Improving parts and service absorption rates

Editor's Note: This article is Part 3 of a Part 4 print-to-web series continuation of the article, "Models of Management: Money, Metrics and Margins" that appeared on p. 24-29 of the February 2009 Farm Equipment. In that article, six Farm Equipment "Dealership of the Year" alums shared their approaches to four key areas (cash flow, interest costs, parts and service absorption and used equipment evaluations) that will impact their business' bottom line in 2009.

To complement the dealers' views, Farm Equipment also contacted two leading farm equipment dealer consultants — Stan Jackson, Stan Jackson Consulting, and George Keen, Currie Management Consultants — for their insight. The last installment covered managing interest costs, while this one focuses in on improving parts and service absorption rates.

Stan Jackson, Stan Jackson Consulting

"First, the smart dealers sit down with their accountant every 6 months and make sure that all general ledger accounts used in the absorption calculation are free of errors and are properly categorized," says Stan Jackson, Stan Jackson Consulting. "Simply put, these GL accounts should contain only pure information that reflects true absorption." Jackson says a common error includes dealer bonuses wrongly categorized as fixed expenses.

"The point is to study the formula, then back-track to the people and processes that make up the formula and fix all loose joints — you want to tighten up the process based on the facts."

Second, he says, is to market the shop, particularly since part sales follow shop sales. He suggests adopting the same management rules of hotel operators: you have 20 rooms (shop spaces), so only 100% occupancy is acceptable.

"Market with the objective of filling every room, on every work day. That means endlessly marketing the shop since the goal of 100% fill rate, 100% of the time is rarely possible," he says.

"The shop is the most under- marketed department, despite all the modern techniques available to make it the most valuable cash flow generator."

Third, says Jackson, is understanding absorption's role within new wholegoods sales. "When machine sales are growing rapidly, absorption often suffers — the variable costs rise faster than shop and parts margins can offset these costs. The same happens if a dealership acquires another location. Start up costs, increased interest load, and the learning curve climb can knock the best absorption plans off track.

"These are temporary diversions — hold the course, fill the shop and measure the productivity of each technician."

Jackson also shares practical ideas he's seen successful dealers employ to boost absorption performance. "One of the best recent ideas to evaluate technicians through 360-degree evaluations by peers." Another great idea, he says, is to have to have the service manager arrange a 15-minute formal conversation with the technicians twice a year where only one question is asked...What barriers in the service department, if removed, would increase your contribution to our absorption goals?

"All input is consolidated and prioritized and at least the top two barriers are removed within the next 30 days. Sound impossible? Try it and be amazed with others already getting the benefits from this technique."

George Keen, Currie Management Consultants

George Keen, Currie Management Consultants, offers five suggestions for dealers looking to improve parts and service absorption rates.

1. Provide better technician training and tools to decrease troubleshooting time.
2. Expand sales of service contracts to get paid for service work and to increase preventative maintenance and service.
3. Work with your parts people on telephone techniques and how to increase add-on and related sales.
4. Try mystery shopping to see if your phone techniques are as good as you think they are.
5. Focus your service sales more on "quoted jobs" with one price for the job. Then, in your presentation to the customer, be sure to reinforce the value of your work, your warranty, your experience, their reduction in downtime, and your guarantee of this price (they don't have to worry about the price increasing if you stumble on problems). Of course, you need to be doing a good job in estimating, but that doesn't mean "cheap." Rather, it means fair price with good follow through, commitment to the price and the delivery of a complete unit as promised.