Do your
service advisors call around to get the best price before they order
their parts? They do? Gee. That's a Shame!
Since Henry Ford
rolled his first Model T off the assembly line shop owners have been
exposed to an incredible amount of both technical and management information.
Fortunately, most of it has been good for the industry. Yet at the
same time there's also been a disease, a virus if you'd like, that's
been passed from generation to generation of shop owners. It's driven
much of the profit out of the industry, it's ruined business relationships
and it's driven thousands upon thousands of shop owners into bankruptcy
court. It's the ill-founded belief that the way you make a profit
on parts is by buying the cheapest parts.
A case study in partnering with the right suppliers: Ray Kroc and
McDonalds
When I first entered
the auto repair business, just like most, I had all the wrong mentors.
They were the people who had big toolboxes, a great understanding
of automobiles, but little understanding of business. So what I decided
to do was identify role-models that I could pattern my life after,
and one of those individuals was Ray Kroc, the founder of McDonalds.
What I learned about him was how to choose vendors. Here's his secret.
Let's say he's looking for a meat packing company. He would choose
a reputable company and tell them that he would give them all of his
business from the marketing area. He went on to say he didn't expect
them to be the cheapest, nor the highest priced, but what he did expect
was this: Their overall pricing had to be competitive, and the service
he expected would have to be extraordinary in return for his commitment
to them. This kind of "partnering up" with vendors helped
him grow a small Southern California start-up company into a worldwide
giant. I used this same partnering philosophy to grow some of the
most successful auto repair shops in America, and you can use it too.
All that I ask is that you consider the following.
If you plan on
being successful in the auto repair business, you have to partner
up with the right suppliers. That's the reality of business. When
it comes to parts, I'm sure you'll agree the substandard parts will
drive up your repair time, they'll drive up your warranty claims and
they'll erode your customer base. You not only have to choose the
right parts, but as Ray Kroc taught us, you also need to choose the
right suppliers. Not the cheapest suppliers, but the right suppliers.
These are the companies that deliver the right part in the right amount
of time, they stand behind their parts and they understand your needs.
These suppliers are out there, and they are priceless.
Understand the value of your time
The age-old belief
that you need to "buy the cheapest part to make a profit"
has even more flaws. It doesn't take into consideration the time you
spend on the phone calling around for the cheapest price, it doesn't
take into consideration the loss of gross profit, and it certainly
ignores the value of building a relationship with your vendors. Let's
take a look at each of these three.
First of all,
your time has a value, so rather than "spending" it trying
to save a few dollars, you should "invest" it in selling
your service. An extra five minutes with a customer at the point of
sale will give you a far better return than spending the same five
minutes with two other part suppliers. Invest your time. Don't spend
it.
The second thing
you need to think about is the gross profit you lose by buying cheaper
parts. Here's an example. Let's say two shops, Elite Auto and Mike's
Auto, are both looking to make a 45% gross profit on their part sales.
Elite buys a high quality part from his primary vendor for $90.00.
Working on the 45% gross profit margin, his software will calculate
the sale price to be $163.63, giving him a gross profit of $73.63.
On the other hand, Mike's Auto Repair calls around, spends an extra
five to ten minutes on the phone, and finds a cheaper part for $75.00.
Working on the same gross profit margin of 45%, he sells his part
for $136.36. Giving him a gross profit of $61.36. Do the math and
you see Mike's profit is $12.27 less than Elite's. So with all his
efforts, what Mike's accomplished is this: One, he's made less profit.
Two, he's spent more time with his suppliers and less with his customers.
Number three?
He's ignoring the value of building a good, strong relationship with
the company that really is his best vendor. There is no question.
Business relationships are the cornerstones of every great business.
Not only has Ray Kroc proven this point, but to quote Bob Lutz, past
Vice-Chairman of Chrysler, "Browbeating suppliers doesn't lead
to higher performance. As a matter of fact, it leads to the opposite".
A Closing Thought
So let me leave
you with this thought. The belief that has been passed down over the
years from shop owner to shop owner that the way you make money is
by shopping prices on each job is more than just a falsehood. It's
actually an insidious disease. Once it penetrates your business it
will eat away your profits, it will eat away your business relationships
and it will eat away your customer base. And given time it will take
far more than your customers and income. It will take the actual life
of your business. What you need to do is chose your business partners
wisely, partner up with them, manage your business and then do what
you do best. Take good care of your customers. If you do, you have
my promise. The profits will follow.
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