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December 2017
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The manager manages, or does he/she?

In writing this month’s article, I went back and researched articles I’ve written in the past years. The following article, written well over twenty years ago, was chosen to update and repeat almost as written. I’ve known many equipment dealers, in many industries who have read our articles and made changes to better market, manage and merchandising their product support. They have told me of their success. They have reaped benefits in both increased product support sales as well as product support profitability.

So this article is not for those dealers who successfully made necessary changes years ago, but for those dealers who: hesitated, put-off, never got around to it, or never really comprehended their unknown opportunities!

Aftermarket services and/or product support over the past five to ten years have become recognized as highly important profit centers for the equipment dealer. In fact, many equipment dealers would have been hard pressed to have survived the last 10 years of business without them. While there is recognition, few really recognize the magnitude of this part of their business. Caterpillar, in a recent article published that their dealers globally were leaving $18 Billion on the table.

Responsibilities of service and parts managers have changed dramatically over the past 20 years. During any business day these managers will find themselves wearing many hats. They are now responsible as: asset managers, people managers, computer managers, market managers, sales managers, merchandising managers, advertising managers and many times they also find themselves called upon to be credit managers.

It should be recognized that a dealer’s parts and service departments have more personal contact with dealer’s customers than any other department within the dealership and their personal relationships and handling of your customer’s concerns are key drivers of customer satisfaction which leads to the dealer’s increased market share.

We have all heard over the years that the best salesperson does not necessarily make the best sales manager. It is also true that the best counter-person does not necessarily make the best parts manager nor does the best technician make the best service manager.

Too often equipment dealers (most come from sales or other related business areas) fail to recognize the profit opportunities available to them in both service and parts. Unless equipment dealers begin to perform customer/market analysis and measure the profitability of their parts and service potential opportunities, they will continue to miss their goals and opportunities.

Service managers are managing a fully equipped expensive shop, numerous pieces of expensive over the road equipment, thousands of dollars in special shop tools, technicians whose training cost exceed, in some cases $60,000 apiece. Financial models of equipment dealerships are predicting that in two to three years 50% of the dealership’s employees will be involved and managed by the service manager.

A parts manager is managing a dealer’s inventory running from $25,000 to well over a million and is spending more of the dealership’s hard-earned cash than anyone else in the dealership, sometimes under control and sometimes not under control.

Understanding the scope of these two managers’ responsibilities and duties as well as understanding the importance of these positions to the financial strength of a dealership is far more imperative today than ever before. Measuring a parts and service department continues to lag behind the measurement of the other departments within the dealership.  If you don’t measure it, then you can’t manage it!

Recent studies indicate that, of the four or five profit centers, a dealer principal spends the least amount of his time in the service department. Could there be any correlation between that and the fact that the service department is one department that continues to ignore their unknown opportunity?

Unfortunately most parts and service managers came into their present positions through attrition and time in grade. Their skills were learned from the previous managers and through on the job training.

Their experience, gained from their predecessors, all too many times was lacking in certain skill sets needed in a changing market.

Too few dealers spend time instructing their managers in the fundamentals of accounting or measuring their department. Also too few dealers share departmental financial information with a manager, making it impossible for that manager to manage his/her department.

Concern and interest in a typical equipment dealership has always centered and focused around the sale of whole goods. That can be explained, as the sales department will tell you: Without the sale of equipment there would be no aftermarket!

There is a simple measurement to bring into perspective parts and service sales to show how additional profit improvement in these departments relates to the sale of complete goods. We have always referred to this measurement as the giant funnel theory.

In the need to examine the makeup and nature from a profit standpoint, visualize your dealership as a giant funnel. Into the top of this funnel will be placed the gross sales receipts from all the dealership’s profit centers. The funnel represents the cost of doing business with the variable, fixed and semi-fixed expenses incurred by the different departments.

From the bottom of the funnel will drip the left over or net profit. This is expressed as a percent of gross sales collectively within the dealership.

The impact of all this is that for every dollar of gross sales poured into the top of the funnel, only a few cents drops through as net profit. A dealer’s basic goal would be to pour more sales into the top of the funnel, expand the opening at the bottom and, finally, allow more net profit to flow through.

An interesting aspect of the funnel theory is to reverse the flow. On the negative side, assume your dealership came up short at parts inventory time in the amount of $5,000. Divide this loss by your net profit to determine how many dollars in gross sales would be necessary to make up for this particular loss.  Example: $5,000 divided by .04% = $125,000.  If you cut a customer’s service bill by $100 divided by .04% = $2,500 in increased sales.

The easiest way to realize a profit is to stop losing it!

On the positive side and bringing parts and service sales into their proper perspective, consider the following examples: Assume your current parts sales are $752,482 and your gross profit on parts is 30% or $225,774. In the next year you increase your parts sales a mere 10% while maintaining the same gross profit. Your parts sales are now $827,730. Your gross profit dollars have increased to $248,319 for an improvement of $22,545.

Your dealership’s net is 4%. Divide the gross profit dollar improvement of $22,545 by 4% and you arrive at $564,375. In order to make $22,545 in gross profit dollars at 4% net, the dealership would have to generate $563,626 in new equipment sales.

Here is an example of how service through measurement and goal setting can improve the total profitability of a dealership. Present service sales of $847,282 at a gross profit of 58% generate gross profit dollars of $491,423. Here again the dealer through better service marketing improves his service sales by a mere 10% to $932,010. His gross profit dollars improved to $540,565 or an increase of $49,142. Divided this number by the dealer’s 4% and you can see this is equivalent to complete goods sales of $1,228,502.

Measuring and in turn planning to achieve your dealership’s goals in parts and service is quite possibly the best method for dealers to accomplish the basic goals of increasing both volume and profits.

It is imperative to measure both the profit center and the individual working within that profit center.

The final measurement in both parts and service is the overall goal of achieving a 100%+ Absorption Rate. Achieving this percentage requires a teamwork effort but in the long run establishes financial strength for the dealership, making it possible for a dealer to weather any business downturn and to become extremely competitive in the complete goods market.

Many equipment dealerships indicate that absorption rate is the ultimate goal of everything that is done in the dealership. It is a negative thinking dealer who believes that 100%+ is unachievable.

Apply the same techniques to your aftermarket that you have applied to your complete goods and you will be successful. Opportunities exist today to develop your dealership’s profitability and financial strength. Seek out and go after these opportunities! For the past six years we have referred to these opportunities as unknown and/or unfocused opportunities. The unknown opportunities are as “plain as the nose on your face” once you begin analyze some specific computer reports.

Two of our most popular manuals: Service Marketing, & Fourteen Steps to Increased Product Support Sales & Profits are offered to you this month for our low price of $16.99, if you are interested please email us at , give us your name, address, dealership and lines of equipment handled and your manuals and invoice will be emailed immediately, pay only if you are satisfied with the two manuals is our guarantee . . .

John R. Walker is president of Aftermarket Services Consulting Co. Inc. E-mail to contact John.