In the latest of our series, thanks to legendary service advisor trainer, Lloyd Schiller, of LloydSchiller.com and Brooke Samples of Profit Blueprints, Brooke looks at the debate surrounding what the sales department should pay for repairs and maintenance.
Most dealerships elect doing most work at a Retail Labour Rate, understanding that the cost of the work will be passed on to the vehicle customer, and the dealership ultimately will make more profit since the sales department typically sells from cost on used vehicles.
Internal labour rate
There are, however, still dealerships whose Internal Labour Rate is 50 – 50 per cent of the retail labour rate and deeply discount the parts. To those dealerships I pose the following question:
What if you’re the Used Vehicle Manager and every week you bring in a beautiful trade at a great price and you expect to make $2,000 on it, plus finance income? Now you’re told to sell it to an employee for $500 over cost (even if the employee has plans to retail the vehicle). If this happens every week, the $104,000 gross profit you would have made for the year is now $26,000.
Although the numbers may be larger in this example (and maybe not), the effect is the same when the sales department ‘asks’ the other departments to discount their efforts. The Service Department, the Body Shop and the Parts Department could be selling their work at a higher rate to retail customers. For service and body there is no replenishing the time sold; once it’s sold at a discounted rate there’s no chance of selling it at a higher rate.
The time the parts counter people spend tracking down the parts the Parts Department doesn’t stock, could be spent providing excellent service to the departments and customers who pay a higher mark-up percentage.
As any Service Manager or Body Shop Manager can tell you, finding Technicians is a challenge – just like finding beautiful used vehicles at a bargain price. The effort of finding, hiring, training and coaching Technicians is valuable, just like the time spent by the Sales Managers finding, appraising and preparing a vehicle, then ultimately working a deal to get the best price.
If the labour rate for service work was only worth 60 per cent of the retail labour rate, you can be sure the factory would pay claims at that labour rate. If a parts mark-up of 20 per cent made sense, then the factory would pay no more. I’ve run the analysis many times for many dealerships, and a 25 per cent mark-up on parts will allow the Parts Department to break even. There is little pride or sense in breaking even.
There will be times when the Service, Parts and the Body Shop will need to help the Sales Department with a discount, but it shouldn’t be an everyday occurrence; we call them ‘Mulligans’. Maintenance work should be done at the same price as Customer Pay – not more than the Customer Pay work. If there is a ‘special’ price, then that is what Sales should pay. The Sales Department should also be part of the ‘Team’ and not send work outside the dealership because they can get it done ‘so much cheaper’.
This is a disservice to all involved, including the customer if something on the vehicle fails because work was done by the cheapest guy on the block.
The Service Department should be part of the team and earn the right to charge the retail labour rate by providing excellent service and not putting the used vehicles at the end of the line. If it takes a week to get a car through reconditioning then I can’t fault the Sales Department for demanding a discount.
There are a lot of challenges and debates when running a dealership and its departments; let’s not make the internal mark-up up be one of them.
Fixed Operations Consultant