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Jared Hamilton
From: Jared Hamilton
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Bryant Gibby

Bryant Gibby Used car manager

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Am I getting taken by our service department?

     I had such a good response to my post last week about the relationship between the sales department and the accessories department, I decided to take the conversation a step further and write a post on the relationship between sales and service.

 

     I received a lot of great comments talking about what an appropriate markup would be on our accessories to make it to where sales had an opportunity to make some gross on the accessories that we included into the deal.  It triggered the question: " What is an appropriate rate that the service department should charge the sales department with regard to reconditioning used cars"?  I am the used car manager at our store, so this is a topic that is pretty close to home and is also something that I have spent lots of time discussing with the GM.

 

     The thing that has always pissed me off about our reconditioning process is that the used car department pays the same $90 per hour for labor that any shmuck that walks in the front door would pay.  I don't know if that is the norm at most dealers, but I'm not a huge fan of paying that much (especially since I am by far their best customer).  The reason I hate it so much is because I get paid off the gross of each deal and every extra dollar that I give to the service department is a dollar that I don't get paid on. My argument to the GM is that he is making the profit either way, regardless of the labor rate that I pay to the service department.

 

     I'm thinking there has to be a better way to do this to where it is a win-win for sales and for service. What do you guys think?

Eric Hamm
I think your first problem is the fact that you refer to your dealerships service customers as "schmucks". Without those schmucks, you have nothing. The greatest asset you have as a person who sells used cars for a living is your service department. And a profitable service department is much more likely to be an asset than an unprofitable one. That being said, without knowing exactly what you are being charged for the services they provide, it's hard to give you an opinion. At our store, we charge retail rates to the used car department, however, if the service department does oil changes as a loss leader (at our store we do $18.88 oil changes), the used car department should get the same treatment. Most service departments have a discounted rate/price for most maintenance work they perform because it is competitive work. You shouldn't pay the same $90 per hour to have wiper blades put on. I used to complain about the same thing until someone asked me what I thought our hourly rate should be for used cars. My response was $40 per hour. Then I went and pulled Repair orders and found we were doing about 3 hours per R.O. on average. The difference I would save by having MY hourly rate was about $110 per unit. You slide $110 per unit without batting an eye when your customers ask for a discount, so work on holding $110 extra per car and you won't have to worry about how the service department is reaching into your wallet. What I've found to be the biggest problem (at our store) is that our techs operate on the KYA philosophy and recomend unnecessary repairs. Institute some standards (i.e. we only replace tires with less than 50% tire life remaining, etc.) and have someone who's best interest isn't in maximizing the RO review the work being done.
Jared Hamilton
a few thoughts: 1. SCHMUCKS!?! Duuuuude... dont go there. :-) 2. Im not sure I agree with Eric on the 18.95 oil change example. The loss leader is to attract customers that will hopefully bring more business to the dealership, its not something the used car manager will do. Meaning the UC manager will not step up and recon brakes because he brought a car in off the lot for an 18.95 oil change. That being said i LOVE how Eric justified the rest of his reasoning. You really are taking about 1-200 per deal... its not a deal breaker. Im a fan of charging the UC dept retail, BUT the UC manager should be controlling all his recon. How much control do you have over what is and is not done to each vehicle. I think that is where the real magic happens to balance vehicle condition, price and gross. UC managers that know how much to recon (and can buy cars right) can control their inventory costs. If your service has an open checkbook... BIG PROBLEMS. Id focus there more than I would focus on the 90 per hour. Lastly, you are the service dept's best customer. You single handedly bring them the highest RO count at full retail. That being said you should be treated like the best customer. Your cars should be in and out, techs should stay late to get that cherry piece you just took in out early for the weekend etc. Its ok to pay retail as long as the shops retail pricing is in line with the market. IF retail is above market than its just a hidden pack and that will do no good for anyone but the Svc manager. And, again, you should expect GREAT service. This is a good debate thought, lots disagree with me and Id welcome to hear some other opinions. Hot topics in most stores, thanks for bringing up.
Ed Brooks
Dale Pollak has written extensively on his blog at DalePollak.com on reconditioning. Two recent posts are particularly on point. The resulting discussions are fascinating as well. Reconsider Your Reconditioning – Thoughts from Two Experts (http://www.dalepollak.com/2010/02/22/reconsider-reconditioning-thoughts-experts/) I’ve had two experiences in the last 24 hours that has me really fired up on the issue of reconditioning. First, yesterday afternoon I spoke with one of the most successful high-volume/profit used car dealers in the country. He told me that he averages less than $500 per vehicle reconditioning. I might add that he reluctantly admits to still charging retail labor rates. That’s right, less than $500 per vehicle using retail labor rates. This stands in stark contrast to what I see most dealers charging, between $650 and $1,250 per car. Unless you’re really in the business of rebuilding used vehicles for retail, as a general rule, what in the world is going on? As my friend explained to me, he can do a safety inspection and even get new rubber and brake pads on a car for less than $500. Shouldn’t this be the norm for most cars? How does he do this for less than $500 per car? Well, as he explains it to me, the big cost is usually in parts, items like tires and brake pads. He told me that most parts departments want to use the OEM supplied tires and brake pads. These are obviously high dollar items. My friend told me that his parts manager goes out to the after market and procures quality low-cost substitutes, applies the same mark-up, and delivers the parts to the vehicle substantially below the cost of the OEM alternative. While I would not advocate circumventing any manufacturer’s certified requirements of using OEM parts, nor would I discourage certification on most eligible vehicles, I think that this approach should be the norm for all other vehicles. The second experience was this morning when I read an article from industry expert David Ruggles on the subject of reconditioning. Completely independently, David sent me an article that he is submitting to Ward’s Dealer Business on this subject. David brilliantly makes the observation that performing excessive reconditioning produces many irrational consequences. One of the greatest evils is that used car managers and buyers can’t justify paying current wholesale market rates for badly needed used vehicle inventory. In light of the highly compressed margin environment, the expectation of $650 to $1,250 reconditioning makes it impossible to justify just about any purchase. It’s really no wonder that most used car managers have the perception that they can’t buy used cars for prices that allow them to make money. So, even if we don’t want to have the discussion about charging less than retail labor rates, could we at least come to terms with the fact that we probably can’t justify spending $650 to $1,250 to recondition used vehicles on average? Shouldn’t these amounts be reserved for only certified cars, and the occasional exception case? Every day I become more convinced that the old practices of reconditioning are just not fitting the realities of today’s used car market. Reconditioning – The Last Bastion of Old School Management (http://www.dalepollak.com/2010/06/23/reconditioning-bastion-school-management/) Looking back over the past 5 years I’m pleased to report significant progress in terms of the enlightenment of used car operations. Many now understand the need for rational pricing, free agency stocking and retail market based appraising. Dealers are also coming to the understanding that on-line classified advertising sites like AutoTrader and others are no longer optional advertising mediums, but rather essential components of used car success. To be sure, there is still much more work to be done to improve the execution in each of these areas, but at a minimum, conscience enlightenment has occurred. The one area of operation however, which has sadly not kept pace with the changing times is the reconditioning process. Most dealerships still claim to have a 2 – 3 day reconditioning time, but in reality the time from acquisition to virtual and physical front line readiness is approximately 7 – 10 days. Moreover, the required expense in getting a car ready for sale is too high. The result is that many dealers that expend the effort to become velocity organizations do not realize the full benefit and value because of this considerable constraint. To question the reconditioning process or the expense tramples on sacred religious ground of dealership philosophy. If the service department isn’t broken, why fix it is the general attitude of most dealers. The answer is that traditional philosophy of service department reconditioning is killing the used car department. It wasn’t until the used car business got really bad that the industry would consider changing its practices. Fortunately or unfortunately, I don’t see the same catalyst of tough times in the mechanical department to create the stimulus to question reconditioning practices. As a result I don’t see this critical component of used vehicle operations changing any time soon. For too long, the retail automotive industry has operated a core belief that every department should stand on its own. To the extent that one department does business with another they should each maximize their own profits at the expense of the other. This system is based on the premise that eventually it all gets passed on to the customer. Today however, customers are not willing to accept the cost of the liberties taken by each department as the product passes through the process. As a result, the entire dealership is weakened rather than strengthened by the old fashioned departmentalized silo method of management. I am therefore, calling on the industry educators consultants and practitioners to recognize the need to create overall gain for the dealership by reducing the rigidity and the draconian philosophy of every department for itself.
Bart Wilson
I'm a big fan of Dale's approach when it comes to recon. I know of one used car dealer that, when he can get away with it, has some of his recon done outside his dealership (at a tire shop) because they can get it done cheaper. Nobody wins when that happens.
Daniel Boismier
Bryant, Most owners realize that a good used car manager is goin to recoup wahtever they pay in recon so why not pay full retail? If you don't it's profit leaking out of his pocket. That being said, I'm an advocate of a team approach when it comes to management. Why not put your variable and fixed managers on a GM "like" pay plan, sucha as a % GP after controllable expenses for all profit centers. Or maybe just used and service could work combined. Then all parties are aligned and the team work goes way up (not to say there isn't any now). I've seen it done well. Just have to make sure like in any Team selling situations you have top performers.

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