PROFIT OR WASTE OF TIME?

[scottchatman]

Let's say you decide to discount a certain wholesale part on the assumption that a little profit is better than no sale at all. Let's also say that you are giving your customer 30 days to pay. At what point would you be better off losing the sale?

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Scott Chatman

[Gary J. Naples]

Hi Scott,

That is a very interesting question. Rest assure parts managers aren't the only ones that deal with this issue. There is an old slogan "Profits in pennies, volume in millions." Although its a nice slogan, it does have its place. Grocery stores, for example, can work on small margins and their net comes out at pennies per dollar. But they move their goods daily and weekly. And, they are not so likely to take inventory losses. Moreover, they sell mostly for cash and their volume is steady. But when a business, such as your parts department, has to stock large inventories of parts, most with erratic movement, carry receivables and so on, capital turnover can't help but slow down.

The answer to your question, however, is not so cut and dry. The costs of doing business put a logical limit on how low you can price. But in order to set your prices you have to first know what amount of gross profit your department must generate in order to meet departmental and corporate profit objectives. In other words you have to produce a gross profit that pays the bills and leaves a residual equal to or close to the anticipated net return.

Let's say, for example, your total departmental gross profit objective is 35 percent. As you know your total gross profit is derived from parts sales through the service department, possibly an internal body shop, counter retail, internal sales, wholesale, and discounts and allowances. Departmental planning should ensure that the selling price of parts in each sales area combines to provide your total gross objective of 35 percent. So, if that means your wholesale customers can receive a discount equal to 15 percent above cost, then giving them parts at 10 percent above cost would necessitate that sales elsewhere, like retail, would have to be increased 5 percent to offset the overhead loss.

Consequently, its not a question of how big of a discount can be given or at what point is a customer not worth the sale, as it is a question of what price should you sell for to assure profitability objectives.

[Chuck Hartle]

Hi Scott,

Gary's approach is one way to look at it. You are talking to the ex "King" of skinny profit. And, I might add, the bad back to prove it.

There are other tanglibles to look at as well. Such as;
How much volume does the customer purchase?
How much volume does the customer return?
What kind of parts are they purchasing?

Here is something my dealer got me to do several times as we re-thought our profits in our wholesale operation.

First, determine what percentage your wholesale business is compared to your overall monthly (or yearly) parts sales.

Next, fire your whole parts department (on paper of course) and begin to hire back the people you would need to support your sales internally (Service, Body Shop, and Internal Sales). Once you have determined what it would take to sustain your internal parts operations, take a look at who you have left to take care of the wholesale operation.

The major tangible that Gary has left out here is the amount of effort and pay you are shelling out to support the wholesale operation. Typically, your highest paid parts advisors work the wholesale counter. If you pay them generously (above average) and you are discounting parts above your market area, you will have a problem.

Some say the secret to a great wholesale operation is to have a strong service operation so wholesale becomes the cherry on top. This can be true, but you should really take a look at your wholesale operation and all the expenses associated with doing it. I am not saying that you shouldn't be in wholesale. If fact, I feel just the opposite. There is a lot of hidden value a good and profitable wholesale operation can bring to the entire department.

What I am saying is that there is a point of diminishing returns and you have to balance that. After all, if you aren't making money selling the part, retail or wholesale, what are you accomplishing? Take it from a guy who is not trying to convict you as much as convince you. Don't give in to deep discount tactics as it just means more work for you making the same amount or less profit.

Chuck Hartle'

[This message has been edited by Chuck Hartle (edited 04-20-2000).]

[Gary J. Naples]

Hi Chuck,

You made good points with regard to parts purchased and returned. Nobody wants an abusive customer.

While I agree with you about quantifying the effort and payroll to support the wholesale operation I'm assuming that these costs are known or at least taken into consideration before any selling price is established.

Arbitrarily discounting any sales without giving thought to the expense side would surely invite disaster. Requisite to proper planning is awareness of operating expenses and departmental profit contribution. Unfortunately, rarely is there any integrated planning on the dealership level or the department level.

By the way I like your method for determining wholesale personnel expense.

Gary J. Naples