry. He has been an industry pioneer in Internet technology since 1997, and his background in shops goes back almost 30 years. He is respected nationwide as an owner and manager who specializes in multiple-shop management. Today he is a software developer for the transmission industry, offering apps that make everyday tasks in a transmission shop easy by using today’s technology. TransTeam’s mobile technology puts transmission-shop production on a smart phone. Art invites all Transmission Digest shop-owner fans to go to his website and become a TransTeam fan. Visit www.transteam.com
