One year later: Effect of GM return reserve change?

[mbowers]

Here's a reprint of a special report Lloyd Schiller prepared in the wake GM's decision to introduce major changes in its parts policies. The report appeared in the May 2002 issue of the Parts Manager:

By now, most GM Dealers have heard the broadcast of 4/21/02 concerning Parts Purchase Discounts and Return Allowance reductions (takeaways). In my 20 years of observation, any time GM has made a major parts program change, it has always benefited GM. I am sure the corporate speak will be that youll make it up with margin. This reminds me of the tongue-in-cheek car ad I saw in the mid 1980s where a Dodge dealer smilingly proclaimed, We dont want to make money; we want to make friends. We lose a little money on every car or truck we sell, but we make it up with volume.

Dealers have already been receiving a Dealer Impact Worksheet from GM. Some of our Clients have annual negative impacts upwards of $ 500,000! Similar to 1996 when GM lowered Dealer Net, several things may happen:

If GM lowers Dealer Nets (they say they wont), you will take an immediate Parts Inventory negative adjustment (also known as a hit, and not included on their worksheet).

If you price up from Dealer Net (vs. up or down from Suggested List), and do not adjust your pricing accordingly, you will maintain your Gross Profit percentage margins, but your Gross Profit dollars will fall dramatically. You can clearly see that in order to maintain your Gross Profit dollars, you will need to adjust your pricing escalators (matrices). There will likely be a loss of Gross Profit dollars on Warranty since their matrix is fixed (i.e., another discount to GM). Keep in mind when you do adjust your pricing strategies, you will also need to include offsetting the loss of Gross Profit on Purchase Discounts to both your Retail Customers as well as to your New and Used Vehicle Departments. That is just to stay even. Each dealers exact needs will be different.

If you pay your Parts Personnel on Sales or the Sales Gross Profits, it is likely your Personnel Expense will increase (due to these offsets) while your Net Profits decrease due to lower Gross Profit dollars and less Purchase Discounts. YIKES!

Dealers who run clean inventories will definitely need to take Return Reserve longer to maintain a clean inventory due to lower Return Allowance %, and then will receive lower Purchase Discount dollars for the remainder.

I certainly agree it is better to make the money from selling rather than from buying. But with no incentives for good behaviors through increases in CFI money or Return Allowance, this is simply a Win-Lose proposition. I hope the Dealers and Dealer Councils will exercise their voices and opinions. This is not a good or fair deal. Euphoria over improving market share or Bob Lutz (whom I also greatly admire) should not cloud this issue.


Question for GM Parts Managers: It has been 12 months since the changes became effective. What has been the impact on your business?

[vaxley]

For the previous 7 years, I always had enough return reserve left over to send 98% of my old and unused parts back to GM. Now, with the down turn in the economy and a little less parts sales and purchases YTD, I find I've run out of reserves, which probably makes GM happy. 1% of 3+ million dollar purchases puts a huge dent in profit that I need to use to get rid of obsolete parts - I have always said that the corporation forgets always who pays GM's bills - we as dealers-and we're their only customer that they treat like dirt. I guess since we can't buy them anywhere else, they don't have to service us at 110% like we as business people do daily. If we had the attitude of some of the warehouse workers, we would shortly be out of business. Each month it gets harder and harder to satisfy our customers because of price or direct ship on wheel studs or washers that are critical to finish a job, but have to come from outside vendors because GM does not want to warehouse these items.
GM spent 40+ years teaching dealers to buy wisely and make profits so we could run our daily business-and in 1 swoop, it was wiped out. Now in a truly competetive world, we are to sell for less, spend more on advertisement, train our people to their standards for GM's bragging rights, pay our employees top dollar(we should), and GM does not want to incentivise us to buy from them-maybe we should find our own source for buying parts? What do you think?

[This message has been edited by vaxley (edited 06-17-2003).]

[This message has been edited by vaxley (edited 06-17-2003).]

[Jon]

I have to concur with much of what Vaxley said. GM has really taken a large step backwards with many of its programs and policies in the last year. Yeah, I know, they have really pushed the market with incentives to keep cars moving and have gained a little market share as a result. But what will be the long term effects of their other policies ? Will the increased owner base evaporate over time due to crazy policies like source and consignment stocking that make it impossible to service the GM owner ? Vaxley refers to wheel studs coming from source, has everyone else noted how long it takes to get anything from this source ? Unless you pay OVN, it is averaging 6-7 days. Truck dealers, how many customers have to make two trips to your store to get campaign 03012 completed because GM decided to source stock the little trim plugs for this campaign instead of putting them in your PDC where you could have them tomorrow and keep pace with demand ? Customers want next day service, GM wants us to provide next day service, GM has spent a FORTUNE with the template warehouse project, why on earth can't they see the foolishness of source stocking stuff like hardware and other common parts that prevent dealers from giving next day service ? Source stock should be for specialty trim and emergency situations ONLY, the only way we can give GM vehicle owners the expected level of service is PDC and Parts Plant stock with consistant delivery times.

Back to the original question, how are we doing with returns. We are a fairly small store and usually had just about enough return reserve prior to the Great GM Takeaway, especially if we were diligent about using Special Order returns. We analyzed the fallout and weighed the options and opted to code orders as "4" to maximize discounts. This has helped us maintain profitability and so far we are not getting buried in obsolescence, it has gone up a few points. Magic ? No, telling customers like it is as gently as we could, we can't and won't special order stuff "just in case" anymore and they will have to share the pain when they want to return stuff for reasons other than an error on our part or GM's. Lost a little business, most of it came back when they found that other dealers weren't too keen on returns either. I think it is too early to tell if this will alienate customers in the long run, it does seem like many competing franchises have also been hurt by their manufacturers policies too.

Definitely complain long and loud about what you see, especially when you can document things in detail, GM likes details. Tell your DPM, he/she files a weekly report and would like specifics to include. Fill out your annual dealer surveys, again in detail. Attach additional sheets explaining the problem areas if you need to. GM reads every one of these comments and passes them along to the appropriate area within SPO. Go to DealerWorld and fill out a form for the next dealer council meeting in September. We have gotten GM's attention on a few points with our lobbying, only our perseverence will get them to continue re-evaluating our situation. If we don't speak up we can only blame ourselves for whatever the factory does to us.

[This message has been edited by Jon (edited 06-17-2003).]

[gully]

Obviously the biggest problem is obsolescence. Ive been back and forth with option codes, but I think I have it dialed for now. Im lucky I didnt have an obsolescence problem before all this went down like some dealers. I cant say that Ive changed my business practices with my customers, nor should I, but there is definitely less resources to return parts.

Even though the discount and allowance (takeaways) were only 1% here and 1.75% there and so on.heres how those small percentages effected us. For a quick comparison, I looked at my 2002 purchases and buying options (combination of STD, 3 and 4) and applied the percentage change to those figures. I used the same buying option figures taken off that years P&A summary to get a fair comparison. Well, I lost about 21% of my discounts and return reserve! What effect is that on the General Motors Our Partner financial statement???!!!!

GM has always played their shell game and probably always will. They take away things such as discounts and allowances, then make you play the game of jumping through hoops to get some of it back. GM wants us to be customer focused, but still play their silly games to try and be somewhat profitable. Which is more important? Our customers or shell games? Now it looks like theyre changing the Financial Statement in 2004. What next??

Ship Direct parts. O3012 campaign. wont go there.

[partsmandean]

When I was in college I had a poster that had the caption, "Migrate, Mutate, Adapt or Die". Seeing as how the news in the automotive industry has seemed to say that the manufacturers are all leaning towards less discounts and less reserves, I've decided that changing loyalties (job/migrating) or just going about business as usual like nothing is happening (mutating and slowly dying), are not viable alternatives and have decided to adapt. I now do my GM orders accordingly, I take all the discount for stock orders and all reserve for special orders. Dealing with a body shop that is used to having carte blanche when it comes to returns has also forced me to order everything for them from another dealer that sells to me at GM cost with 'no questions asked' return policy for a monthly service fee. This has enabled our dealership to keep all of our customers happy while keeping our growth in profit at a steady increase as well. Sure, it was easier a year ago, but who ever said that there was anything easy about the automotive industry in the first place? Oh, and I won't lie about it, as I know there are a lot of you out there who will, but my obsolescence is still always under 10%.