As things change quickly around us due to the dynamic environment, including the COVID-19 pandemic, market trends are accelerating. We must adapt to continue to be successful. I hope you will take something from this article to help stabilize or grow your business. Many opportunities in a dealership are related to the Aftermarket side of your business including parts, service, and services sales.
Online Strategy
As many of you have known for a long time, there is increased competition from companies offering online parts sales. Customers have also been demanding access to parts online. They want the same convenience they have shopping for other products online. Our options are to do one of three things:
- Do nothing and continue to lose an additional 3% of sales every year and fail to serve our customers’ needs at critical times like now.
- Look at our online competition and work to duplicate what they have to offer.
- Combine our strengths and the benefits of being an online retailer to provide customers with a better alternative and get as many sales as possible from your customers.
Before assuming that listing your parts on a website will help grow the business, think about this! Do you want to compete on price only? If so, how low do you want to cut your prices, and if your margin drops significantly, do you have a strategy that leads to similar or improved profitability for the dealership?
This article is focused on some items that we need to “Tune-up” as we transition the business to an enhanced online presence.
Understanding Strengths & Weaknesses: Wholegoods and Aftermarket
We must be specific about looking at the Wholegoods and Aftermarket sides of the business. As an equipment dealership service and parts department, you have several advantages:
- Being close to the customer
- Able to fill parts orders instantly most of the time
- Access to captive and non-captive parts
- Knowledge of the product and access to manuals, documentation, and special tools
- Skilled technicians to diagnose and repair
- Able to reduce downtime for your customers
Take the time to think about your strengths as a business. Most of those listed above are items that an online competitor can never beat you on if you play to your strengths. Think about any sport that you may have played competitively. To win, you played to your strengths and the competitors’ weaknesses. Both are important to understand. To learn about this in more detail, see the brief article on SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats)
Understanding where you stand relative to your competitors helps you understand how you can help customers better. Aftermarket and Sales operations complement each other for dealerships.
Should Your Next Dealership Department be Services?
In the Aftermarket operations of dealerships, we continue to think about Parts and Service as the two departments. I propose that we should be looking at a third Aftermarket department called services. Whether it is formalized or integrated into your aftermarket operations, it needs to have focus, or a big opportunity is being lost.
How Big is the Services Opportunity?
The previous CEO of Caterpillar, Doug Oberhelman indicated that in 2014 their dealers were missing out on up to $18 billion in revenue because of a lack of focus on the Aftermarket business and specifically not being engaged with services and using available machine data.
Various estimates indicate that the Global Construction Equipment Market is growing by about 5% per year over the next five years. Similar growth is expected in the United States. The segment of the construction market is projected to grow the fastest is services. One example is the IoT(Internet of Things) Construction Market. It is expected to grow 16.5% per year over the same time frame.
Explicitly applied to your organization, this is a lost opportunity to grow revenue by 20-25% or more with higher-margin business that drives customer satisfaction. We will speak about this subject in more detail in a future article.
Services Strategy & KPIs
Depending on your organization and the manufacturers you are aligned with, there are many opportunities in the services space. The equipment manufacturers you are aligned with may help determine where you are on the journey right now, but much is within your control. It is critical to have a strategy and accept that technology is growing quickly in the construction industry.
Customers are shopping for solutions to a problem when they engage with you. They may need to dig a hole or move some material. The first step may be to offer a machine as a solution but consider other services and technology that could be offered to the customer as a packaged solution that brings the customer even more value. This also moves your dealership from just a supplier to a trusted business partner, helping them improve the business and meet their goals.
There must be a plan and strategy to successfully develop and grow business related to selling services and technology. To deliver real results, the dealership should have specific KPIs and goals for all employees that have involvement with this part of the business.
Telematics & Data
If your dealerships represent product lines that integrate some form of telematics, are you using it to generate revenue? If you have not already, do you know that dealerships representing Caterpillar, John Deere, Komatsu, and others in partnership with the manufacturers are monitoring alerts from customer and dealer rental machines?
This insight is being used to be a better business partner with the owners of the equipment, protecting their investment and generating revenue for the dealership through parts, service, and services sales. When you can proactively offer support before the customer may even know there is a problem, it is a game-changer for everyone.
In many situations, the data already being generated by the equipment. Manufacturers have invested heavily in advanced technology. Customers may not be ready to monitor the available data as they may not understand the full value or do not consider monitoring a core part of their business. In addition to basic health monitoring, there are many opportunities to be a provider of technology services to existing customers. One thing that should be noted about the construction industry is that it is currently adopting advanced technology, software, and services faster than ever before.
How to improve Service Department Performance Instantly
Sometimes it can appear daunting to improve performance. Everyone is working hard and is very busy. How can we ask for more, and if we do, will we get employees to deliver? There are other low and no-cost alternatives to improve the revenue of the service department.
Machine Inspections
When a field technician goes to work on a machine or a machine is dropped off at a dealership location, one of the first steps should be an inspection. Remember, any inspection of a customer’s machine could save the customer downtime and generate revenue for the dealership even if it is operational. Why do you need to start doing this today on every machine? It’s about revenue and taking care of your customer. If you only fixed what the customer told you about, the equipment may not actually be in good working order when you return it to the customer. The customer may not have documented every issue or recognize that some features are not working normally.
If there is an unidentified issue, the customer will likely question why the problem was missed or, even worse, assume the issue happened while your dealership had the machine. If that happens, it may impact your customers’ business and damage your dealerships’ reputation. Experience shows that effective inspections can add 15-18% on average to work orders. That’s 15-18% more revenue for both your parts and service department.
Review of Labor Rates
A lot is changing right now. Check the shops in your area and learn if they have changed their labor rates to reflect the extra costs required to operate in the current environment or made a decision to maintain their dealership’s labor rates as a matter of goodwill to customers. Remember, the difference of $10 per hour in a shop with five technicians yields over $100,000 in profit to keep the dealership functioning for the year or improve profitability.
Flat Rate Pricing
Consider moving to flat-rate pricing on as many jobs as possible in your shop if you have not done so. Start measuring the percent of jobs completed using a flat rate instead of charging by the hour. Start with a target of 70% and work up from there. When a job is based on the hourly rate, you are frequently discounting work done by your most seasoned technicians that have the highest hourly wage and deliver the highest quality repairs. This is because since they can do the job faster, the customer is being charged less. There are options to determine what your flat rates should be quickly. There is no need to spend years trying to develop them to start the journey.
Work Order Accuracy
One requirement that needs to be in place at every dealership location is requiring that technicians be “clocked in” to the work order they are working on at all times. It is critical for numerous reasons:
- The simple requirement drives typically at least a 10% gain in productivity.
- It is necessary to determine technician productivity and efficiency.
- It helps with planning and compensation.
- It is essential to audit the validity of commonly used Flat Rates.
Keep in mind that if time is not tracked on the work order then you actually have no idea what it really cost to do the job.
Telematics
If your dealerships represent product lines that integrate some form of telematics, are you using it to generate revenue? If you have not already, do you know that dealerships representing Caterpillar, John Deere, Komatsu, and others in partnership with the manufacturers are monitoring alerts from customer and dealer rental machines?
This insight is being used to be a better business partner with the owners of the equipment, protecting their investment and generating revenue for the dealership through parts, service and services sales. When you can proactively offer support before the customer many even know there is a problem, it is a game-changer for everyone.
How to Improve Parts Department Performance Instantly
Margin Pricing
If your dealership offers discounts to some customers, including wholesalers, do you offer a fixed percentage discount? If you do, you are likely to sell some products at a loss. That should never happen on less, your management team has made a strategic decision to do this for some reason. Discounting using a margin pricing strategy will create a variable discount by product to protect your margin on each part and can be automated.
Your customers that you offer discounts to will also understand the variable discount by explaining that you can’t sell parts at a loss. Since they likely run their own business too, the logic should be clear. Using a Margin Pricing strategy for discounting will stop negative margins from happening on some parts sales and drive increased profits to the bottom line.
Rounding Up
You may find that as “priced” by OEMs that your dealership represents, some parts pricing appears almost random. This is because the manufacturer’s focus was on margins as the part moves through the supply chain. Capturing manufacturing costs and suitable margins that they believe are reasonable for all parties involved in the part’s supply chain. Sometimes things like customer psychology get lost in the mix. Almost everywhere you look, prices end in 9 or 99.
At least 60% of consumer product prices end with number nine. Much research has gone into this.
- People place more focus on the left digit of a price than the rest. $19.99 is perceived as significantly less than $20. The difference between $19.24 and $19.99 is usually perceived as insignificant but is a 4% increase.
- The optimistic side of us responds positively to prices ending in 9. It triggers a response in us that the product is less than the next whole dollar and is somehow discounted. Research cited in the Harvard Business Review done by one retailer; adjusted a price from $34 to $39, increasing demand by over 30%. This is not a recommended strategy across categories of parts but could be applied strategically to low margin parts.
Consider that this simple change could help your dealership deliver an additional percent or more of margin depending on how aggressively it is applied. When developing sales promotions, consider rounding to decide on pricing your parts and service department promotions. Take the time to learn if your competitors are using this strategy.
Fill Rate
Changes to fill rate are not instant, but every journey must start somewhere. A minimum fill rate of 70% is as low as customers are willing to accept under almost any conditions. The accepted process of measuring the fill rate is referred to as “Customer Facing Fill.” That does not mean that we can fill 70% of the parts ordered each day from local inventory but rather fill all the line items on customer orders 70% of the time, which is a higher threshold but is more focused on customer experience. When the customer places an order with your dealership they remember if the whole order was filled or if another interaction was required for the dealership to fill the order.
Measuring this way better aligns with how customers perceive the experience of ordering parts from the dealership. The customer frustration comes from making the extra trip or waiting additional days for the parts or their machine to be repaired by the service department.
Summary
As we have moved into what is likely to be a more challenging business environment in the future, all Aftermarket business including the parts and service departments’ performance becomes more critical. If you don’t have clarity on the importance of parts and service department absorption, take the time to read about it in the following article as it could provide you some of the tools needed to survive in this new environment: SERVICE DEPARTMENT ABSORPTION: Key to Success!
Take time to determine how taking action on items identified in this article can make a difference for the whole dealership. Focusing more on Aftermarket can be a benefit for the whole business. These are all areas that can have a significant impact on long term performance:
Parts and service departments need to be viewed as part of the lifeblood of a dealership. What they offer are critical components that allow machines that customers have invested in to operate. When machines fail, and we bring value to the table by having parts available immediately 70% of the time and offer many other benefits that establish a value proposition, it makes a difference. If the value proposition is communicated to the customer, and we do what we say, it goes a long way to retaining customers long term and generating additional revenue from your aftermarket operation. Also, Don’t forget to have a focus on services.
Remember; It’s far more expensive to gain a customer than retain one! In fact, it can be very profitable and be an excellent winning business strategy for all parties.
Ideate Consulting Group partners & consults with small and large enterprise to apply organic business growth methods that are proven and time tested to grow sales and revenue long term.
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