|IN THIS ISSUE FEBRUARY 2013|
By upgrading parameters and employing unique ways of reaching out to customers, dealers are improving the top and bottom lines of their parts business.
For most farm equipment dealers, the gross margin on parts sales is three to four times that generated by sales of new wholegoods. According to the South Western Assn.’s 2011 Cost of Doing Business Study, the typical dealership gross margin on new equipment sales ranged from 6.4% to 9.3%. The sale of parts and accessories, on the other hand, produces a 31% margin regardless of the dealership’s sales volume.
In other words, it’s a solid margin that dealers can bank on. And in many cases, it doesn’t require the level of investment in facilities and personnel that it would take to effectively expand service operations.
Some dealers even say they’re doing quite a bit better than the benchmark gross margins.
“The sale of parts has always been important because it produces the highest margins of any segment in my business,” say Bill Shrock, owner and president of Plevna Implement in Kokomo, Ind. In fact, his one-store operation, which handles AGCO and Massey Ferguson equipment, is achieving a 36.1% gross margin on parts, higher than any other dealership in its 20 Group.
In the last five years, Shrock says, Plevna has grown its parts business by just shy of $1 million. He believes, with some continuing refinements, margins and parts turns can be further improved when he gets his newly opened store in Nappanee, Ind., up and running at full capacity.
Other dealers are also upgrading their parts operations; recognizing even a percent or two improvement can produce a major impact on their bottom lines.
Defining the Metrics
Kathy Guthrie, a dealer development specialist with John Deere, works with dealers to help optimize their parts operations. The basic operational metrics she works with include first-pass fill, turns, zero sales and stock order percentage.
First-pass fill can be measured in a few different ways, but Deere measures it as “all or nothing,” according to Guthrie. “If a customer wants five parts and walk out of the dealership with only four, their fill on that part is zero because the customer didn’t get everything they wanted. I know some companies measure it differently.”
She adds that Deere’s measurement considers all parts, not just the stocked parts. “So naturally, it’s going to be a lower percentage than if it were only stocked parts being measured.”
“Turns,” or how fast inventory is moved, and “zero sales” are closely linked, says Guthrie. In fact, she notes, many of the metrics of a parts department performance are highly correlated and processes are often highly dependent on one another.
For example, she says, “If you have a high zero sales on parts, your turns are going to be lower. That’s going to bring that measurement down.”
“We know that a certain amount of zero sales inventory will always exist; the key is to control the inventory within guidelines,” says Guthrie. “It’s not that we would expect a dealer to have nothing in zero sales, because there are so many machines and so many parts that it would be impossible to have ‘zero’ zero sales. Our guideline is between 10-12% zero sales of the dealer’s total parts inventory.”
Another example is the relationship between turns and fill percent. “There’s a very fine line between turns and percent of fill because you want to bring in enough to please your customers, yet you don’t want to bring in so much that it’s going to sit there,” she says. “This is why it’s very important to fine tune your parameters so that you’re ordering what the customers are needing, not just because you want to bring something in.”
The fourth metric, stock order percent, measures the dealership’s ordering performance to obtain parts with the stock order and special terms discount as well as prepaid freight. The figure is based on the percent of dollars ordered on the stock order and special terms orders.
“Our dealers have the opportunity to order parts on special terms programs. These programs offer greater discounts, prepaid freight and special payment terms. Because of this, we encourage dealers to order as much as they can on these programs, as long as it makes sense and are parts they know they can sell,” says Guthrie.
“We also encourage our dealers to have a conversation with customers when they need a part that the dealer does not have in inventory. If the customer can wait two to three days for the part, it can be added to the next stock order. That way the dealer will get the discount and the customer saves on freight. However, if it’s an emergency, customer parts can always be ordered machine down for next day delivery.”
‘Refining’ the Processes
Guthrie has found for many dealers, merely “tweaking” their parts operations are often what’s needed to improve bottom-line results. There are a few things she’s observed that dealers can do that will produce positive results pretty quickly.
The first, she says, is to place stock orders every day. “We know dealers get busy and it’s easy to put it off. But if they have their business system set up correctly, it’s designed to bring in the parts that should be ordered on a daily basis.”
The second thing is establishing the discipline of doing surplus returns every month.
“Together, these two affect the four major metrics dealers need to keep track of,” says Guthrie. “For example, if they’re not returning their surplus inventory every month, it builds up and can turn into zero sales.
“I can’t speak to other companies, but we have return indicators on parts that lets the dealer know whether or not they’re returnable. When Deere decides that a part is going to be non-returnable and places it on the delete list, they give the dealer 30 days to get that part returned before they can’t return it any more. So every month when the dealer processes their surplus returns, they should do a return on the parts that are becoming non-returnable,” says Guthrie.
Another area where dealers need to pay close attention, she says, is inventory control. Customers have more confidence in dealers who have established good inventory control practices because he’s able to tell them quickly if the part’s available or not.
Also, she points out, with accurate inventories, dealer ordering is more efficient, “because when they’re placing an order, the system takes into consideration what’s already on hand. So if your inventory isn’t correct, the order’s not going to be right, so it all goes hand in hand really.”
One of the recent beneficiaries of Deere’s parts optimization process is West Central Equipment, a four-store dealer group in Pennsylvania that had been experiencing the growing pains of becoming a multi-store operation beginning in 2008.
Typically, the dealership focused on the traditional metrics of parts absorption and turns, according to Bryon Hoburg, West Central Equipment’s corporate parts manager. “The first thing we look at is absorption, which improved by 6.75% during the past year or so. Then we look to see how we’re turning those parts over. Along with turns, of course, is our dead stock, as well as our stock order percentage to make sure we’re not giving up discounts,” he says.
Hoburg says he’s paid particular attention to dead stock since becoming responsible for parts operations at the four stores three years ago because once a part becomes non-returnable, a dealer has only three options — and at least two of them are not good.
The first, he says, is to hopefully find another store in the dealer group that can sell it. Single stores don’t usually have this option and for smaller dealers the option is very limited, at best.
“The next option is to find an organization that will purchase your dead, non-returnable stock. Of course they’re purchasing that at a greatly reduced price. The final option is scrapping the parts. When a part sat for a predetermined time, we literally threw it away. We no longer do that since I’ve taken over this position,” Hoburg says.
This is where the interplay between parts metrics comes into play. Hoburg says by paying close attention to stock order percent, obsolete or aged inventory can be minimized.
The stock order percent is the percentage of product that the dealership receives from John Deere as part of its daily stock order. “So the higher that stock order percentage is, the more lucrative it is for the dealership and our customers because parts sent to us ‘machine down’ or as an emergency order incurs freight charges.”
He says Deere’s goal is to have its dealers at 80% stock orders. “We are right at that threshold and were able to improve it by a half of a percent this past year,” says Hoburg. “Our goal is for our first pass fill to be over 80% within the next 12 months.”
Hoburg explains that West Central implemented the strategy to improve its first pass fill rate as it embarked on becoming a multi-store operation. They replaced their antiquated business software with Deere’s EQUIP™ system and, with the its help, have been “tweaking” it ever since.
“They helped us detail our daily stock orders and to look closer at the parts that we were selling in the timeframes that we wanted to target, and to better define those parameters. In other words, when we’re in June, we want parts we sell in June, not parts we sell in December. Once we did that, we saw a huge difference in having what the customers want on stock the first time they come in.”
He says the dealership also “greatly” improved its inventory accuracy. “We had some challenges with our barcode scanners and through the optimization process, we identified some practices and procedures we needed to improve. We were able to modify those and now our inventory is much more accurate. If you don’t have accurate inventory, you’re not going to have first pass fills where you want them to be. You’re also not getting satisfied customers or as many repeat customers.”
Increasing Sales, Improving Profitability
In addition to overall parts sales, margin, fill rate, first pass fill rate and inventory turn, Nelson Horning, corporate parts manager for Messick’s in Elizabethtown, Pa., also keeps close track of salary expense as a percent of margin in measuring the performance of the dealership’s parts operations. It’s also played a significant role in expanding the dealership’s parts business and improving its bottom line by monitoring personnel costs.
Currently, the dealership is achieving a gross margin of 30.5% on parts sales and is in the range of two to three turns. But all performance criteria must lead back to profitability, says Horning. That’s the number one performance criteria.
Messick’s operates five New Holland dealerships throughout eastern Pennsylvania and carries somewhere in the neighborhood of $10 million in parts inventory. In addition to the standard store sales, for several years the dealer group has also employed traveling parts salespeople.
Horning says the dealership pays particular attention to salary expense as a percent of margin because, “As far as the profitability of the company or the parts department, there are two major costs. One is inventory costs, or what are you paying interest on, what are you losing in obsolete parts, that type of thing. Then there’s salary expense, or what percent of your margin is going out to employees.
“One method that we have utilized that helps us control some of our salary expense is we’ll have between 10-20 part time, seasonal employees throughout the course of a year, which is typically a much cheaper cost of labor to us because we don’t have benefits and we can fluctuate their hours based on our needs.”
The second action Messick’s has taken is a second shift in shipping and receiving. “This is an area that is extremely busy for us because of the quantity of parts we move in and out. So we actually run an evening shift over our busier times, which are again staffed with part time people. It allows us to get some work done in off hours where we just really can’t put any more people in the mix during the day. We’re busy pulling orders and shipping them out. A second shift allows us to replenish the bin in the evening and it does it in a way that doesn’t add a bunch of overtime salary,” says Horning.
The bottom line in this approach has allowed Messick’s to grow it parts business without significantly adding to its salary expense.
“This is the type of thing that we’re looking at right now to see if we can improve efficiencies in our parts operations, and each would be geared around the salary expense that we have,” says Horning.
At its Elizabethtown location, Messick’s employs 42 full time employees and 10-20 part time employees at any given time. So a small percentage of the dealership’s total salary figures can make a big difference in what he pays out. “For a lot of dealers salary percentage is not as big a deal because they’re working with four or five people. But it’s become important to us because of the number of people we have.”
Parts on the Road
Another method Messick’s is utilizing to expand its parts business is putting parts employees on the road to sell and develop relationships with customers. “We can see by doing this, it clearly adds numbers to our total sales,” says Horning. “It’s a harder thing to determine whether there’s added sales to justify putting a person on the road when you include a vehicle and that sort of thing.”
He adds that dealers may find it difficult to justify putting a full time employee on the road to sell parts and he understands why — because it’s difficult to quantify what level of business he’s actually creating vs. business they would have gotten in any case.
“This is what makes it difficult. I can see growth, but would I have gotten some of that growth without the guy on the road? I get service business, I get sales business as a result of a relationship that my parts guy may have started, but that’s really difficult to measure. But it is easy for us to go out and say that the areas that I have put a parts employee on the road and asked him to go into those areas, we can clearly see growth in those areas.”
Making Ordering Easy
Horning says that to this point, Messick’s has focused on placing parts orders as flexible as possible, including developing their own mobile phone app.
“As far as parts sales, we have a web presence out there that generates business for us. We look at it as wanting to provide all the resources that we can to the customer, and then let them use whatever options they want to do business with us.”
The dealership is set up to accept orders via its website, fax, email or customers can use an app on their mobile phone. “You can look up the parts and call us and tell us what you want, or you can just call in or come in and have somebody do all that stuff for you,” Horning says.
With their mobile phone app, customers can look up parts on their phone and place the order.
Their system is designed to provide an automatic response acknowledging the order was placed. The customer receives an email when they place an order and when it’s shipped, which includes a tracking number. He says there’s no doubt that making it easy for customers to do business with them and the flexibility the dealer offers has significantly added to Messick’s part business in recent years.
Follow the Numbers — Using ROI to Sell More than Iron