Sept. 27, 2004 – A Little Corner of Neglect Could Be Worth $63,936

If you are the average, middle-of-the-pack dealership, you are losing $63,936 annually and you don’t even know it.
Good dealers and service managers who focus on repair order parts consistently achieve a ratio of 1 to 1, RO parts sales to RO labor sales. They sell $1 worth of parts on repair orders, for every $1 worth of labor.
However, in analyzing thousands of repair orders over the last year I found that a typical import powersports dealer is running at .82:1, or 82 cents in parts for every $1 of labor. Excluded from my analysis were the Big V Twin dealers who consistently meet or beat the 1 to 1 ratio.
Let’s quantify this. The average import dealership does 2,664 customer repair orders each year. The average total revenue per repair order is $244. A breakdown shows:

Ave. Import Repair Order
Labor $131
Parts 107
Misc. Fees 6
Total $244

The average import dealer loses $24 in parts sales by not achieving a 1 to 1 ratio.

Ave. Import Lost Sales
Labor $131
Parts 107
Lost Sales $24

Which means an annual revenue loss of $63,936 (2,664 RO’s x $24).
Bottom line: If the average dealership could simply bring their service parts revenue in line with their labor revenue, they could expect an additional $63,936 in revenue.
Of the 200 dealerships that I analyzed, the highest dealership was achieving a 1.59:1 parts to labor ratio and the low man on the totem poll was at .39:1.
You can bet the dealer on the high side is doing a full 360° walk-around, up-selling parts and not re-installing the worn parts. My friend on the low side probably doesn’t realize that he is losing $148,944 in sales each year for not being just average at (.82:1) or losing $213,120 each year for falling short of the ideal 1 to 1 ratio.
How can we improve our parts to labor ratio? Some guys would say, “Well, we’ll just lower the labor rate.”
Wrong answer.
Here are 6 practical ways to start up the hill:
n Service Writer Training. Are your service writers properly trained? John Matherson of Mission Motorsports in Laguna Niguel, Calif., explained to me that he teaches his service writers to perform a complete and thorough walk-around in order to up-sell parts. “If the customer comes in for a tire replacement, we automatically check the chain and brake pads.”
This is a soft sell technique that increases parts sales and incidentally, builds customer confidence in you.
Another useful tool used by Mission Motorsports is a check list. They have designed check lists by make and model so that service advisors don’t miss a thing.
n Replacement Parts. Are you reinstalling worn parts? Do you blow out the air filter to capture its last dying breath or do you show the customer the benefits of changing it? Do you continually clean those dirty rusty parts and then slap them back onto the unit? One nut or bolt doesn’t matter, but 10,000 sure do.
n Shop Supplies. Do your techs have a limitless supply of nuts, bolts, cotter pins, fluids, oils, and greases in their bays that you simply recoup by charging “Shop Supplies?”
When practical, you should be charging out the proper part numbers to the repair order. This helps with inventory levels as well as documenting to the customer everything that went onto their machine. It also helps that parts to labor ratio.
n Technicians. Are your technicians roaming through the Parts Department pulling the parts that they need? Those technicians should stay in their bays where they make you and themselves money. All parts requests should be handled by the Parts Department to ensure that they get sold properly to the job.
n Pricing Structure. Is your pricing structure set properly for competitive vs. non-competitive parts? In most computer systems you can escalate parts prices based on categories, suppliers or other criteria.
Competitive parts generally are available through many sources within the dealership’s market area, while non-competitive parts are only available through your dealership or a limited number of outlets. Why are you pricing that O-Ring at book price? You can’t get it at Wal-Mart and customers don’t buy it from you because it is low priced, they buy it because they need it.
A skilled parts manager can work the parts pricing structure to maximize the margin of each part while not offending or driving away customers. The market dictates what you can and can’t charge. If you don’t understand the market you could be under-pricing many items while appearing to gouge on others.
n Service Writer Pay Plan. Even though it is their job, very few service writers make a conscious effort to sell parts unless their pay plan is affected by it. Track their performance like any salesperson and provide them with incentives for selling.
Monitor your parts to labor ratio and make changes to improve it. Don’t just assume that you have to be average at 82 cents on the dollar. There are many things that you can do to directly affect this ratio, and minimum, this little corner of neglect could turn into a little $63,936 pot of gold.
The import parts to labor ratio has been running at .82:1.00. In June and July it dropped 3 points to the .79 range.
– Blake Lawson

Blake Lawson is a senior consultant and analyst with ADP Lightspeed in Salt Lake City Utah.  He has an MBA from Thunderbird and over seven years of experience advising and auditing powersports and automotive dealerships.